Oil minister Puri urges OPEC to reduce oil prices

  • October 4, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Oil minister Puri urges OPEC to reduce oil prices

Subject: IR

Section: Groupings

In News: Oil minister Puri urges OPEC to be pragmatic, make global crude prices affordable.

Key Points:

  • Brent Crude oil prices have jumped from around $72 in June to around $97 per barrel in September 2023
  • Oil Minister Hardeep Puri appealed to OPEC to ensure that the global energy market remains balanced by ensuring that crude oil prices do not outstrip the paying ability of the consuming countries.
  • Puri has also been cautioning that unreasonably high oil prices could jeopardise the post-pandemic recovery and lead to an economic slowdown in various parts of the world, which could in turn hit global oil demand.
OPEC

  • The Organization of the Petroleum Exporting Countries (OPEC) was founded in Baghdad in 1960 and headquartered in Vienna.
  • OPEC has 14 member countries including the Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela as its founder members.
  • Currently, the Organization has a total of 13 Member Countries. Qatar is the last country to terminate its membership.
  • In its biannual meetings, oil ministers agree on production quotas for each member. They can control production since most of the member countries have state-run oil firms.
  • OPEC’s stated objective is to co-ordinate and unify petroleum policies among member countries and ensure stable prices for petroleum producers.
  • Most OPEC countries rely heavily on revenue from oil sales. High oil prices can hurt demand and low prices can affect the budget. Hence the organization tries to balance oil prices from getting too low or too high.

OPEC +:

  • OPEC+ refers to the group of 24 crude producers comprising OPEC members and non-OPEC members including Russia.
  • The OPEC members’ bloc is led by Saudi Arabia while Russia is the biggest producer amongst the non-OPEC members.
  • OPEC controls 35% of global oil supplies and 82% of proven reserves. These figures increase to 55% and 90% respectively with the addition of non-members to form the OPEC+ group. This enables the OPEC+ group to have substantial control of oil prices around the world economy.

Why is the price rise more worrisome for India?

  • India is the world’s third-largest consumer of crude oil and depends on imports to meet over 85 percent of its requirement.
  • Given the country’s extremely high import dependency, India’s economy is sensitive to oil price volatility. 
  • Apart from inflationary pressures, high oil prices could have implications for India’s trade balance, foreign exchange reserves, the rupee, and the overall health of the economy.

What has supported the recent price surge?

  • Production cuts by major oil producing countries.
  • Signs of improved macroeconomic conditions and easing of inflation in major oil consumers like the US.
  • Global oil demand is touching record highs with expectations of further demand expansion.

Production cuts by OPEC plus:

  • Saudi Arabia and Russia surprised the world last month by announcing an extension of their voluntary supply cuts–totalling 1.3 million barrels per day (bpd)–till the end of 2023.
  • The additional voluntary production cuts by Riyadh and Moscow are over and above the OPEC+ cuts totalling 3.66 million bpd, which shall be in place till the end of 2024.

Economic Impact of high crude prices on India:

  • High oil prices negatively impact India’s trade balance and are a drain on the country’s valuable foreign exchange reserves, which also has a bearing on the value of the rupee.
  • Elevated oil prices pose a challenge to the Indian rupee, and a sustained increase could push the currency to record lows against the U.S. dollar, the head of global foreign exchange. While there is no direct fixed relationship between oil prices and currency value, generally a sustained rise in crude price is negative for Rupee.
  • As with other major importers of oil, a surge in oil prices adds to inflationary pressures for India as well. High oil prices can also potentially hit profitability of key sectors with high energy costs. All of these implications could have a negative impact on economic growth, as high inflation and low profitability in various sectors would hit disposable incomes and discretionary spending.

Global economic impact of high prices:

  • High oil prices on a sustained basis could feed into inflation globally, jeopardise global economic recovery, and lead to destruction in oil demand from major consumers.
  • High oil prices also incentivise faster transition to cleaner fuels, particularly in the mobility sector.
OPEC +

OPEC+ is a larger group of major oil producing nations and includes members of OPEC along with Russia and a few other producers. OPEC+ produces around 40 per cent of the world’s crude oil, with Saudi Arabia as the top producer and Russia in the second spot.

Market-linked pricing mechanism

  • Under India’s ‘market-linked’ pricing mechanism, oil marketing companies are expected to increase or decrease the selling price of petrol and diesel based on the international price of crude oil.
  • However, they were forced to keep prices stable last year because of several state elections, despite a rise in crude oil after Russia attacked Ukraine in February last year.
IR Oil minister Puri urges OPEC to reduce oil prices