Explained: OPEC+ Crisis, UAE-Saudi Clash Over Oil
While India’s petrol and diesel prices have crossed Rs 100/liter in most states, the top oil-producing nations are in the middle of a price war. The war is between OPEC+, UAE, and Saudi Arabia. In case you do not know what OPEC is we highly recommend you go through this piece on marketfeed on What is OPEC and How Does it Control Global Crude Prices?
Nevertheless, let me give you a brief about OPEC. OPEC stands for Organization of the Petroleum Exporting Countries. Established in the 1960s consisting of 13 of the world’s major oil-exporting nations. The purpose of the organization was to control the global supply of oil and its prices, thereby giving a fair price discovery to all member and non-member nations.
OPEC+ or OPEC Plus was a cartel formed in 2016 by 10 other oil-producing nations excluded from OPEC, these were Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan, and Sudan. OPEC and OPEC Plus were later amalgamated and now work together making OPEC Plus a 23 member organization.
The organization conducts meetings twice a year to establish specific quotas or targets for each member based on current supply and demand, as well as expectations of future supply and demand. The basic norm is that all member nations have to follow these quotas. Since most of OPEC Plus’ oil production comes from state-run oil companies, it is easy for officials to control output/supply.
When the pandemic started, oil consumption went down, demand decreased and therefore oil prices fell. In fact, in the US, WTI oil futures prices went negative to -$37.63 a barrel. To protect these oil prices from falling further OPEC nations decided to cut production since it would reduce supply and prices would eventually rise. The OPEC countries formed a pact to cut oil production till April 2022. The plan worked well so far till the global crude oil price surpassed normalcy. In India, many states have reported petrol prices crossing Rs 100 a litre. The OPEC nations have now decided to meet and mitigate the issue of soaring oil prices. The natural thing to do would be to increase oil production. On 5th July, the member countries met at a video conference, but the meeting was called off after a spat between UAE and Saudi Arabia.
Problem #1: UAE wants to produce more oil, Saudi disagrees
OPEC Plus allots a baseline quota to each nation. A country needs to keep up with its baseline quota of producing oil. Neither too much, nor too little. UAE has been allotted a baseline of 32 lakh barrels per day. UAE Energy Minister Suhail Al-Mazrouei said that the level is “totally unfair and unsustainable.” The UAE thinks it can produce more than the current baseline, it says that it can produce 38 lakh barrels per day. Obviously, more barrels produced would mean more money coming into the country.
Energy Minister Al-Mazrouei believes that the country has ‘sacrificed’ a lot in terms of production capacity as compared to other members. Saudi Arabia on the other hand believes that THEY sacrificed more production capacity as compared to other countries. Astonishingly, Saudi is the LARGEST producer of oil amongst the OPEC Plus countries and in the world.
Problem #2: Saudi says extend agreement date, UAE refutes
OPEC had signed an agreement for cutting oil production that was valid for two years ending April 2022. Saudi Arabia wants the agreement for oil cuts to be 'extended' by 6 months till the end of 2022.
Naturally, UAE would not be happy with the extension as they would lose an opportunity to earn some extra income given that they are focussing on increasing oil production.
The 18th OPEC Plus meeting was called off. This is not the first time that there has been a clash amongst OPEC nations. Last year, Saudi and Russia had a disagreement on cutting oil production where Russia refused to cut oil production, unlike other OPEC nations. There have been multiple instances where different countries conflicted on production and price. In most conflicts, Saudi has a role and seems to be the big brother of OPEC member nations.
Saudi and UAE are amidst a political cold war. Saudi had imposed trade restrictions on UAE. Any company operating in Saudi would be forced to set up their regional office in Saudi or face business restrictions. This would mean that companies operating in both countries would have to choose between the two. Saudi Arabia imposed travel restrictions to and from UAE the very next day the OPEC Plus dissension took place.
How Does This Conflict Impact India?
India’s ex-Petroleum Minister Dharmendra Pradhan had locked horns in the international forum with Saudi Arabia. Pradhan had pressed OPEC to cut down on production curbs in other countries. He had stated the importance of the right petroleum prices for all-around economic development.
India had filled its 'strategic oil reserves' when prices were rock bottom last year. These reserves would then be used to cushion oil prices whenever they soared. Saudi had also nudged India to use these reserves instead of pressing for reducing production curbs. So can India actually use these reserves to control oil prices? The answer is NO. These reserves are way too small to have an impact on oil price control. India is planning to double its strategic reserves in the near future. It is planning to privatize the whole initiative incentivizing private companies that set up strategic oil reserves
India faces way too many problems right now. Uncertain monsoons, rising inflation, possible US interest rate cuts, and high petrol prices. If petroleum prices are not curbed, India can expect some really high inflation rates. Goods would become expensive and transportation costs would increase. The only option available then would be for the government to cut down on high taxes that it charges on petrol. It would be in the best interest of India for UAE and Saudi Arabia to settle their vows and come to an agreement.