Much to the chagrin of skeptics, the Organisation of the Petroleum Exporting Countries (OPEC) together with non-OPEC countries (notably Russia) has formalised an agreement to cut oil production by over 1.8 million barrels a day to push up oil prices and their export revenues. This surely is not a great news for oil importing countries like India that imports about 80% of its oil requirements. Oil analysts feel that India should prepare itself for paying higher prices for (Brent) crude from 1 January onwards when the deal would begin to come into effect. “The Asian countries that are relatively dependent on oil imports, such as India and Sri Lanka, are most vulnerable to higher oil prices due to the high share of oil in their total import bill,” says Rajiv Biswas, Asia-Pacific Chief Economist with IHS Global Insight.
“But the overall negative impact is expected to be relatively modest if the increase in oil prices due to the OPEC deal is contained to around $10 per barrel or lower over the next few months,” says Biswas. Crude oil figures among the top three commodities that India imports by paying dollars since oil, like gold, is a dollar denominated commodity. India imports about 4 million barrels of crude per day. Given the ongoing (demonetisation) pain, the government might not pass on the added burden to the common people. The government does have a mechanism in place to absorb the shock of higher oil prices.
Under the deal, the 13 member oil cartel (OPEC) has agreed to cut their production by 1.2mb/day while the rest (over half a million barrel a day) of the cut is expected to come from non-OPEC members, with Russia promising to contribute half of it. Signing of the deal had immediately sent crude prices up by about 10% taking Brent to $52 a barrel. Many expect crude oil to remain within $60/barrel as any movement beyond would backfire on the signatories of this deal who all want(ed) to teach a bitter lesson to (US) shale gas industry. Since (shale) gas prices are linked to crude, any upward movement in oil prices (beyond $65/barrel) might again make shale gas production viable.
Within the OPEC block, richer members like Saudi Arabia have agreed to take the maximum pain of lowering their own production. Saudi Arabia, the cartel’s de-facto leader, has agreed to allow Iran to produce about 3.9million barrel a day which is a seen as a big concession. OPEC has also set up a monitoring committee to check that no one cheats. “But bureaucracy (all across the globe) does not have an inspiring record to achieve the goal for which they are usually set up,” says Lydia Powell, Senior Energy Analyst with the Observer Research Foundation. Also, “the high cost involved in such monitoring might also prove be a big deterrent.”