Syllabus: GS3/ Economy
Context
- A new oil war is unfolding through production and pricing strategies rather than armed conflict, with far-reaching global economic implications.
Background
- Recently OPEC+ decided to increase crude oil output by 411,000 barrels per day (bpd) from June 2025.
- This marks the third consecutive month of production increase, reversing part of the 2.2 million bpd voluntary cuts taken in 2023.
- This move caused Brent crude prices to drop sharply, indicating a highly sensitive oil market.
Steps taken by Saudi Arabia
- Saudi Arabia significantly reduced its crude output in 2024, bringing it below 9 million bpd, its lowest since 2011, in an attempt to support falling oil prices.
- Due to non-compliance from members like Iraq, Kazakhstan, UAE, and Nigeria, it now seeks to counter overproducers by flooding the market, a strategy used in past oil wars.
Reason for policy reversal
- Post-COVID Demand Weakness: After COVID the recovery of the economy was “K-shaped” i.e. uneven and fragile and oil demand did not bounce back strongly.
- Rise of Non-OPEC+ Producers: Countries like Brazil and Guyana, along with U.S. shale oil producers, aggressively expanded production to capture market share, adding to the global supply glut.
Reasons for Decrease in Oil Prices
- Oversupplied Market: Even as demand stagnates, multiple producers are adding supply, creating downward pressure on prices.
- Peak Oil Demand Theory: The International Energy Agency (IEA) projects that global oil demand may plateau or even decline by the end of the decade, weakening long-term price prospects.
- Energy Transition: The global shift towards electric vehicles and renewable energy, especially in major markets like China and Europe, reduces reliance on fossil fuels.
Impact on India
- Short-term Gains: A $1 decrease in crude oil price translates into an annual saving of approximately $1.5 billion for India.
- Lower prices ease inflationary pressure and reduce the import bill, helping India’s current account balance.
- Long-term Risks: Prolonged low oil prices can harm the economies of Gulf countries, many of which are India’s key trade and investment partners.
- Over nine million Indian expatriates reside in the Gulf, and any economic slowdown could lead to job losses and reduce the $50 billion in annual remittances India receives.
- India’s own refined petroleum exports, among the top items in its export basket, may suffer due to falling global oil product prices.
- Investment from oil-rich sovereign wealth funds might slow down, affecting India’s infrastructure and energy projects.
| About OPEC – The Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental organisation established in 1960 at the Baghdad Conference by Saudi Arabia, Iran, Venezuela, Kuwait and Iraq. – Currently, it has 12 members, viz. Algeria, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, the United Arab Emirates and Venezuela. – Objective: To coordinate policies with respect to petroleum demand and supply to ensure fair and stable prices and ensure a steady income to oil producing countries.It is headquartered in Vienna, Austria. OPEC+ – OPEC+ has 22 members, made up of 10 major oil producing countries (Russia, Kazakhstan, Azerbaijan, Brunei, Bahrain, Mexico, Oman, South Sudan, Sudan and Malaysia), along with the 12 OPEC members. – It was formed in 2016 after the adoption of the ‘Algiers Accord’ by OPEC countries in September 2016 and signing of the ‘Vienna Agreement’ in November 2016 between OPEC and other major oil exporting countries. |
Source: TH
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