3 min read.Updated: 03 Oct 2021, 09:55 PM ISTLivemint
Opec+ has re-asserted control of crude prices as a big cartel while the world’s pivot towards clean energy proceeds too slowly. As we can’t count on cheap oil, let’s lighten domestic levies
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The age of oil is far from over, in spite of the global urgency to curb carbon emissions, the ‘plus’ avatar of the Organization of Petroleum Exporting Countries (Opec+) has regained unity as a cartel, and, as global crude nears $80 per barrel, it is clearly time for India to ease domestic levies on fuel. Our policy since the oil-price slide of 2014 has been to keep retail prices high and mop up the external windfall of lower import bills through taxes, but without offering relief when costs rise instead. Apart from its heavy burden on fuel-users, this approach stokes inflation and makes it harder for our central bank to fulfil its mandate of price-stability. It may still have been bearable if dearer oil were just a blip, but two widely-assumed factors of price moderation need interrogation. First, can clean energy reduce oil demand enough to make a difference? Second, to what extent has shale supply from US frackers loosened Opec+’s grip on the global market for oil?
With Saudi Arabia’s row with Russia that coincided with last year’s covid crash now well in the past, an Opec+ huddle on Monday is expected to take a call on a speedier revival in combined output than its current schedule of 400,000 daily barrels every month, as post-covid combustion resumes. By Opec’s latest forecast, the world’s oil market will regain its pre-covid volume of some 100 million barrels per day by 2023 and then expand to plateau at almost 108 million by 2035. An economic slump in fuel-guzzler China could get in the way of that, but the cartel’s new projection of renewables making up less than a tenth of global energy use by then does look credible, given our slow progress against climate change that prompted Riyadh’s recent dismissal of a net-zero emission target by 2050 as a “La La Land" fantasy. If Opec is confident of taking its share from a third of today’s market to 39% by 2045, attribute it to cost dynamics. This also explains why Saudi sway over prices persists in the face of America’s shale-oil gush. Once US drillers began using advanced tools to fracture rocks and crack open elusive reserves about a decade ago, dozens of new frackers turned America into the world’s biggest oil producer. Its 10.6 million daily barrels last month exceeded Saudi and Russian output by about 1 million each. But shale producers are estimated to break even at $40-45 a barrel, while Arabian desert oil costs less than a tenth to extract, with fixed assets long defrayed. This lets Riyadh open and close its taps of supply at will, even if just to squeeze out high-cost rivals via a glut of cheap oil, as seen in the 1980s. The past decade’s episode left US frackers battered, though with survivors far more efficient, and Opec with renewed power over international prices. On balance, while oil’s $147-per-barrel peak of 2007 may not be hit again, it could yet stay at elevated levels set by Opec+.
The past decade saw data replace oil as the top source of monopoly profits and frackers relieve the US of its energy anxiety. With its economy better able to absorb oil shocks, like the stagflationary spike of the 1970s (and even slower upshoots, as seen in the 2000s), the US recently pivoted its geo-strategic focus from West to East Asia. Momentous as this is, the economies of big importers like India remain vulnerable. Our post-independence tryst with self-reliance was taken apart by oil needs. And our import-dependency remains high. We can’t count on cheap oil. Let’s slash fuel taxes.