OPEC Plus

In News 

• Recently, as energy prices rise amid crippling sanctions against Russia, OPEC and its partners are under pressure to stabilise the market. 

Background

• OPEC Plus was created in 2016 when OPEC countries decided to ally with other oil-producing countries outside the group to cut down the global output of oil.
• Declaration of Cooperation (DoC): Under the pact, called the Declaration of Cooperation (DoC), the countries have worked together to influence global energy prices.
• Charter of Cooperation: To institutionalise the cooperation further, OPEC countries and their allies, in a ministerial meeting held in 2019, accepted a ‘Charter of Cooperation’.
  • The Charter provides a platform to facilitate dialogue and exchange views regarding conditions and developments in the global oil and energy markets.
  • The goal is to contribute to a secure energy supply and lasting stability for the benefit of producers, consumers, investors and the global economy.

About the recent controversy/ Challenges

• OPEC Plus countries are an alliance between the Organisation of the Petroleum Exporting Countries and other major oil producers.
• Under pressure from major oil importers, OPEC Plus last week agreed to raise production.
  • A jump of about 50% over the monthly increase.
• OPEC plus countries, which control more than 50% of the world’s crude supplies, had joined hands to cut down oil production by 10 million barrels a day in 2020.
  • The decision was taken amid falling oil prices as demand for oil fell drastically due to COVID-19 lockdowns across the world.
• U.S. shale market: Some economists have argued that, if it weren’t for OPEC, the global oil market would resemble the U.S. shale market that is characterised by many small producers competing against each other.
  • In such a competitive market, no producer would have the market power to influence prices.
• The lack of entry barriers would ensure that any attempt at forming a cartel would be busted eventually as abnormally high returns enjoyed by the cartel would attract competitors who want a share of the pie.

Factors that are raising the prices

• The price of oil is expected to remain elevated for some time to come after the European Union decided to cut down oil imports from Russia by 90% and block European insurers from selling cover to tankers carrying Russian oil.
  • The move is expected to worsen the present oil supply crunch as non-Russian oil producers may not be able to compensate for the lost Russian supplies and meet the EU’s demand for oil within a short span of time.
• It is feared that as the global economy gets back on its feet, the failure of OPEC Plus countries to increase output quickly enough to pre-pandemic levels could cause oil prices to stay high.

Significance of this grouping

• The new grouping was seen as a response by oil-producing countries to protect their interests amid the rise of the U.S. shale industry.
  • U.S. shale oil producers had caused a steep drop in the price of oil by massively increasing U.S. energy supplies and put the finances of OPEC governments under a lot of strain.
• The global energy market was largely dominated by western multinational companies, called the ‘Seven Sisters’.
  • Anglo-Iranian Oil Company (now BP),
  • Royal Dutch Shell (now Shell),
  • Standard Oil Company of California (later Chevron),
  • Gulf Oil (now merged into Chevron),
  • Texaco (now merged into Chevron),
  • Standard Oil Company of New Jersey-Esso (now part of ExxonMobil) and
  • Standard Oil Company of New York-Socony (now part of ExxonMobil).

India’s share

• India has remained dependent on the import of oil to meet its energy needs.
• India’s domestic crude oil production in FY22 was at its lowest in almost three decades even as domestic oil consumption has increased significantly over the years.
• Structural reforms in the energy sector could help countries including India to boost domestic production and cut down their reliance on OPEC.
• The sanctions imposed by the West on Russia have offered India an opportunity to purchase oil at highly discounted rates from Russia.
  • Russia has been on a search for fresh buyers for its oil ever since the West imposed stringent sanctions on it for invading Ukraine.

Impact on India

• If OPEC+ and the UAE are not able to reach an agreement for increasing the production, expected relief in the form of lower crude oil prices could be delayed. 
• India is the world’s third-biggest oil importer and consumer stated that the delay in decision can threaten the consumption-led-recovery in some countries.
  • India imports about 84 per cent of its overall crude needs with over 60 per cent of that coming from Middle Eastern countries, which are typically cheaper than those from the West.
• Rising oil prices are posing fiscal challenges for India, where heavily-taxed retail fuel prices have touched record highs in some parts of the country, threatening the demand-driven recovery.
• 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(UTs).

Way forward

• Countries that depend on oil imports to meet their energy needs have been trying to find ways to tackle OPEC’s market power.
• Western countries like the U.S. and the U.K. have been exerting political pressure on OPEC countries to increase their output in order to prevent the global economy from slipping into a recession.
• The U.S. has also tried to boost its own domestic energy production so that it won’t have to rely on OPEC to meet its energy needs.
• The American shale revolution, which was driven by private oil producers that were free to exploit resources beneath the ground, managed to cut down America’s dependence on oil from West Asia and made the country a net exporter of oil.

Source: TH