Strategic Reduction in OPEC’s Oil Output

Strategic Reduction in OPEC’s Oil Output

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April 06, 2023

Why is it in the news? - Due to low demand and the need to stabilize oil markets, the OPEC group recently decided to reduce oil production.

OPEC: What is it? - The 13 oil-exporting developing nations that make up the Organization of Petroleum Exporting Countries (OPEC) are a permanent intergovernmental organization. In order to guarantee a consistent supply of petroleum to consumers, the OPEC's mission is to coordinate and unify the petroleum policies of its member nations, thereby stabilizing oil markets. The executive arm of OPEC, with its headquarters in Vienna, Austria, is the OPEC Secretariat.

The significance of OPEC is as follows:

• Holds more than 80% of the world's proven oil reserves

• Produces approximately 40% of the world's crude oil

• Exports account for approximately 60% of global petroleum trade

OPEC+ is a loosely affiliated organization that is made up of the 13 OPEC members and ten of the world's major non-OPEC oil exporting nations. In addition to OPEC members, it includes Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan, and Sudan. Since 2016, they work together to set the global price of crude oil.

What effects does the Oil cut have?

• The Brent benchmark, one of the most liquid crude grades, is used to price over three-quarters of the world's traded oil

• Inflationary pressures on the global economy

• Fluctuations in global assets

• The oil producing nations other than OPEC have also reduced their oil production

• The oil market may move into a deficit Refineries around the world process it.

Impact on India - India obtains approximately 85% of the crude oil it requires from international oil markets. In 2022, India had a 3.7% current account deficit. These are the effects on India:

• An increase in the cost of importing oil, which could result in inflation

• An increase in the deficit in the current account

• A weakening of the Indian rupee

• The possibility of a decrease in global investment in India, particularly in the United States

• A difficulty for the monetary policy committee to determine the basis points

Source: The ET & The Business Line