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Oil market price war resurfacing

Oil market price war resurfacing

Is the world again heading to another oil confrontation? The 'battle' between the US and OPEC countries for dominance in the oil market has prompted such an apprehension. And that is aggravated by the declared intention of countries led by America and including China, India, South Korea, Japan and Britain to release millions of barrels of crude reserve into the open market. OPEC producers are yet to make an official response to this, but their scheduled meeting of December 2 may give some answers. However, even after the decision of the major consumer countries including the US, crude price has risen to USD 82 per barrel, marking an increase over USD 80 for the first time since 2014. The US step is as much unexpected as it is bound to complicate international relations too. But experts are of the opinion that the decision is unlikely to bring down oil prices immediately.

For reining in international petroleum products' prices, countries have declared that they would transfer some volumes of crude to oil companies: the US has committed 500 million barrels, Japan 4.5 million, Britain 1.5 million and India 5 million. China and South Korea are yet to disclose their figures. The US camp believes that this action will force producing countries boost production and thereby prices will come down. But as a matter of fact the fluctuations in crude oil prices are beyond the simplistic market factors of demand and supply. Crude oil prices are in fact determined by a gamble of marketing tactics indulged in by the big oil firms who also wield crucial clout over western governments and the market. And oil price, a key factor in determining the vibrance of global economy, often influences equations including even the fate of regimes of countries. Ultimately, the crucial role in price determination is played by the political and economic ambitions of OPEC + countries, which includes Russia, and the interests of America and China.

The genesis of the fresh political crisis is in the Covid-ravaged countries making oil price their main weapon for their economic revival. OPEC countries have no alternative to think of other than price increase. But that will make the state of the shattered economy of America and India more complicated. At another level, this price rise will put in crisis the unbridled production thrust of countries itching for economic resurgence like China and Japan. Further, for governments in India and the US facing nationally crucial elections in 2022, a fall in international crude prices is also a political imperative. The question is whether OPEC countries, who hold 79.4 per cent of the world's proven oil reserves, will succumb to such pressures. Saudi Arabia is firm that they should not. But the decision will hinge on the stand of Russia whose production level beats Saudi's. And the silence of Russian leader Putin, and the possible pressure exerted on Russia by the US and China, also sharpen the conundrum.

As for the government of India, by releasing into the market its strategic reserve - which was purchased at USD 19 per barrel - the Central government may be able to stem the fall of the value of the rupee and make good the loss suffered through slashing the fuel taxes. It is not to be forgotten that it is the oil kept in reserve for the hard day that is being used up now for temporary political gain, as it did by drawing on the reserve funds of the Reserve Bank of Indiaand eating it up. Another motive behind this decision is also likely, i.e. by leasing 30 per cent of the oil tank farms to private entities and thus making profit for ISPRL (Indian Strategic Petroleum Reserves Limited). One of its two storage facilities in Mangaluru had already been transferred to foreign oil firms. This financial acrobatics, which is done with no lightening of the tax burden on the citizens reeling under skyrocketing petroleum product prices, will not bring any benefit to the country. As it happened with the RBI's reserve, this also is likely to be misused in the build-up to the elections in UP. This decision, obviously adopted in the interests of America, will not only lead to a fall in domestic product prices, but also stands the risk of adversely affecting the diplomatic relations with OPEC countries. If America, sitting on a reserve of 720 million barrels and the largest crude producer of the world, and India with a stock of just 40 million barrels and importing 85 per cent of its crude oil requirement, enter the international oil market for the same game, it risks giving a big blow to the national interest.

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TAGS:Crude oil price war releasing strategic reserve OPEC production 
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