04-September-2024-Special-Article

OPEC+ DISCUSSING DELAY TO PLANNED OIL OUTPUT HIKE IN OCTOBER

The Organization of the Petroleum Exporting Countries (OPEC) and its alliance OPEC+ play a crucial role in determining global oil production and prices.

Recently, OPEC+ nations have announced a reduction in oil output, raising concerns about global oil markets and India’s energy security.

As India’s fuel consumption continues to rise, this decision could significantly impact its energy import strategies, compelling it to seek alternative sources like the Americas.

India, the world’s third-largest oil consumer, imports more than 85% of its oil, making it vulnerable to price fluctuations and supply disruptions. This situation necessitates strategic adjustments in India’s energy policy.

About OPEC

• Establishment: OPEC was founded in 1960 at the Baghdad Conference by five countries: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela.
• Headquarters: Vienna, Austria.
• Objective: The organization aims to coordinate petroleum policies among its member nations to ensure fair and stable oil prices for producers, a consistent supply for consumers, and equitable returns on investments.
• Current Members: OPEC has 12 member countries: Algeria, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, the UAE, and Venezuela.
• Membership Changes: Qatar left OPEC in 2019, and Angola withdrew in 2024.
• Global Role: OPEC produces around 30% of the world’s crude oil, with Saudi Arabia being the largest producer within the group. OPEC countries control roughly 49% of global oil exports and hold around 80% of proven oil reserves.

What is OPEC+?

• Formation: In 2016, OPEC formed an alliance with 10 non-OPEC oil-producing countries to address falling oil prices driven by an increase in US shale oil production. This led to the creation of OPEC+.
• Members: OPEC+ includes the 12 OPEC members along with Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan, and Sudan.
• Production Share: OPEC+ countries together produce about 40% of the world’s crude oil.

Why is OPEC+ Cutting Oil Production?

• Market Stabilization: The main goal of OPEC+ is to stabilize and raise oil prices by reducing production. This helps balance supply and demand in global markets and ensures better revenues for oil-exporting nations.
• Non-OPEC Supply Growth: The International Energy Agency (IEA) has projected a rise in crude oil supply from non-OPEC countries, particularly the US, Canada, Brazil, and Guyana. This increase threatens OPEC’s market dominance, prompting production cuts to maintain price stability.
• Geopolitical Tensions: Conflicts in oil-producing regions, shipping disruptions, and sanctions, especially those related to Russia, have affected global oil supplies. OPEC+ uses production cuts to counter these issues and manage market volatility.
• Long-term Strategy: OPEC+ aims to prevent market crashes caused by overproduction. By controlling output, they hope to create a more predictable and stable oil market environment.

Implications of OPEC+ Oil Cuts

• Global Oil Prices: A reduction in OPEC+ oil production is likely to cause a spike in global oil prices. This could lead to increased import costs for nations heavily reliant on oil imports, potentially driving up inflation and slowing economic growth.
• Impact on India:

• Shift in Supply Sources: Due to reduced production from OPEC+, India may increase oil imports from non-OPEC+ countries like the US, Canada, Brazil, and Guyana. This could diversify India’s supply base and reduce its dependence on West Asian crude oil. Notably, India’s imports from West Asia have already declined from 2.6 million barrels per day (mb/d) in 2022 to 2 mb/d in 2023.
• Price Volatility: While diversifying suppliers can enhance energy security, India could face greater exposure to price fluctuations in these new markets. This could increase the cost of oil imports, widen the current account deficit (CAD), and add to inflationary pressures.
• Economic Strain: Rising oil prices can affect India’s economy, especially industries reliant on oil such as transportation and manufacturing. This could slow down economic growth and lead to higher inflation rates.

India’s Growing Fuel Consumption and Refining Capacity Expansion

• Fuel Consumption Growth: India’s demand for liquid fuels is expected to grow from 5.3 mb/d in 2023 to 6.6 mb/d by 2028, a 26% increase over five years. This growth is driven by factors such as population increase, higher GDP growth, and rising GDP per capita.
• Refining Capacity Expansion: To meet growing fuel demand, India has expanded its refining capacity by 1.3 mb/d between 2011 and 2023. The country is planning further expansions, including the 1.2 mb/d Ratnagiri mega project, to be completed by 2028.

Challenges in India’s Energy Sector

• Energy Security and Import Dependence: India relies on imports for over 75% of its oil needs, a figure that is projected to surpass 90% by 2040. This makes India vulnerable to international market volatility and geopolitical disruptions, such as the Russia-Ukraine war and Western sanctions on Russian oil.
• Declining Domestic Production: India’s domestic crude oil production has been on the decline due to ageing oil fields and insufficient investment in exploration. Production dropped from 32.2 million tonnes in 2019-20 to 29.2 million tonnes in 2022-23.
• Infrastructure Bottlenecks: India faces infrastructure challenges such as limited pipelines and storage facilities, land acquisition delays, and regulatory hurdles, which hamper the efficient transportation and distribution of oil.
• Rising Import Bills: India’s oil import bill is expected to reach USD 101-104 billion by FY25, up from USD 96.1 billion in FY24. This growing bill could widen the CAD and lead to higher inflation.

Way Forward

• Strengthening Bilateral Ties: India should strengthen relations with oil-producing nations in the Americas to secure stable and favorable supply agreements.

• Investing in Refining Capacity: India should prioritize its refinery capacity expansion plans to meet rising fuel demand and reduce import dependency.
• Building Strategic Reserves: Developing strategic petroleum reserves will provide a buffer against global supply disruptions and price shocks.
• Energy Diversification: India must accelerate its transition to renewable energy sources to reduce dependency on imported fossil fuels and enhance energy security.
• Monitoring Global Trends: Staying updated on OPEC+ decisions and global market trends will help India make informed adjustments to its energy strategy.

Mains Question:

1. Discuss the implications of OPEC+ oil production cuts on India’s energy security and economic stability and suggest measures to mitigate its impact. (150 WORDS)