Context:Amid the coronavirus pandemic and a slowing global growth,oil prices have declined to their lowest level since 2002.
- The benchmark Brent had hit $23 per barrel recently, the lowest in 18 years.Also The West Texas Intermediate was trading at $20.48 per barrel.
Reasons behind the decline in the oil prices
- This decline in the oil prices amid COVID-19 is considered the result of the brinkmanship of the Organization of the Petroleum Exporting Countries plus (OPEC+) combine.
- Brinkmanship: It is a foreign policy practice in which one or both parties force the interaction between them to the threshold of confrontation in order to gain an advantageous negotiation position over the other. The technique is characterized by aggressive risk-taking policy choices that court potential disaster.
- Continuation of surplus production targets:
- Saudi Arabia also continues with its surplus production targets, despite pressures from the US to reach a compromise with Russia.
- The world’s largest oil producer company Saudi Aramco, plans to boost supplies to 12.3 million barrels per day in April and offer discounts.
Probable implications of the Crude prices decline on India
- The plunging of the global crude oil prices has placed major consumers such as India in a beneficial position.
- Refiners in India have declared ‘force majeure’ on oil purchases from West Asian makers.
- A force majeure event refers to the occurrence of an event which is outside the reasonable control of a party and which prevents that party from performing its obligations under a contract.
- Reduction in the import bill:Every dollar per barrel drop in crude prices reduces India’s oil import bill by ₹10,700 crore on an annualized basis.
- Probable increment in revenues:India has also leveraged the opportunity to increase excise duties on petrol and diesel to boost its revenues.
- Opportunities for cooperation between India and China:
- Low energy prices have also opened a slew of opportunities such as further cooperation between India and China and filling up India’s strategic petroleum crude oil reserves at favourable terms.
Organization of the Petroleum Exporting Countries (OPEC)
- It is a permanent, intergovernmental organization, created at the Baghdad Conference in 1960.
- It is a group of most powerful oil exporting countries.They are considered an extremely powerful group, as oil prices dictate the budgets and policies of many countries.
- It uses Brent as their pricing benchmark.
- OPEC membership is open to any country that is a substantial exporter of oil and shares the ideals of the organization.
- As of 2019, OPEC has a total of 14 Member Countries viz. Iran, Iraq, Kuwait, United Arab Emirates(UAE), Saudi Arabia, Algeria, Libya, Nigeria, Gabon, Equatorial Guinea, Republic of Congo, Angola, Ecuador and Venezuela.
Note:OPEC plus countries are the non-OPEC countries which export crude oil.