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Sansad TV: Perspective- OPEC to Slash Oil Output

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Introduction:

The OPEC+ alliance of oil-exporting countries have agreed to cut production by two million barrels per day beginning in November. Members of the oil producers’ group, which includes Russia, are saying that they want to stabilise prices, which have fallen in recent months as the world economy slows. The cut marks the biggest reduction by the group since the height of the pandemic in 2020 when OPEC members slashed output by 10 million barrels per day. Also, it comes despite countries, including the U.S. which has repeatedly asked the organization to increase oil production, after oil prices skyrocketed due to the Russia-Ukraine war. A reduction in output will inevitably impact oil prices around the world.

OPEC:

  • The OPEC was founded in Baghdad, Iraq,with the signing of an agreement in September 1960 by five countries namely Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. They were to become the Founder Members of the Organization.
  • It is a permanent, intergovernmental organization.
  • Currently, the Organization has a total of 14 Member Countries.
  • OPEC’s objectiveis to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.
  • OPEC membership is open to any country that is a substantial exporter of oil and which shares the ideals of the organization.
  • OPEC’s 14 members control 35 percent of global oil supplies and 82 percent of proven reserves. With the addition of the 10 Non-OPEC nations, notable among them Russia, Mexico and Kazakhstan, those shares increase to 55 percent and 90 percent respectively. This affords OPEC+ a level of influence over the world economy never seen before.

Slashing production:

  • This is the largest cut since the beginning of the Covid-19 pandemic. Brent crude, the international benchmark, was up 28 cents or 0.3%, at $92.08 a barrel after the cut was announced
  • In light of recent falling gas prices, OPEC+ officials had decided in September to reduce oil output by a modest 100,000 bpd after they first agreed in the previous month to increase production by the same amount.
  • Oil prices skyrocketed after Russia’s invasion of Ukraine in February, and have since begun to soften over the past few months, before dropping sharply to under $90 in September due to fears of a recession in Europe and reduced demands from China because of its lockdown measures.
  • Today’s cut is the biggest of its kind since 2020 when OPEC+ members slashed outputs by 10 million bpd during the Covid-19 pandemic, Reuters reported.
  • The reductions would boost prices and be extremely beneficial for the Middle Eastern member states, to whom Europe has turned for oil after levelling sanctions against Russia since it invaded Ukraine.
  • OPEC+ members are concerned that a faltering global economy would reduce the demand for oil, and the cuts are seen as a way to protect profits. Increased oil prices, which first occurred during the invasion of Ukraine, have helped Saudi Arabia, one of the founding members of OPEC, become one of the world’s fastest-growing economies

How will this affect India? 

  • India – which imports over 85% of its crude oil consumption — is confident of navigating the spikes in energy prices due to the oil output cut. While India and many other nations were expecting a one million barrel per day cut in supply, the 2 million bpd cut has taken large parts of the world by surprise.
  • India’s oil imports from Russiahit a record high in June as Moscow offered major discounts for its oil amid Western sanctions to boost its Rouble.
  • While Russian oil accounted for about 16% of India’s overall imports in April-August, a five-fold increase from last year, the purchases from Russia fell 2.4% in September. Currently, Saudi Arabia has emerged as the second-biggest oil supplier to India while Iraq maintains the top spot.
  • India has become Russia’s No. 2 oil buyer after China as others have cut purchases since Moscow’s invasion of Ukraine in late February. The next OPEC+ meeting will take place on Dec 4, after the oil cuts kick in.