Any fall in crude oil prices brings relief to New Delhi, staggering under an untenable subsidy burden, but perennially meeting with popular resistance against any revision in petroleum product prices. That it is prone to cowering under pressure from opposition parties is again evident in its vacillation to allow the market decide diesel prices. But New Delhi now has reasons to rejoice, at Brent crude last week sinking below $90 a barrel for the first time since December 2010, as New York benchmark West Texas Intermediate crude broke the psychologically important barrier of $79 a barrel. This is primarily because petroleum accounts for more than 32 per cent of the country’s total energy consumption and our import dependence on crude is about 80 per cent.
The softening in world crude prices has got much to do with Saudi Arabia, unquestioned leader of the 12-member Organisation of the Petroleum Exporting Countries (Opec), producing a volume that is a cause of annoyance to belligerent cartel constituents like Iran, Algeria and Venezuela, and non-Opec output making some good strides in lifting crude oil and liquid fuels production. Collaterally, the anaemic state of the world economy, the Euro zone crisis and slowing growth in each BRICS (Brazil, Russia, India, China and South Africa) country remain a damper for demand.
In Opec, Riyadh remains the voice of reason. This was evident from Saudi oil minister Ali al-Naimi’s statement that “our actions have helped the oil price drop... which has acted as a type of stimulus to the world economy”. Naimi also said his “analysis” would point Opec to setting a collective production ceiling higher than the 30-million barrels per day (bpd) target agreed in December. This is in line with Opec demand forecast rising to 30.7 million bpd in the second half. At this point, much to the relief of an economically beleaguered world but drawing snarls from Opec belligerents, Saudi Arabia is pumping oil at a 30-year high of 10.1 million bpd. Besides providing some kind of “stimulus” to a faltering world economy, isn’t Riyadh engaged in an exercise to compensate for declining production and exports from Iran that has come under sanctions from the West for its nuclear programme?
Sanctions apart, the US Energy Information Administration says lack of investment in the oil sector will shrink Iranian production to 2.7 million bpd by the end of 2012, from 3.55 million bpd at the end of last year. The setback will be potentially more, if more recent sanctions against the Iranian central bank and the European Union embargo to become effective from July 1 are factored in. Iran and some other Opec members think Saudi Arabia is responsible for the group’s production exceeding the collective output target by 1.6 bpd and creating a surplus situation. Iraq, though still suffering from spasms of violence, is able to rapidly expand production after restoration of normalcy in its oil industry. At this point, Iraq has reasons to sing the same tune as Iran in the Opec forum. A complaint by the incumbent Iraqi president of Opec that the sharp fall in oil prices in “a very short time” is due to “a tremendous surplus” amounts to taking a dig at Saudi Arabia. Circumstances have muffled Iran’s voice, both inside and outside Opec. This was clearly in evidence at the last Opec meeting in Vienna. So, Teheran stayed happy with the Iraqi stand on oil production and prices.
Opec members have made it a practice to say things for public consumption which may be different from the agenda they are actually pursuing. Byzantine politics rules the roost in the oil cartel. Iran and Iraq, which fought an eight-year war in 1980s, find themselves on the militant side of the divide in Opec. The moderates are led by the biggest producer, Saudi Arabia. The Opec split is wide open as to how much oil is to be pumped daily and on Iranian sanctions. Riyadh’s thinking that Opec being a business group, its decisions relating to production, supply-demand balance and price expectation should remain beyond the pale of politics, cannot have the backing of hardliners. No wonder, the Opec meeting was marked by irreconcilable differences on all major issues.
Opec has seen many shifting of alliances, even within the clearly defined moderate and hardliner groups. Iraq, then supporting the Venezuelan unsuccessful bid to get Opec lodge a formal protest against forthcoming EU sanctions against Iran, will by no means come in the way of Baghdad pursuing the goal of becoming the second-largest Opec oil producer replacing Iran. For the first time since the US-led NATO invasion in 2003, Iraq recently achieved production of three million bpd. Consultancy firm Oppenheimer says, “Iraq, for all intents and purposes could double its production in the next five years from three million bpd to six million bpd. No other Opec country has the ability and capacity to do that.” Iraq, sprinting ahead with its oil sector rehabilitation programme, will at some point allow loosening of its ties with Iran, leading to a shift in the Opec power balance. Will not that spell a change in the complex Opec production ceiling to our advantage?