Oil slick ahead?: Opec’s cut in crude output shows the futility of Western sanctions. India must brace for tougher times

Source: The post is based on the article “Oil slick ahead?: Opec’s cut in crude output shows the futility of Western sanctions. India must brace for tougher times” published in The Times of India on 7^th October 2022.

Syllabus: GS 3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Relevance: About oil price rise and low trade volume growth

News: Oil prices are likely to remain elevated as the OPEC plus, which includes Saudi Arabia and Russia, decided to trim production in a bid to keep the price high. On the other hand, WTO forecast growth in merchandise trade volume is now projected to grow at 1%, lower than the 3.4% forecast a few months ago.

About OPEC Plus’s recent decision on oil production

The grouping produces a little more than 50% of the world’s crude. They planned to reduce output by 2 million barrels/day beginning November by using August’s production as a benchmark. It’s about 2% of production.

About the recent Trade volume growth

Trade volume growth is being dragged down by the economic slowdown in three major economic engines, the US, Europe and China. Such as, 1) The US monetary tightening will soon create major impacts, 2) Europe is facing energy shock in the form of a 350% year-on-year increase in gas prices. This will lead to reduced consumer spending, 3) In China, its zero-Covid strategy has taken a toll on its growth.

How Trade volume growth and OPEC Plus decision are interlinked?

The energy shock in Europe is partly due to the economic sanctions imposed by the US and Europe on Russia following its invasion of Ukraine. This is because of  Europe’s dependence on Russian gas.

The rest of the world felt the impact through both an oil price surge and upward pressure on the prices of key food items.

Further, ongoing US-led sanctions on other oil producers such as Iran and Venezuela are hugely counterproductive and have restricted the free flow of oil.

How oil price rise and low trade volume growth will impact India?

Supply pressure on key commodities can keep domestic inflation elevated, and a global slowdown will drag down the growth of the Indian Economy.

This is visible in September’s purchasing managers’ survey for services as it showed the lowest reading in six months.

So, India’s policymakers have to tussle with the dual challenge from the external sector. Monetary and fiscal policies need to be flexible to adapt to a highly uncertain scenario.