Is oil party over?

Ashwani Mahajan
Thanks to constantly declining prices of crude oil internationally, for the last more than 2 years, net oil importing countries have benefitted immensely. It is notable that India imports nearly 70 percent of its oil requirements. Due to declining crude prices, oil import bill of India has come down from $164 billion in 2012-13 to merely $83 billion in 2015-16. As a result India’s trade deficit has nosedived to only $118 billion in 2015-16 from $190 billion in 2012-13. It is clear that this would not have been possible, had crude prices not fallen. In the event of high crude prices, our rupee would have depreciated significantly; balance of payment worsened and inflation could have gone out of control.
Low fiscal deficit
Declining oil prices also benefitted the exchequer. As crude prices had been falling, government did, but only partially transferred the benefit of the same to the consumers and instead raised tax on petroleum products. This led to increase in Government’s revenue and government could reduce fiscal deficit and therefore enforce fiscal discipline. By 2015-16, our fiscal deficit could be brought down to only 3.9 percent of GDP. Therefore we can say that declining crude prices helped us in not only reducing our trade deficit but also our fiscal deficit. Prices could also be brought under control and overall performance of the economy also improved in terms of GDP growth.
Is oil party over?
Crude oil prices have now once again started increasing in international markets, recently. Crude price, which had come down to as low as $30 per barrel; now moving around $ 55 per barrel. This has happened after OPEC (Organisation of Petroleum Exporting Countries) countries decided to reduce their daily output by 1.7 million barrels. It is notable that OPEC countries provide nearly 42 percent of world oil supplies. In November 2016, non-OPEC oil producing countries also joined hands with OPEC countries and agreed to reduce production of oil. Therefore, obviously for the time being oil prices have started taking an upwards trend and oil prices are keeping around $55 per barrel. Now there is a dilemma that whether low price regime is over and in future oil prices may start increasing fast.
Though on the outset, it seems that oil prices may start looking upward because OPEC decided about reducing oil production and non-OPEC producing countries also have joined the chorus. However, there in another contrary view coming from Energy International Administration (EIA) of USA. According to EIA, crude prices may remain well under $50 per barrel even next year. Though EIA agrees that OPEC countries will honour their commitment to cut their production, their oil production may actually fall; however, it would be more or less compensated by increase in production by USA. According to EIA, US companies are likely to increase production next year and some non-OPEC countries may also increase production. There has been an unprecedented increase in the production activities of US companies and they have registered significant profits as well. Therefore, it is very likely that they will continue to increase production. News agency ‘Reuters’ also shares the opinion of EIA and its research reveals that this effort of OPEC to prop up oil prices is not likely to be a success, as non-OPEC production is likely to increase fast. However, there is a slight difference between EIA and ‘Reuters’ assessment of future oil prices. According to ‘Reuters’ oil prices are likely to be between $55 and $57 per barrel, but not more than $60 per barrel; however, according to EIA, it will be around $50 per barrel.
On the other hand experts also differ about possibility of reduction in output by OPEC. Though, OPEC has decided to reduce their production by 1.7 million barrels, it is conditional to non-OPEC countries reducing their production by 0.6 million barrels. So far only Russia has committed to the reduction in production by 0.3 million barrels. Some OPEC countries even say that, they will reduce their production, irrespective of non-OPEC countries, falling in line.
Situation has changed now, as OPEC accounts for only 42 percent of oil supply globally, which used to be 52 percent earlier. Today non-OPEC countries are playing an important role in global oil supplies. Tension between OPEC major Saudi Arab and non-OPEC major supplier Russia is a known fact. On the other hand, USA has been increasing its crude oil production constantly. USA’s total crude production which was nearly 5 million barrels in the past has increased to nearly 9 million barrels now.
This has played a major role in dampening oil prices internationally. Although, OPEC countries have decided to prop up prices by contracting productions and non OPEC countries are also joining hands with them, there is always a doubt about whether individual countries in OPEC and non-OPEC will actually honour their commitments honestly. Constantly increasing production by USA indicates to the point that it is interested to keep oil prices low. There are two reasons behind this thinking of USA. One, USA does not want that Saudi Arab is left with big surplus from export of crude oil, as it has been financing terror world over (including USA). Secondly, increase in oil prices may shake efforts to take USA economy out of recession.
We must also keep in mind that OPEC countries do not command monopoly power, which they did previously. In 1973 they used to supply 52 percent of would supply, and now they supply merely 42 percent. Although oil exporting countries are passing though huge financial crisis, however, due to erosion in their monopoly power, they may not be able to push up prices in any near future.
(The author is Associate Professor, PGDAV College, University of Delhi)
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