Recently, the Organization of the Petroleum Exporting Countries (OPEC+) — that includes Saudi Arabia and Russia — said that they would slash production by two million barrels a day. Though this is not the first time OPEC+ has done so, it did create a flutter in the market given the current geo-political situation.

The reason for OPEC+ is obvious — to check oil prices from declining.

But, this cannot be a long-term decision as the OPEC+ cannot move ahead without worrying about the impact of such decisions on demand — as high prices create more concerns about recession and demand destruction. Therefore, OPEC+ has to be mindful of consumers like India and China.

India’s stand

Hardeep Singh Puri, Minister for Petroleum & Natural Gas, recently stated “India will buy oil from wherever it has to for the simple reason that this kind of a discussion cannot be taken to the consuming population of India.”

To a question on Russian oil he said, “India has not been told by anyone to stop buying oil from Russia. If you are clear about your policy, which means you believe in energy security and energy affordability, you will buy from wherever you have to purchase energy from sources.”

This Puri reportedly said after his meeting with US Energy Secretary Jennifer Granholm.

More recently, Puri at the fifth South Asian Geoscience Conference, Geo India 2022, said, “At present, five million barrels of petroleum is being consumed in our country every day and it is also increasing by three per cent, which is higher than global average of around one per cent.”

Clearly, India’s sheer demand size gives it a voice in the global market and if consumers like India and China combine forces, then it would become difficult for producers to play on the price.

According to Ehsan Ul-Haq, Lead Analyst at Refinitiv in London, “Although the announcement is for 2 million barrels a day, my assessment is it will be much less and at a pro-rata basis. This is a short-term reaction.”

The International Energy Agency’s Oil Market Report of October, took a similar line: “The decline in OPEC+ supply will be smaller than the announced 2 million barrels/day reduction in production targets, with the majority of the alliance’s members already producing well below their ceilings due to capacity constraints.”

“Our current estimate is for a decrease of around one million barrels/day in OPEC+ crude oil output from November, with the bulk of the cuts delivered by Saudi Arabia and the UAE. Further production losses could come from Russia in December, when an EU embargo on crude oil imports and a ban on maritime services go into full effect. Russian officials have threatened to cut oil production in order to offset the negative impact of proposed price caps,” the report said.

Changed scenario

Why is it different this time? “While previous large spikes in oil prices have spurred a strong investment response leading to greater supply from non-OPEC producers, this time may be different. US shale producers, traditionally the most responsive to changing market conditions, are struggling with supply chain constraints and cost inflation – and, so far, they are maintaining capital discipline.

This casts doubt on suggestions that higher prices will necessarily balance the market through additional supply,” the report said.

Clearly, it will lead to destruction in the market.

“What is more important is to see how the demand will respond to higher prices as there is lot of inflationary pressure in Europe and some other consumer nations as well. For developing world, it is double whammy — high fuel prices and strong dollar (oil is majorily traded in dollars),” Ehsan Ul-Haq said.

A drop in demand will impact producers. “Sourcing nations need to think whether to handle high food prices or fuel prices, as even food prices are high which has put inflationary pressure on economies. They (sourcing nations) will need to handle both and there will be demand destruction in food as well as fuel,” he said.

Not to forget the scene in China, he pointed out. “The demand in China has not risen as much as it used to be.” The biggest consumer of oil of the total 99.6 million barrels per day is the US, followed by China and India. Though the US is also the largest producer today, it still needs to import 10-11 per cent to meet its demand. India on the other hand imports more than 80 per cent of its oil requirements.

On whether the latest decision will mean India sourcing more Russian crude, he said, “let us remember that most of the Indian refineries can process only limited quantum of Russian oil because of the crude quality. Indian refiners are mainly dependent on West Asia for the supply.”

Robin Mills, CEO, Qamar Energy, an energy consulting and advisory services company , said “There is not much India can do in the short term, but it is pursuing the increase in electric vehicles. It should try to avoid fuel subsidies or tax reductions and instead protect low-income consumers in other ways.”

“The cap on oil prices (as being discussed by G7) is possible, but it will have major unintended consequences. India needs to think about how it secures the benefits of the price cap and how to redistribute those to consumers,” he added.

A middle path which hurts neither the producer nor the consumer is the ideal situation.

For India the challenges are: demand — to meet its demand it has to import; subsidy — to protect consumers an artificial lid is put on retail price; and forex outgo — oil is bought in dollars.

While the transition towards other sources of energy and increasing the fossil fuel output is an ongoing process, India due to its sheer consumer base can bargain on price, if it remains consistent in its approach and does not buckle under international pressure as it did during the Iran sanctions.

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