As in the 1970s, the Organization of the Petroleum Exporting Countries (together with Russia) has weaponised oil, with its largest supply-cut since 2020 to send global oil prices sharply higher to $96 a barrel. This oil shock threatens the world economy—already burdened by an energy crisis due to the eight month-long war between Russia and Ukraine—with the prospect of sharply lower growth, if not recession, and higher inflation. Its impact is particularly serious for emerging economies like India that imports most of its requirements. Prima facie, global oil prices appear much higher than is warranted by demand-supply imbalances. Global demand for oil during the last quarter this calendar year is pegged at 101.01 million barrels a day while global supply is roughly similar at 101.68 million barrels a day, according to the US Energy Information Administration. However, OPEC’s decision to reduce output by two million barrels a day—which kicks in from November—will make the market tighter to ensure higher oil prices. There will be further upward pressure on prices if the US-led G-7 moves to impose price caps on Russian oil gain traction. Moscow has threatened that it would cut oil exports to countries participating in the putative price-cap plan. The oil cartel’s cuts in production thus may be accompanied by further shortfalls in oil supplies. Global oil prices are forecast to remain elevated at current levels, even breaching $100 a barrel by Christmas.
The oil cartel’s moves—dictated by Saudi Arabia in defiance of US pressure—exemplify a larger struggle underway to control the global oil market. US president Joe Biden even travelled to Saudi Arabia in July to persuade the kingdom to increase production to keep a lid on prices. But to no avail. The US is disappointed with OPEC’s decision as it seeks lower prices ahead of the crucial mid-term elections in November. It has accused the cartel of aligning with Russia to damage the world economy. As the US cannot step up shale oil production over the short-term, it has the option of releasing more oil from its strategic petroleum reserves to cool down global oil prices. There is also talk of reviving measures like the so-called “Nopec” legislation to crack down on oil cartels. America’s interest in lower prices contrasts with the Saudi-led OPEC’s interest in higher oil prices to incentivise more investments in production capacity. The kingdom also needs higher prices for its ambitious modernisation plans, all of which exemplify the deepening fault-lines between leading oil producers and consuming nations.
Elevated global oil prices are not good news for India that imports 86% of its requirements. Indications are that its crude import bill this fiscal is likely to substantially exceed last year’s level of 212 million metric tonnes worth $120 billion. A rule of thumb is that every increase in global oil prices by $10 a barrel raises the current account deficit—which is the broadest measure of India’s goods and services transactions—by $9-10 billion. With much higher oil prices currently, the deficit may thus hit 3.8% to 3.9% of the gross domestic product (GDP) in FY23, signalling greater vulnerability in India’s external accounts and further fall in the rupee’s exchange rate. Determined efforts must therefore be made to increase the levels of relative self-sufficiency by significantly stepping up domestic oil and gas production.
