Opec Output Pact Proposal

July 6, 2021

Syllabus:

Context:

The latest round of meetings among the opec+ group of oil-exporting countries has stalled.

Background:

The opec+ group of countries had, in april 2020, entered into a two-year agreement.
- It entailed steep cuts in crude production to deal with a sharp fall in the price of oil as a result of the covid-19 pandemic.
- The price of brent crude hit an 18-year low of under $20 per barrel in april 2020 as economic activity around the world crashed as countries dealt with the pandemic.
- The initial production cut by opec+ was about 10 million barrels per day or about 22 per cent of the reference production of opec+ nations.
In november 2020, however,the price of brent crude started climbing consistently by the steady rollout of vaccination programmes around the world.
Opec+, however, maintained lower levels of production despite crude oil prices reaching pre-covid levels.
- With saudi arabia, notably, announcing a further cut in production of 1 million barrels per day for the february-to-april period.
- It helped boost rising prices even further.
The opec+ group ran into sharp criticism from developing economies, including india, for deliberately maintaining low supply levels to raise prices.
The petroleum minister had even stated the high price of crude oil was slowing down the economic recovery of developing economies post the pandemic.
In april, opec+ agreed to gradually increase crude production as prices reached $64.5 per barrel including a phased end to saudi arabia’s 1 million barrel per day cut in production by july 2021.

Issues:

The uae agreed that there was a need to increase crude oil production from august 2021;
- But did not agree to a condition by the opec joint ministerial monitoring committee (jmmc)that;
- The two-year production agreement will be extended by six months.
The uae’s key objection to the existing agreement is the reference output used to calculate the total production apportioned to each oil-exporting country.
The uae noted that the baseline production level reference used in the current agreement was not reflective of the uae’s production capacityand, therefore, led to the uae being apportioned a lower share of total production of crude oil.
The uae noted that the baseline reference production levels were unfair and that it would be open to extending the agreement if baseline production levels were reviewed to be fair to all parties.

Impact on india:

If the uae and other opec+ nations do not reach an agreement to increase production in august 2021, expected relief in the form of lower crude oil prices could be delayed.
India is currently facing record-high prices of petrol and diesel, with pump prices of the former exceeding rs 100 per litre in 13 states and union territories.
High crude prices have led to indian oil marketing companies hiking the price of petrol by about 19.3 per cent and that of diesel by about 21 per cent since the beginning of 2021.

Question: