Context:
The world’s largest group of oil producers, known as OPEC+, has decided to continue reducing oil production to avoid a drop in oil prices due to concerns about a global economic slowdown.
- Saudi Arabia, (a major oil producer and member of OPEC), has voluntarily pledged to further decrease its oil output by an additional 1 million barrels per day in July 2023.
Concerns:
- India relies on importing over 80% of its crude oil needs, and is cautious about the combined supply reductions by Saudi Arabia and OPEC+.
- However, India has been diversifying its oil sources and buying more oil from Russia, which has helped decrease the price of imported oil.
What is OPEC+ and How Does It Work?
- OPEC+ is a group of 23 countries that sell crude oil internationally and make decisions about how much oil to sell.
- The core of this group is OPEC, made up of 13 countries, mainly from the Middle East and Africa.
- OPEC was created in 1960 as a group that aimed to control the global supply and price of oil.
- In 2016, OPEC joined forces with 10 other oil producers, including Russia, to form OPEC+.
- Russia, as a member, is one of the world’s largest oil producers, producing over 10 million barrels per day.
- OPEC+ adjusts its oil supply to match the demand and maintain a balanced market. When demand for oil decreases, they reduce supply to keep prices higher. They can also increase supply to lower prices.
Why is OPEC+ Reducing Oil Production?
- Concerns about Weak Global Demand
- Interference with Market Dynamics
- Fears of a Banking Crisis which can impact oil prices
- Slow Growth and Lower Demand, raising concerns about falling oil prices
- US Debt Ceiling Negotiations
- Punishing Speculators
- US Output Increase due to shale oil growth and technological advancements, which could affect global oil supply and prices.
Impact of Reduced Oil Production on India:
- Inflationary Pressure: The production cut by OPEC+ will lead to higher crude oil prices, causing inflation in India.
- Economic Slowdown: Higher oil prices will increase production costs for industries, affecting their profitability and competitiveness.
- Current Account Deficit: India’s import bill for oil will rise, worsening the current account deficit.
- Government Finances: The government will face higher subsidy burdens due to increased oil prices, impacting fiscal deficit and public spending.
- Currency and External Vulnerability: Higher oil prices will increase India’s dependence on foreign exchange reserves and external borrowing, making it vulnerable to-currency fluctuations and global economic shocks.
- Energy Security: Reduced oil production emphasizes the need for India to enhance its energy security by diversifying energy sources and exploring alternative fuels.
Strategies to reduce India’s Oil Dependency:
- Promote Domestic Oil and Gas Production by incentivizing exploration and production activities within India.
- Diversify Energy Sources by focusing on alternative and renewable energy sources.
- Enhance Energy Efficiency Measures by prioritizing energy-saving initiatives across sectors.
- Develop Strategic Oil Reserves to establish and maintain an adequate strategic petroleum reserve.
- Strengthen International Energy Partnerships with non-OPEC oil-producing countries.
- Support Research and Development by investing in advanced energy technologies and innovation.
- Encourage Sustainable Transportation by promoting public transportation systems and electric vehicles.
- Engage in Energy Diplomacy by actively participating in international forums to advocate for fair oil markets.
News Source: The Guardian
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June 8, 2023
