Oil production cut: Oil must not get to spoil economic expectations

Source: The post is based on the article “Oil must not get to spoil economic expectations” published in the Livemint on 4th April 2023.

Syllabus: GS – 3: Indian Economy and issues relating to planning, mobilization, of resources

Relevance: About Oil production cut.

News: Recently, the OPEC+ members declared a plan to cut an oil production output of over 1 million barrels per day. Though this is just about 1% of global demand, this would suffice to push up global oil prices.

Note: Ever since the Russia-Ukraine war, oil prices are on downhill. It resulted in large parts of the world facing inflation and growth slowdowns.

How oil production has impacted the global economy?

Oil volatility has been a geopolitical threat ever since the price increase in 1973. This was caused by a Saudi-led embargo in protest against US support for Israel. At that time, a) Importers suffered a shock, b) OPEC countries generated plenty of oil wealth and made them powerful to handle economic outcomes around the planet, c) Since oil is a vital commodity, its shortage has made it difficult for free-trade theory to demonstrate its benefits. 

After that, almost every big recession of the past half-century in the West has been preceded by an oil upshoot (including the Great Recession).

What will be the impact of the oil production cut in India?

The Reserve Bank of India (RBI) estimates 6.5% retail inflation in 2022-23. This is a failure of RBI’s inflation target mandate. This is because the Indian basket of oil was assumed at an average $95 per barrel.

To avert another miss of its target, RBI’s policy approach may need to assume almost similarly adverse conditions. Regardless of special oil supply deals with Russia, India cannot count on a return to cheap oil.

What will be the future of oil production?

Earlier the US came to rescue the oil prices. But ever since the US shale revolution, the US itself has turned it into an oil major. But that does not result in reduced oil consumption. But a) The world’s shift away from fossil fuels will not reduce the demand for oil at an immediate pace. Further, a push for clean energy has reduced investment in oil projects, leaving existing suppliers with an advantage, b) Russia’s invasion of Ukraine might force the Western countries to weaponize not just oil trade, but also its financial enablers, and c) China’s influence in oil-rich West Asia has risen, and US retreat from free trade is lowering the globalization. All these might lead to Cold War II.

What should be done to avert the impact of Oil production on the global economy?

The world needs to embrace globalization based on open-market principles and global peace. As the G20 president, India must remind the world that oil production is in everybody’s interest.