Economy
What do Opec+ production cuts mean for India?
Summary
Last week, Opec+ countries announced a voluntary oil production cut by 1.16 million barrels per day (bpd). Reduced global oil supplies can impact the economy of India, which is dependent on oil imports for approx. 85% of its energy needs. Mint explains:Last week, Opec+ countries announced a voluntary oil production cut by 1.16 million barrels per day (bpd). Reduced global oil supplies can impact the economy of India, which is dependent on oil imports for approx. 85% of its energy needs. Mint explains:
What’s behind the production cuts?
Opec+ producer countries, in early April, announced oil output cuts of approx. 1.16 million bpd. This voluntary cut, which is in addition to an existing 2 million bpd cut, is aimed at supporting market stability. The strategy for changing production targets has to do with the crude oil price that the Opec+ countries aim for. Recent production cuts, totalling 3.7% of global demand, will raise the crude oil price per barrel, which had slumped in March with Brent crude falling below the $75 per barrel mark. Higher prices might help cover up the losses producer countries faced after prices crashed.
What is the trend in crude oil prices?
Crude oil prices crashed in April 2020 due to the pandemic. Prices recovered when economies opened up. Subsequently, the Russia-Ukraine war saw prices rocket from $78 per barrel in January 2022 to over $120 per barrel in March 2022. But then the global economy slowed and a recession in advanced markets now looms large. This has resulted in declining demand for crude oil from major economies such as the US and EU, causing oil prices to start falling again. Post the announcement of voluntary output cuts by Opec+ countries, international oil price increased by approx. 6%.
What could be the impact on the Indian economy?
India is the third largest oil consumer and imports approx. 85% of its total crude oil requirement. The cut could raise crude by $10/barrel, increasing import bill and worsening the current account deficit by around 0.4% of GDP. This will impact foreign exchange reserves and result in depreciation of the rupee, which in turn can increase imported inflation.
Will there be an impact on common people?
For some time now, changes in international crude prices have not led to a change in the prices of petrol and diesel. Now, if the rise in crude oil import bill is passed on to the public, it may lead to cost-push inflation as every economic activity gets affected by oil price movement. On the flip side, with crucial assembly elections coming up, state-controlled oil marketing companies may be stopped from passing on the increased burden to consumers. That will further worsen the financial balance of the oil public sector units.
What can the government do?
India can turn to Russia for more supplies of cheap crude. But of late there’s been a small decline in Russia’s share in India’s oil imports. As a long-term strategy, the government should focus on alternative energy sources and building of better roads. The time is right for the government to work on bringing petroleum products within the goods and services tax. Energy efficient use of vehicles or an eco-driving culture should be inculcated.
Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.
