October 10, 2022

Good morning. In today’s either/view, we discuss whether the decision of OPEC+ to cut oil production will have any impact. We also look at a hydrogen-powered car built by an engineer in Maharashtra, among other news.


OPEC+ Cuts Oil Production – Will It Have A Significant Impact?

If there’s one thing globalisation has taught us, it’s that everything is interconnected. Also, there’s a domino effect that can begin on one side of the world and ripple through countries and continents. With the war in Ukraine continuing and the winter months upon us, the global energy markets have been under stress.

In that regard, the decision by OPEC+ to cut oil production comes at a significant time. There are multiple economic worries, inflation being the chief among them. The global oil markets are certainly volatile, so doesn’t it make sense to stabilise them? Or does this move threaten to disrupt things even more?


For starters, let’s define a few things to see who the major players are. The Organization of the Petroleum Exporting Countries (OPEC) is the international organisation of 13 countries that accounts for a large portion of global oil production and oil reserves. The countries are Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, United Arab Emirates and Venezuela. Today, OPEC produces about 30% of the world’s oil.

In 2018, there came a larger group. OPEC and its allies, led by Russia, agreed to increase crude output by 1 million barrels per day to ensure market stability. This larger, 24-member group came to be known as OPEC+. While Saudi Arabia is the leader of the OPEC bloc, Russia is the biggest player among the non-OPEC countries. When the 2018 agreement was finalised, these two countries agreed to bear the brunt of the costs.

As the pandemic set in and global supply chains were disrupted, energy shortages and price hikes meant the world needed more oil to meet demand. This meant OPEC+ was in the driver’s seat. They could either increase output or maintain a measured approach to keep prices high to compensate for the pandemic-induced losses. For example, Saudi’s oil export revenue in 2020 was cut in half.

When Russia began its invasion of Ukraine, one of the concerns was what would happen to oil and energy supplies. As global condemnation of Russia’s actions was swift, it included countries refusing to buy Russian oil. Its prices began to fall. With lower prices for Russian oil, new Asian markets opened up.

Two notable standouts here are India and China. They took a more diplomatic stance on the war. Things changed in the global markets. Russia is now China’s biggest oil supplier overtaking Saudi. India continued to import Russian oil. They’ve taken advantage of discounted Russian oil as global energy prices remain high.

Now, the OPEC+ alliance decided to cut production by about 2 million barrels a day to support stagnating oil prices. In announcing their decision, Saudi Energy Minister Abdulaziz bin Salman reiterated the group’s position as a guardian of stable energy markets. He said the group is here as a moderating force. But is that truly the case? Or will the decision have minimal impact?

VIEW: Making things worse

The global economic outlook isn’t looking good. The IMF is again lowering its global economic growth projections for 2023. Its Managing Director Kristalina Georgieva said they have downgraded outlook three times already. The message is clear – things will get worse before they get better. The war in Ukraine has increased food and energy prices. There’s record inflation in the US and EU.

Given the current global economic scenario, this decision will worsen inflation. With the threat of recession looming, it would only exacerbate the economic downturn. It’s because high oil prices are a de-facto tax on the economy. Economically speaking, it doesn’t make sense. The resulting price rise will ultimately undermine Saudi Arabia and other exporters by decreasing demand. A recession will only make this worse.

It’s a cunning move by OPEC+ as the main beneficiaries will likely be Russia and Saudi Arabia. For the US, the cut affects its position in trying to lobby others off Russian oil. With discounted prices, some countries might not be able to resist cheap Russian oil. Needless to say, President Biden didn’t take too kindly to the news calling it a disappointment.

What’s in store for India? It’s not exactly an ideal situation to be in. Changes in global oil and gas prices matter to India’s economy. More than any other major economy, it imports about 87% of its oil. It spent $89 billion from April to August to import crude oil and petroleum products. That’s $39 billion more than a year earlier. So, India is likely to face a higher import bill.

COUNTERVIEW: It’s not as bad as expected

While the production cut seems drastic given the current conditions, it may have little impact on actual supplies. Things might only get worse if the group agrees to redistribute production targets or if Saudi Arabia acts alone. Here’s why – the amount the group produces and its target have divulged widely over the past year. This gap will dilute any effects of the production cuts.

More to that point is that even a reduction of 1 million barrels a day would require only six countries to actually make cuts. The other countries are producing well below their individual targets. If this happens, the actual reduction would be only about 3.3 lakh barrels a day.

According to OPEC’s latest bulletin, the decision was necessary to maintain balance in the global oil market. With lower growth forecasts for 2023, there’s been a downward revision in oil demand forecasts. Looking long term, this could help control volatility in oil prices. If there’s an economic and demand recovery towards the end of 2023, crude prices could rise even if OPEC+ goes back to its supply targets.

Concerning India, OPEC’s share of oil imports has declined over the past several years. For example, in FY2023, India is expected to import 47 million barrels a day from OPEC which is less than 60% of total imports. Also, India has an exclusive arrangement with Russia so any cuts will have only a mild effect.

Reference Links:

  • OPEC Is Dead, Long Live OPEC+ – Forbes
  • OPEC-Plus in Driver’s Seat As Global Energy Crisis Intensifies – Natural Gas Intelligence
  • Opec: What is it and what is happening to oil prices? – BBC
  • Ukraine crisis: Russian oil and gas turn to Asia – BBC
  • OPEC+ makes big oil cut to boost prices; pump costs may rise – AP
  • IMF to slash global economic growth forecast for 2023; here’s what its chief said – Moneycontrol
  • Explained: OPEC+ Oil Production Cuts, Concerns Over Price Hike, And How Is The World Reacting – Outlook
  • The Greed And Geopolitics Of The OPEC+ Oil Production Cut – Forbes
  • Economic impact and geopolitical undertones in OPEC+ production cuts – Moneycontrol

What’s your opinion on this?
(Only subscribers can participate in polls)

a) The decision by OPEC+ to cut oil production is right and necessary.

b) The decision by OPEC+ to cut oil production is wrong and unnecessary.


For the Right:

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For the Left:

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