Sarat Chandra IAS Academy

Output Pact by OPEC +

Output Pact by OPEC +

#GS2 #International Organisations #Growth and Development

Context: Recently, the United Arab Emirates (UAE) pushed back against a plan by the Organization of the Petroleum Exporting Countries (OPEC) oil cartel and allied producing countries to extend the global pact to cut oil production beyond April 2022.

The Output Pact & Fluctuating Oil Price:

  • The OPEC+ group of countries had, in April 2020, entered into a two-year agreement (Output Pact), which entailed steep cuts in crude production to deal with a sharp fall in the price of oil as a result of the Covid-19 pandemic.
  • The price of Brent crude hit an 18-year low of under 20$ per barrel in April 2020 as economic activity around the world crashed as countries dealt with the pandemic.
  • The initial production cut by OPEC+ was about 10 million barrels per day or about 22 per cent of the reference production of OPEC+ nations.
  • In November 2020, the prices started rising and in July 2021, they were USD 76.5 per barrel (from 40$ in October 2020) especially due to the steady rollout of vaccination programmes around the world.
  • OPEC+, however, maintained lower levels of production despite crude oil prices reaching pre-Covid levels, with Saudi Arabia, notably, announcing a further cut in production of 1 million barrels per day for the February-to-April period, which helped boost rising prices even further.
  • The OPEC+ group ran into sharp criticism from developing economies, including India, for deliberately maintaining low supply levels to raise prices.
  • In April, OPEC+ agreed to gradually increase crude production, including a phased end to Saudi Arabia’s 1 million barrel per day cut in production by July.

UAE’s Objection: What is the Issue?

  • UAE agreed that there was a need to increase crude oil production from August 2021, but did not agree to a condition by the OPEC Joint Ministerial Monitoring Committee (JMMC) that the two-year production agreement be extended by six months.
  • The UAE’s key objection to the existing agreement is the reference output used to calculate the total production apportioned to each oil-exporting country.
  • The UAE noted that the baseline production level reference used in the current agreement was not reflective of the UAE’s production capacity and, therefore, led to the UAE being apportioned a lower share of total production of crude oil.
  • It also said that baseline reference production levels were unfair and that it would be open to extending the agreement if baseline production levels were reviewed to be fair to all parties.

How will this impact India?

  • India is the world’s third-biggest oil importer. India imports about 84% of its oil and relies on West Asian supplies to meet over three-fifths of its demand.
  • As one of the largest crude-consuming countries, It is concerned that such actions by producing countries have the potential to undermine consumption-led recovery and more so hurt consumers, especially in our price-sensitive market. India believes that the high price of crude oil is slowing down the economic recovery of developing economies post the pandemic.
  • If the UAE and other OPEC+ nations do not reach an agreement to increase production in August, expected relief in the form of lower crude oil prices could be delayed.
  • India is currently facing record-high prices of petrol and diesel, with pump prices of the former exceeding Rs 100 per litre in 13 states and Union Territories.
  • High crude prices have led to Indian oil marketing companies hiking the price of petrol by about 19.3% and that of diesel by about 21% since the beginning of 2021.
  • The high prices might also increase the Current Account Deficit and put inflationary pressure on the Indian economy.

Organization of the Petroleum Exporting Countries:

  • It is a permanent, intergovernmental organization, created at the Baghdad Conference in 1960, by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela.
  • Headquarters is located at Vienna, Austria.
  • OPEC’s main objectives are:
    • Unification and coordination of petroleum policies among Member Countries, in order to achieve just and stable prices for petroleum producers
    • Ensuring of an efficient, economic and regular supply of petroleum to consuming nations and an adequate return of investment
  • OPEC membership is open to any country that is a substantial exporter of oil and which shares the ideals of the organization.
  • Today OPEC is a cartel that includes 14 nations, predominantly from the middle east whose sole responsibility is to control prices and moderate supply.

Organization of the Petroleum Exporting Countries Plus

  • The non-OPEC countries which export crude oil along with the 14 OPECs are termed as OPEC plus countries.
  • OPEC plus countries include Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan and Sudan.
  • Saudi and Russia, both have been at the heart of a three-year alliance of oil producers known as OPEC Plus — which now includes 11 OPEC members and 10 non-OPEC nations — that aims to shore up oil prices with production cuts.
Output Pact by OPEC +
Output Pact by OPEC +

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