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Tuesday, August 03, 2021

OPEC’s output pact proposal: How will decision affect India?

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.

Written by Karunjit Singh | New Delhi |
Updated: July 6, 2021 8:04:19 am
OPEC's output pact proposal: How will decision affect India?The OPEC+ group of countries had, in April 2020, entered into a two-year agreement, 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 latest round of meetings among the OPEC+ group of oil-exporting countries has stalled as the UAE has pushed back proposals making an increase in crude oil supply conditional on an extension to an output agreement. Another round of discussions between OPEC+ countries scheduled for Monday was reportedly called off as key players failed to make any progress in resolving key issues.

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What is the background?

The OPEC+ group of countries had, in April 2020, entered into a two-year agreement, 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, however, the price of Brent crude started climbing consistently and has, now, risen to $76.5 per barrel — up from about $40 per barrel at the end of October — buoyed by 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. Petroleum Minister Dharmendra Pradhan had even said the high price of crude oil was slowing down the economic recovery of developing economies post the pandemic. In April, OPEC+ agreed to gradually increase crude production as prices reached $64.5 per barrel including a phased end to Saudi Arabia’s 1 million barrel per day cut in production by July.

What is the issue?

According to the UAE’s official news agency, Emirates News Agency, the UAE agreed that there was a need to increase crude oil production from August, 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 government said that it made “no sense to attach conditions to increase in August,” noting that the only option offered by the JMMC included an extension to the current agreement. 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. The UAE noted that the baseline reference production levels were unfair and that it would be open to extending the agreement if baseline production levels were reviews to be fair to all parties.

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How will this impact India?

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 per cent and that of diesel by about 21 per cent since the beginning of 2021.

Pradhan noted last week that he had recently had productive conversations with OPEC member nations and was hopeful that crude oil price would “sober” after the current set of meetings.

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