The OPEC Cartel Losing Clout Will Benefit India...

Thu, 27 Oct Pre-Open

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The Organization of the Petroleum Exporting Countries (OPEC) is a cartel formed by major oil producing economies mostly the Middle East and other African, South American countries. This was formed for the benefit of the major oil producers. These members generally meet to decide whether the current oil price is feasible for production and also to rebalance any excess supply/demand that might arise due to various global factors.

Saudi Arabia acts as the head of this group due to the vast proven oil reserves that it holds. The biggest competition to this cartel comes from two sources. First the American shale oil producers and the second, Russians who are also a major exporter of crude oil. However, the steep fall in the oil prices over the past few years has resulted in huge pain for all the oil producers alike. A major cause of this fall is the global supply glut over demand of crude oil across the world. Oil producing countries which are majorly dependent on oil for their revenues are struggling and are reporting fiscal deficits.

It is here that the OPEC cartel has struggled to remain united. As declining oil prices is reducing revenues, each country is trying to increase its production i.e. exports to tide over the revenue shortfall and also importantly to protect market share internally and with other Non-OPEC competitors as well. Thus, the cartel has failed to remain united and cut its production driving oil prices further south to lows of $30 per barrel. Iran, part of the OPEC cartel which was under sanction earlier and hence not able to supply its crude oil is also now looking to export its crude to countries thus adding to the global supply. The International Energy Agency (IEA) expects the global output to exceed demand until the second half of 2017.

How does this benefit India? India has to import over 75% of its crude requirements. The country lacks crude reserves and hence is dependent on the international market for meeting its crude requirements. A prolonged softening of oil prices will mean lower import bill and crucially save us a lot of our foreign exchange reserves. If India is to transition to a middle income country the crude requirement will only increase and any form of cartelization will inflate the import bill of the country. India is already building strategic crude reserves pile which will store our daily crude requirements for any eventuality. Our ability to tie up long term crude supplies will be crucial to avoid any supply shocks that might arise due to any geopolitical events in the future. A weak cartel makes our job that much simpler.

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