By Anjan Roy
The world has suddenly been pushed into a deeper crisis by a sudden decision of Saudi Arabia to cut oil production. Following the Saudi decision, the OPEC-plus members have also announced commensurate reduction in their oil production.
Russia, Kuwait, UAE, Iraq, Algeria and Oman have also declared production cuts. The cuts will begin in May and would continue till the end of the year. Thus, the prospect is one of prolonged pressured on oil market all thorough the year.
There are rumours in the oil markets that some of the smaller producers are none too happy about the sudden decision to introduce cuts. They might even consider defying the production cuts at the prompt of the United States.
The combined reduction in global oil output is being tentatively estimated at around 2 million barrels per day, which is equivalent to 2% of global demand. With such a reduction in oil availability all of a sudden, prices are expected to jump. Already oil prices shot up today in the world markets by nearly 5.5%.
Oil market specialists fear the prices to inch up to $100 a barrel by the end of the year. The implications for the world —as well as India — could be quite unsettling.
This would wipe out all recent gains in the global economy toward a sort of normalcy in the wake of the pandemic. The prospects of a stability in world financial markets have also received a jolt with the return of fresh uncertainty about interest rates.
The Central banks were recently coming round to the view that pauses in interest hikes were in order so as not to roil the financial markets and stall economic recovery. However, with so many fears of oil price rise and its spillover effects on the general price line, the central banks might have to reconsider their softer stance.
While the economic implications of the production cut move are undeniably harsh, these moves are the surface results of some tectonic shifts in geo-politics.
Underlying these surface developments is the increasingly acrimonious relations between the United States and Saudi Arabia. For a while the US has been trying Saudi Arabia to ramp up oil production. But the Saudis have not paid heed to the US advice.
Ever since, the US had held Muhammad bin Salman, in short form MBS, personally complicit in the gruesome murder of the Saudi journalist inside its embassy in Ankara, had even debarred him from visiting US, relations have plummeted. MBS, the king presumptive of the Saudi kingdom, has drifted away from US to embrace China or Russia.
The decision for cutting oil production at this point has been stridently criticised by the US, saying that the higher prices of oil following production cut will provide the wherewithal to the Russians to continue their Ukraine war. Earlier, when Saudi had imposed some oil production cuts in October last year, the US had similarly opposed the decision and threatened “consequences” for the Kingdom.
Now, the US had said as much and the administration is considering to drastically reduce sale of weapons and strategic systems to Saudi Arabia. Unlike previously, Saudi Arabia is showing considerable defiance at the US recently, emboldened probably by its proximity to the Chinese.
The Chinese had brokered a deal between the long-feuding neighbours, Saudi Arabia and Iran. The two countries had fought bitterly with each other for decades as Iran backed Houthi militias had mounted serious assaults on Saudi infrastructure facilities.
Saudi Arabia is also suspicious of Iran’s motivations on developing nuclear arms and delaying these in the region. Saudi fears that Iran’s nuclear programme is directed at the Saudis and other friendly to the kingdom.
But the Chinese brokered deal has brought a sort of clam in the region and nerves are a little less frayed. But, experts feel that the animosity between the neighbours are so deep and also endemic that their peak could hardly last for long.
But for now, the Saudi-Iran deal, the rising diplomatic bonhomie with China and Russian backing at the OPEC plus platform has emboldened Saudi to take on United States. Now, US has fewer options to confront the Saudis effectively.
Immediate beneficiary of the move would be the Russians as their flagging oil revenues should jump. The Russians have promptly announced cut in production by as much as the Saudis. The Saudi oil industry is reducing daily production by 500,000 barrels a day and now the Russian are promising the same.
Russia will thus be a happy situation in which their incomes will jump while they sell less and less of oil production. The per unit oil sales revenues should shoot. That will help the country to easily ignore the sanctions imposed by the western nations.
India’s decision to stick on to Russian oil supplies, and its forward contracts already done with Russia, will to a large extent mute the adverse impact. However, unless the details of the oil supply agreement between India and Russia are known it will be unclear to what extent India might have to fork out more for the Russian oils in future. (IPA Service)