OPEC+ - INTERNATIONAL
News: OPEC+ begins meetings that may seal more output cuts’
What is in the news?
● Recently,
OPEC and its allies began two days of meetings that may culminate in further
production cuts of as much as 1 million barrels per day.
Why the production cut of OPEC+ a concern for India:
1.
High import dependent:
● Production
cuts will increase the crude oil import price for India.
● India imports almost 85%
of its Crude oil from overseas to meet its domestic demand.
2.
Increase inflationary trend:
● Higher
prices will lead to high inflation in the retail market.
● Currently, crude oil and
related products have a weight of 4.4% in retail (CPI) inflation and 10.3% in
wholesale (WPI) inflation.
3.
High Current Account Deficit:
● Elevated
crude oil prices put pressure on India's trade deficit as the country imports
more than 80 per cent of its oil requirements.
● Eg. The World Bank said
that an increase of $10 a barrel could translate into 40 basis points to half a
percent increase in CAD.
4.
Drain of foreign reserves:
● India
needs to spend more from its foreign reserves to pay for importing crude oil,
this will decrease the total foreign reserves of the country.
5.
Domino Effect:
● High
oil prices will increase the input cost of other manufacturing activities, and
this will increase the cost of other end
product goods and services.
6.
Rupee depreciation:
● Higher
prices will push the import bill, which means more demand for the dollar and
that will widen the current account
deficit and weaken the rupee.
7.
High fiscal problem:
● If
crude prices continue going northward, then the crude oil subsidy given by the government prices could go up.
8.
Issue of price volatility:
● Frequent
cuts by the oil producing countries will increase the already volatile market
of the country.
What measures should the government and RBI take to
control the price volatility?
1. Diversify energy sources:
● The
government can focus on diversifying its energy sources by promoting renewable
energy and reducing dependence on oil imports.
2.
Increase petroleum reserves capacity:
● The
government can build and maintain strategic petroleum reserves to ensure a steady supply of oil during times
of production cuts.
3.
Diplomatic negotiation:
● The
government can engage in diplomatic efforts to address the issue of OPEC+
production cuts.
4.
Boost domestic oil production:
● The
government can take steps to enhance domestic oil production by providing incentives for exploration and production
companies.
5.
long-term contracts:
● The
government can explore long-term contracts with oil-producing countries to
secure a stable supply of oil.
● This
will negate the issue of production cuts.
6.
Boost to E- Vehicles:
● Government
should provide more incentives to boost the adoption of electric vehicles in the country which will decrease
the dependence of oil imports for the transport system.
7.
Strengthen hydrogen production:
● More
incentives should be given to increase the hydrogen gas through its flagship
National Hydrogen Energy Mission.
● Eg. Hydrogen is
considered the future energy of the world.
8.
Energy efficiency initiatives:
● The
government can encourage energy
efficiency initiatives across industries and households.
● Eg.
Incentives to adopt solar energy in the rooftop of the houses, industries etc.