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  Will Opec ‘cut’ move break the gridlock

Will Opec ‘cut’ move break the gridlock

| PARSA VENKATESHWAR RAO JR
Published : Oct 1, 2016, 2:17 am IST
Updated : Oct 1, 2016, 2:17 am IST

It seems that the influential cartel of the Organisation of Petroleum Exporting Countries (Opec) has at last managed to break out of the gridlock of production glut and declining prices.

It seems that the influential cartel of the Organisation of Petroleum Exporting Countries (Opec) has at last managed to break out of the gridlock of production glut and declining prices. At its meeting in Algiers on Thursday, Saudi Arabia, the country with the largest production and market share, had agreed to cut its output after resisting it for more than a year. Though the details have to be worked out as to how much each of the 14 member-countries would reduce, it is clear that the large chunk of reduction would have to happen with Saudi Arabia.

The reason for the continuing oversupply of production has been because of the coming out of Iran after the United Nations economic sanctions ended as a result of a deal with regard to its nuclear programme was worked out. Iran pumping crude into the oil market has created problems at a time when demand was low and sluggish because of the continuing economic recession in the eurozone and in North America. Saudi leaders held that if they were to cut back on production, Iran, its main rival in the region, would establish its dominance, and it would be difficult for Saudi Arabia to clutch its way back into the top slot. It was indeed a question of market perception rather than economic rationality, but the markets do not exactly work on the neat demand-supply equilibrium.

The Opec members seem to have realised that stubbornly holding on to the status quo would not help and that it was not the way to move forward. Everyone, and Saudi Arabia much more than the others, was acutely feeling the pinch of falling oil revenues. It was forced to cancel bonus payments to government employees, and cut the salaries of ministers by 20 per cent and of members of the Shura, its consultative council, by 15 per cent. This was an unprecedented measure. The need to do something to push crude prices up was compelling.

Market analysts are, however, coy about speaking on the big-picture state of the world economy. If demand does not pick up due to persistent low economic growth in advanced economies, will the reduction in oil production help in increasing export revenue There are very faint signals of revival in the Western economies. No alternative market of rising demand has been discovered. China, Japan and India, three of the largest Asian economies, are not clocking growth rates that would stimulate greater consumption of crude oil.

As a matter of fact, India’s oil import bill has been falling, though the quantum of oil imported had increased. According to ministry of petroleum and natural gas figures, India has imported 202.1 million tonnes for $64 billion in 2015-16 compared to $112.7 billion it had paid for 189.4 million tonnes in 2014-15.

It has been a happy, or uncanny, depending on the point of view, coincidence that ever since the Narendra Modi government came to power in May 2014, international oil prices have been falling steadily. The price per barrel slid from $105.73 in May 2014 to $62.50 in May 2015 to $45.98 in May 2016. It was a windfall for the Modi government.

There are differing views whether the low prices were passed on to the end-user, whether the oil marketing companies have made good their liabilities, and whether the economy as a whole benefited from it. While the debate would continue even as economists and statisticians do their number-crunching, there is one fact that stands out. Lower oil prices had a negative impact on India’s petroleum product exports. India’s petroleum product exports fell from $56.6 billion in 2014-15 to $29.1 billion in 2015-16.

As an emerging market economy, India’s stakes in the oil market are double-edged. It stands to gain from low crude oil prices as well as from an increase in prices. As the oil import bill is higher, a lower price is preferable.

The moot question on oil prices is that it has to be less arbitrary than it has been so far. And it has to reflect the pull and push of general economic trends. There was an irrational surge in crude oil prices in 2011 ($107.46 per barrel), 2012 ($109.45), 2013 ($105.87), when the world economy was experiencing the tailspin of the global recession. Problems perhaps could have been avoided if there was rational pricing in these years. Speculation in oil prices, which is not much talked about in trade circles, seemed to have caused much harm. It has to be noted that the speculation happens in Western oil markets rather than in oil-producing countries. Opec is in control of the production output, but there is not much it can do about price fluctuations, which tend to swing from bubble to bust.

It is, of course, futile to blame the manipulation of crude oil prices by the manipulators in Western markets. Opec needs to evolve its own rationale for pricing. There was a time in 1997 when Opec felt oil prices should operate within a certain band, and that it should not fall too low nor should it rise too high. The wild swings would cause problems not only for the consumers in the rest of the world, specially in the emerging and developing economies, but it would also destabilise the domestic economies of the Opec members themselves. Of course, there is the gratuitous advice offered to Opec members, especially Gulf Arab countries, that they need to diversify their economies and they should not remain a single-commodity setup. It is a call that the Arab governments need to take for themselves. Meanwhile, there is a compelling need on the part of the oil-producing countries to maintain a reasonable price band to maintain stability for themselves as well as for the rest of the world.

The author is a Delhi-based commentator and analyst