Qatar to withdraw from OPEC

News: Qatar decides to withdraw from the Organization of the Petroleum Exporting Countries (OPEC) from January 2019

Reasons for withdrawal:

• OPEC mainly governs oil production of its members and influences global oil prices, but oil plays a small role in Qatar’s economy, which now wants to focus on liquefied natural gas (LNG) development, which is mainstay of Qatar’s economy.
• Saudi Arabia is OPEC’s largest oil exporter has imposed a land and air blockade on Qatar since 2017 accusing Qatar of supporting terrorist groups. This might be another reason behind Qatar’s withdrawal from Saudi influenced OPEC.

Effect of Qatar’s withdrawal from OPEC:

• The feud between Qatar and OPEC has been brewing since 2017 and Qatar’s exit from OPEC signals a continuation of the middle-east crisis.
• Qatar’s exit would have a psychological impact and could prove an example to be followed by other members in the wake of unilateral decisions of Saudi Arabia
• Qatar’s withdrawal from OPEC might also cripple the effectiveness of GCC and its regional stability objective, which also has Saudi influence and may eventually trigger withdrawal of Qatar from GCC.

OPEC:

• OPEC is a permanent intergovernmental organization and world’s leading oil producing bloc of 15 oil-exporting developing nations, founded in Baghdad, Iraq, in 1960
• Its members include Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Qatar, Libya, UAE, Algeria, Nigeria, Ecuador, Gabon, Angola, Equatorial Guinea and Congo
• Its mission is to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum and a steady income to producers and a fair return to investors

Importance of OPEC:

• OPEC members produce more than a third of global oil supply .
• By increasing or reducing oil production OPEC influences prices of oil in the international market.
• Other major non-OPEC oil producers, like Russia, also collaborate with OPEC in its decisions, which widens the influence of OPEC’s policies

Issues with OPEC:

• Monopolistic functioning: OPEC is an oil producers cartel which creates monopoly in global oil supply to achieve lower production and yet higher revenue, thus affecting consumers like India.
• Non-democratic in functioning: Decisions of OPEC are largely unilateral as they are guided by Saudi Arabia, the de-facto head of OPEC, highlighting its non-consensual and non-democratic functioning.
• Lack of uniformity among members: Recently, Saudi Arabia pushed for reduced supply of oil by OPEC to increase oil prices but Iraq, Iran, Libya and Venezuela wanted increased oil production, to fund their social sectors and capital investments.
• Inability to control errant members: OPEC was unable to stop Iran, who recently sold oil for as little as $25 a barrel, thus highlighting the ineffectiveness of the bloc.
• Single source of income: Over-dependence on oil is the major problem of OPEC countries.
• Fluctuating prices: Untimely fluctuation in global oil prices affects incomes of OPEC countries which:

o   Erodes investor confidence, further draining them of resources

o   Threatens internal stability of other OPEC members like Nigeria, Venezuela and Indonesia face social unrest if prices go lower, thus endangering the cartel’s cohesion and viability

• Social and political struggles: OPEC’s member countries are often embroiled in challenging social and political struggles; like civil war in Libya, ongoing conflicts in Iraq, and recession and humanitarian issues in Nigeria

Diminishing relevance of OPEC:

• Withdrawal of western support to OPEC: With the withdrawal of West’s support to OPEC and its reduced dependence on OPEC, its relevance has decreased.
• Oil inventories: Many OPEC markets, like OECD countries and India, have created their own strategic oil reserves, which gives them cushion against OPEC’s price manoeuvres, by delaying the effect of price rise, which is supplemented by non-OPEC countries’ production.
• Non-OPEC induced price fluctuations: US oil production increases whenever global oil prices increase beyond certain level, thus offsetting OPEC’s increment in oil prices as happened in 2015 when U.S. oil exports increased dramatically.
• Technological advancement and discovery of other energy resources in the West:

o   US shale production:  Historically, OPEC exerted strong influence on crude oil prices due to its monopoly but, of lately, there is oversupply of U.S. shale gas, which competes with OPEC oil

o   Discovery of other resources of energy like gas hydrates, coal bed methane reduces the monopoly of oil

• Renewable sources of energy: OPEC’s relevance is further hampered by renewable energy sector, notably solar, wind power which is becoming increasingly important due to climate changes and advancements in “green” technology.

India and OPEC:

• Inter-dependence: About 85 per cent of Indian crude oil imports come from OPEC nations and by 2040, out of total increase in global oil demand, around 40% demand would be created by India, which highlights importance of OPEC and India for each other.
• India’s macro-economic stability: Any change in oil prices by OPEC directly affects India’s oil import bill and current account deficit thus affecting macro-economic stability of India.
• Oil prices affect Indian expatriates: Slowing OPEC economies and member country policies, like Saudi Arabia’s nationalisation or ‘Nitaqat’ system (transition to a nearly all-Saudi workforce by 2030), hurt incomes and job security of Indian expatriates in gulf.
• Integrated energy investment plan: Stabilisation of oil prices is good for both India and OPEC for long term growth and planning. India should develop a long term integrated energy investment plan with OPEC countries, like between China and Saudi Arabia, to:

o   Ensure stable and uninterrupted flow of oil during both peace and crises.

o   Oil exporting countries would invest money in India’s refinery sector, thus ploughing money back and generating employment.

• Oil buyer’s club: India and China, OPEC’s major oil importers, are deliberating upon establishment of an ‘oil buyer’s club’ that can negotiate better terms with OPEC sellers to cut dominance of the oil block

Way forward:

• Withdrawal of Qatar will not make any major change in OPEC as Qatar produces less than 2% of OPEC’s oil output, but it might severely dent the reputation of OPEC, at a time when it is facing criticism for being unable to control oil prices, and it may trigger other countries to also quit from the bloc.
• It also signals growing divide between two Arab blocs, one led by Saudi and its allies on one hand and independent regional players like Qatar on the other hand.
• OPEC should insulate itself from being affected by larger geo-political schisms and focus on the objective of stabilization of oil markets and regional development.
• OPEC’s membership should be widened to include other major players like Russia, which has shown interest by aligning with OPEC’s policies, and smaller countries like Azerbaijan, Kazakhstan, Malaysia, Mexico in order to ensure global balance in oil production and price volatility.