The global recovery, post the pandemic slump, has led to a significant surge in the price of crude oil, which is now close to its highest level since 2018. The prices for Brent crude oil and US West Texas Intermediate (WTI) crude have seen a noticeable jump. Alongside, an intensifying energy shortage has caused a record-high spike in the prices of natural gas and coal.
Pricing Mechanism for Oil
Historically, the Organization of the Petroleum Exporting Countries (OPEC), functioning as a cartel, used to set prices within a favourable band. Leading the OPEC is Saudi Arabia, the world’s largest crude oil exporter and is responsible for the export of 10% of global demand. The 13 member states of OPEC include Iran, Iraq, Kuwait, UAE, Saudi Arabia, Algeria, Libya, Nigeria, Gabon, Equatorial Guinea, Republic of Congo, Angola, and Venezuela.
OPEC can control prices by manipulating oil production levels – increasing oil production will bring down prices and vice versa. The pricing mechanism for global oil mostly hinges upon the collaboration among oil exporting nations rather than competitive market dynamics. Cutting down oil production or completely shutting an oil well carries significant risk and cost implications.
In recent times, OPEC has teamed up with Russia under the banner of OPEC+ to manage global prices and supply. Originated in 2016, OPEC+ emerged when OPEC joined forces with other top non-OPEC oil-exporting nations, forming an entity with more influence.
Reasons for High Prices
The sharp increase in the global crude oil prices cannot be tied down to one specific reason but can be viewed as a result of several combined factors. Major oil-producing countries have maintained crude oil supplies on a slow increment schedule, despite the price surge. OPEC+ had made drastic cuts in supply in 2020 in response to the Covid-19 triggered global travel restrictions. However, they have been slow to boost production even as demand has recovered. There have also been supply-side disturbances in the US caused by hurricane Ida and less than expected natural gas supplies from Russia, as demand in Europe increases.
Impact on India
India’s national economy is feeling the heat of escalating oil prices. The country’s import bill is set to increase, impacting the current account deficit adversely. The rising crude prices could amplify inflationary pressures that have been accumulating over recent months.
If oil prices continue to rise, it will compel the government to reconsider taxes on petroleum and diesel potentially leading to a loss of revenue and hampering its fiscal balance. Declining tax revenue over the past two years due to the economic slowdown has already strained the country’s fiscal health. The revenue deficit will curtail the government’s capacity to spend or meet its fiscal commitments.
Furthermore, the climbing oil prices are slowing down India’s economic recovery, alongside other oil importing countries, as an increased global price burden can affect the country’s import bill, fuel inflation, and increase trade deficit.
The surge in gas prices is causing a ripple effect, directly impacting both CNG (used as transport fuel) and PNG (used as cooking fuel) prices.
Difference between Brent and WTI
Brent crude oil originates from North Sea oil fields between the Shetland Islands and Norway, while West Texas Intermediate (WTI) is sourced from US oil fields predominantly in Texas, Louisiana, and North Dakota. Both oils are relatively light, but Brent has a slightly higher API gravity, making WTI lighter.
WTI crude is known to be ‘sweeter’ due to a lower sulphur content (0.24%) compared to Brent (0.37%). Brent crude price is the international benchmark used by OPEC, while WTI serves as a benchmark for US oil prices. As India mainly imports from OPEC countries, Brent is the benchmark for Indian oil prices.
The cost of shipping Brent crude is typically less as it is close to the sea enabling immediate ship loading. In contrast, WTI crude, produced in landlocked areas like Cushing, Oklahoma, incurs a higher shipping cost due to limited storage facilities.
