Originally established in 1960 by the founding members; Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela, The Organization of the Petroleum Exporting Countries (OPEC) is a conglomerate that has since grown to incorporate 13 member states, including Algeria, Angola, Congo, Equatorial Guinea, Gabon, Libya, Nigeria, the United Arab Emirates, and Venezuela. The organization’s headquarters are situated in Vienna, Austria.
OPEC conducts around 40% of the world’s crude oil production, and its member’s exports make up roughly 60% of the global petroleum trade. In 2016, the addition of 10 more substantial oil-producing allies led to the formation of OPEC+. This expanded group includes the original 13 OPEC members along with Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan, and Sudan.
The primary objective of the organization is to coordinate and unify its member countries’ petroleum policies to ensure the stabilization of oil markets. This aims to provide a steady income to producers, a regular supply of petroleum to consumers, and a fair return on capital for those investing in the petroleum industry.
OPEC+’s Surprise Reduction in Oil Production
In a recent announcement, OPEC+, which consists of The Organization of the Petroleum Exporting Countries (OPEC) and its allies, declared a surprising reduction of 1.16 million barrels per day in their oil production. The aim is to support market stability amidst rising oil prices, especially after the Russia-Ukraine Conflict.
The cut in oil production is voluntary, with Saudi Arabia, Iraq, UAE, Kuwait, Oman, Algeria, Kazakhstan, Russia, and Gabon taking part. However, not all OPEC+ members are joining the reduction as some are already pumping well below agreed levels due to a lack of production capacity.
Effects of the Voluntary Cut in Oil Production
The decision to reduce oil production will have significant impacts globally. This move may prove detrimental to the US, who has previously requested OPEC to ramp up oil production. Likewise, non-OPEC countries relying on oil exports might face increased competition in the market due to the production cuts.
Specifically for India, which imports nearly 85% of its crude requirement, the cut will lead to increased prices due to decreased production, subsequently increasing the oil import bill. This could potentially lead to inflation, an increase in the Current Account Deficit (CAD) and fiscal deficit, a weakening rupee against the dollar, and negative stock market sentiment. According to the Investment Information and Credit Rating Agency (ICRA), every USD 10 per barrel increase in the price of the Indian crude oil basket could widen the CAD by USD 14-USD 15 billion, or 0.4% of GDP.
To conclude OPEC and its expanded group, OPEC+ plays a critical role in stabilizing the global oil market. Any changes in their production policy can have rippling effects across countries worldwide. As demonstrated with the recent voluntary reduction in oil production, it alters not only the price of oil in international markets but also affects trade deficits and currency values in oil-importing countries like India.
Last Modified: February 20, 2024