Why Have Key Oil Producers Vowed Output Cuts?

Context:

Saudi Arabia, Iraq, the United Arab Emirates, and Russia have all agreed on curbs on oil output that will begin in May and run through the end of 2023. Crude oil prices immediately rose in response to the announcement.

Points to Ponder:

OPEC+ 

  • The Organization of Petroleum Exporting Countries (OPEC) is a permanent international organization founded on September 10, 1960, in Baghdad by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. 
  • The goal of OPEC is to coordinate and integrate petroleum policy among its member countries to provide fair and stable prices for petroleum producers, an efficient, economical, and consistent supply of petroleum to consuming nations, and a fair return on capital for those investing in the business.
  • According to the Statute, “any country with a significant net export of crude petroleum and fundamentally similar interests to those of Member Countries may become a Full Member of the Organization if accepted by a majority of three-fourths of Full Members, including the concurring votes of all Founder Members.”
  • OPEC+ was founded in 2016 when OPEC joined forces with other oil-producing nations. Russia, Kazakhstan, Azerbaijan, Mexico, and Oman are among the ten new members of OPEC+. The decision to form OPEC+ was made in response to decreasing crude oil prices, which were exacerbated in part by a massive rise in US shale oil output since 2011.

OPEC+ countries cutting crude oil production

  • The fundamental goal of OPEC+ production cutbacks is to support market stability by lowering global crude oil oversupply, which has resulted in low oil prices and income losses for oil-producing countries.
  • The restrictions were made in reaction to several issues, including reduced oil demand owing to the COVID-19 epidemic, geopolitical tensions, and concerns about a potential economic downturn.
  • In addition to these variables, Russia declared a 500,000-barrel-per-day reduction after Western countries limited the price of its petroleum in reaction to the Ukraine conflict. Russia’s plan to reduce output was intended to restore “market relations” and support global oil prices.
  • The voluntary output restrictions are part of a larger strategy to regulate global oil supply and demand. Since 2016, OPEC+ members have coordinated production cuts to stabilize oil prices and minimize market volatility.
  • The current wave of production cuts supplements those announced in October 2022 and shows OPEC+’s continuous efforts to balance the global oil market.
  • The impact of the production cuts on oil prices and the global economy remains unpredictable and will be determined by several factors, including global demand for oil, geopolitical developments, and OPEC+ countries’ ability to meet production targets.

Impacts on India

    • India is significantly reliant on imported crude oil, and any increase in global oil prices as a result of production reduction might have an impact on the country’s economic and energy security.
  • Due to geopolitical circumstances, India’s crude oil imports from Russia have increased, and any disruption in supply might have a substantial impact on India’s energy demands.
  • If the output cuts raise world oil prices, it could lead to higher inflation and higher expenses for Indian businesses and consumers.
  • To meet its energy needs, India may need to investigate alternate crude oil sources, which could result in higher costs and competition with other countries.
  • The impact on India’s economy will be determined by the duration and extent of the production cuts, as well as the global oil market’s reaction to these cuts.
  • To achieve energy security, India may need to increase domestic production, diversify import sources, and invest in renewable energy sources.