The US is the largest producer of oil in the world, followed by Saudi Arabia and Russia. This group controls most of the world’s oil, and it is thus their responsibility to maintain oil prices and avoid fluctuations. Back in 2017, when oil prices were dropping, the OPEC countries, led by Saudi Arabia and Russia, came together to form a partnership of sorts to stabilise the markets and keep the prices high. Their solution to the problem was to cut oil production, thus cutting supply while demand remained the same as before. This led to competition amongst the buyers prompting oil costs to go up again.
In the last two years, the global economy strengthened, and oil prices stabilised again. The partnership looked strong, and many felt that it would continue to be so for a long time. But with Russia, nothing is ever so sure, and the coalition came to an abrupt end after just two and a half years.
Since the start of 2020, the coronavirus scare has been dealing some fierce blows to the world economy. Stock markets all over the world were affected, and global market indices were falling. The oil prices, too, were hit hard, and OPEC wanted to use the same tool it had been using all this while to bring the crude value back up.
For those of you who might not know a lot about what OPEC (Organisation of the Petroleum Exporting Countries) is and what it does, it’s a cartel of 13 countries which generates around 44% of the world’s total crude oil production and 21% of the world’s natural gas production. The 13 countries in the OPEC are Iran, Iraq, Saudi Arabia, UAE, Kuwait, Algeria, Angola, Equatorial Guinea, Libya, Nigeria, the Republic of Congo, Venezuela and Gabon.
Till very recently, Ecuador was also a part of the group but left it effective 1st January 2020. Now when you have a look at the member nations, you would know that Saudi Arabia is the most dominant member, and it alone produces around 12% of all of the world’s crude oil. So, it is by default, the leader of the pack, and the other countries just follow what Saudi Arabia decides to do. Now back to the coronavirus scare and dropping oil prices.
Coronavirus Fear And The Dropping Oil Prices
So basically, OPEC decided to continue its strategy of cutting down production to maintain high prices, but Russia had had enough. Therefore, when OPEC (primarily Saudi Arabia) held a meeting on the 6th of March proposing the aforesaid cuts in production, Russia refused to comply and promptly backed out of the coalition.
The Russian reasoning behind this decision was that the American shale oil industry was booming because of the production slashes, and the price hikes which the OPEC and Russia were imposing were thus prompting more customers to purchase from the American companies. Nobody knows for sure what the actual reason is, but whatever it may be, the decision of the Russians angered the Saudis. They reacted by slashing oil prices and boosting production giving deep discounts to its regular customers and also targeting Russian clients.
Oil prices have fallen about 24% to $32.97, which is a big drop, and they aren’t stopping here. Riyadh is threatening to flood the market with even more oil and has ordered the state-owned Saudi Aramco to boost production to around 13 million barrels a day, a level it has never attained before. Even the Russians are now joining in, augmenting their production and lowering costs.
This price war doesn’t hold any good for most of the countries involved, especially the poorer north and west African member countries of the OPEC, whose economies are not as strong as their Middle Eastern counterparts. They are wholly dependent on oil and can’t afford to give such steep concessions. Even the richer Asian countries are hurting themselves, but maybe it’s their way to try and get Russia back on the table.
As far as our own country is concerned, this price war couldn’t have come at a better time and India stands to gain a lot from it. We import almost 84% of our crude oil spending a lot of money on oil imports. According to the PPAP (Petroleum Planning and Analysis Cell), India spent $111.9 billion on oil imports in the fiscal year 2018-19 alone. So imagine how much we could save in the ongoing oil price war, leading to a reduction in petrol and diesel costs, and could eventually use that money saved in other troubled sectors of the economy.