Ministers of the 13-member Organization of the Petroleum Exporting Countries (Opec) were to meet on Tuesday, as this paper went to press, in the face of crude oil prices hitting a five-month low. This is a time of pulls and pressures for Opec: Some members want to cut production while there is global pressure for steady crude prices.
Illustration: Jayachandran / Mint
Two members of the cartel, Iran and Venezuela, have openly demanded production cuts in a bid to garner more oil revenue. Against this is a bloc of Arab countries led by Saudi Arabia, that feel the price band of $90-100 per barrel of oil is fine. There is considerable global pressure on Opec to keep the price of oil in check. More so as Opec’s oil production cuts in 2006-07 created conditions that led to an unprecedented oil price surge, with crude touching $147.27 per barrel in July.
At a broader level, the cleavage in the grouping is not only over price, but political as well. Iran, Venezuela and Russia, perhaps the biggest non-Opec producer of oil, are seen as “bad boys” of the international community. Domestically, all three regimes enjoy popularity because of their funnelling oil revenues to populist ends. In all three cases, this has led to poor governance, aggressive foreign policy and, in general, a defiance of the international community. As a result they have a constant urge to get more money for every barrel of oil exported.
They may still have their way. In response to Western pressure, Saudi Arabia stepped up oil production. The result is that Opec is producing anywhere from 790,000 to one million barrels per day (bpd) more than the collective ceiling of 29.67 million bpd on output.
Opec chairman Chakib Khelil of Algeria has said that by early next year there could be an oil surplus of 500,000-1.5 million bpd. In such a situation, Opec will certainly cut production and oil prices could rise again.
What does this imply for India? It cannot take things easy. Even at the current levels, oil prices are not sustainable and cannot be subsidized for long. Oil companies’ under-recoveries that have been pushed under the carpet (in the form of dodgy oil bonds issued by the government) cannot be wished away. Unless prices are raised, serious damage to the economy cannot be averted. If Opec cuts production in December, another oil price shock may be on way. A wise course would be to raise prices now.
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