Oil is the life breath of the modern world economy. Without it the world would come to a grinding halt. It is both a boon and bane for the world. It has driven economic growth and development. It has also led to wars.
Oil revenues and petrodollars have transformed economies. Countries with high oil reserves also control supplies and prices. When it comes to oil, it is a seller’s market. They are using this as a leverage to fight a war with the rest of the world—oil price war.
Those countries whose main export is crude oil and their economy depends on oil exports have formed an umbrella group called OPEC which stands for Organization of Petroleum Exporting Countries. it was formed on 14 September, 1960 in Baghdad.
Initially, it had five members namely Iraq, Iran, Kuwait, Saudi Arabia and Venezuela. Later, its headquarters shifted to Vienna, Austria.
The formation of OPEC was a turning point in the way international crude oil prices were determined in the global oil market. It also had a bearing on international relations. When they reduce production, the price increases and vice-versa.
The decision to cut production of crude oil or increase it is taken together by the OPEC countries, and they behave like an oil cartel. Recently, Russia has also joined their ranks and the grouping is now referred to as OPEC+.
The two leading producers of oil are apparently at odds with each other. Russia wants to increase the supply of oil but Saudi Arabia does not want to. Saudi Arabia is urging member nations to be very cautious about increasing production.
This despite international crude prices rebounding considerably. At the beginning of 2020, crude oil was trading at 69$ a barrel. The pandemic plummeted the prices down to 20$ a barrel. In October 2021, the price shot back to almost 86$ a barrel.
The pandemic lockdown had brought down the global demand for oil drastically with shipping, aviation and rail all coming to an abrupt halt because of the lockdown. These sectors are the main consumers of oil apart from local transportation which also came to a sudden stop due to the pandemic lockdown.
But now, with economic activity rebounding to pre-Covid levels, the demand for oil has skyrocketed but Saudi Arabia is unrelenting and refuses to increase oil production to meet the demand. This has led to very high oil prices throughout the world. Reports say that OPEC is withholding 7 million barrels a day of supply from the market.
If it is released global prices would fall dramatically. In January this year, Saudi Arabia cut production by 1 million barrels a day. This led to increase in oil prices.
America has not been able to maintain its full production capacity as Texas, the oil-producing state of America, is experiencing severe cold and extreme weather conditions because of which oil production has come down by about 4 million barrels a day. As a result oil prices again rallied and hit a 13-month high. An artificial shortage imposed by OPEC has given oil prices a boost.
Even this price rise has not been able to compensate for the loss suffered by the oil producing countries during the pandemic. The OPEC countries want the price to rise further for them to be able to balance their budget.
Otherwise, most of them are staring at a cumulative 100 billion dollar fiscal deficit this financial year. With the world steadily moving towards renewable energy, the future of oil producing countries looks bleak. One reason they want to make the most of it as long as the party lasts.
How does it impact India? India is the third largest importer of oil in the world and it imports 85% of its oil needs. This make India very vulnerable to increase international crude oil prices.
Since the OPEC+ have not increased supply to the market, the domestic price of oil has been soaring through the roof upsetting the entire budget. The government has no other option but to transfer the price increase to the consumers.
As a result, the retail price of oil has crossed the three digit mark for the first time in the history of independent India. Of course, the taxes levied by the government is one of the reason for the high prices but the government also has its hands tied because of the slowing economy due to the pandemic. It is a catch-22 situation.
But there is no hope of respite soon. We are in the middle of an oil war. The oil cartel, OPEC+, wants to dictate oil prices and keep them high. High prices are undermining the recovery from the pandemic.
They must be brought down. To counter this, six countries namely the United States, India, UK, South Korea, China and Japan have come together to challenge this. They want to do this by dipping into their strategic reserves.
All countries store a certain amount of crude oil for emergency needs such as war during which it is possible that the supply of crude oil can be cut off. These strategic reserves ensure that the oil needs are fulfilled during such times.
But they are not very high. At most, they can supply for a month. India maintains a strategic reserve of 40 million barrels. Yet, these countries want to use their reserves to break the monopoly of the oil cartel by pumping more oil into the market.
The United States is going to release 50 million barrels of oil, India 5 million barrels, the UK 1.5 million barrels and Japan 4.2 million barrels. South Korea and China are also going to release oil from their strategic reserves.
Together, these six countries are going to release anywhere between 65 to 70 million barrels of oil to bring down the price. OPEC is planning to counter this by further cutting down supply of crude oil to maintain high prices thus triggering a global oil war.
This is bad news for the whole world as it is not going to help any country. The sooner this crisis is resolved, the better for the world and its economy.
