Will Opec cut' move break the gridlock?

It seems that the influential cartel of the Organisation of Petroleum Exporting Countries (Opec) has at last managed to break out of the gridlock of production glut and declining prices. At its meeting in Algiers on Thursday, Saudi Arabia, the country with the largest production and market share, had agreed to cut its output after resisting it for more than a year. Though the details have to be worked out as to how much each of the 14 member-countries would reduce, it is clear that the large chunk of reduction would have to happen with Saudi Arabia. The reason for the continuing crude oil oversupply was the resumption  of production by Iran after economic sanctions were lifted. Iran’s supply coupled with low demand led to a crude oil glut. Despite the talk of supply cuts, Saudi leaders were apprehensive of unilateral output cut as it feared Iran, its main rival in the region, would establish its dominance, making it difficult for Riyadh to regain its top slot.

It was indeed a question of market perception rat-her than economic rationality, but the markets do not exactly work on the neat demand-supply equilibrium. Opec members seem to have realised that stubbornly holding on to the status quo would not help. Everyone, and Saudi Arabia much more than the others, was acutely feeling the pinch of falling oil revenues. It was forced to cancel bonus payments to government employees, and cut the salaries of ministers by 20 per cent and of members of the Shura, its consultative council, by 15 per cent. This was an unprecedented measure. The need to do something to push crude prices up was compelling. Market analysts are, however, coy about speaking on the big-picture state of the world economy. If demand does not pick up due to persistent low economic growth in advanced economies, will the reduction in oil production help in increasing export revenue? There are very faint signals of revival in the Western economies. No alternative market of rising demand has been discovered. China, Japan and India, three of the largest Asian economies, are not clocking growth rates that would stimulate greater consumption of crude oil.

As a matter of fact, India’s oil import bill has been falling, though the quantum of oil imported had increased. According to ministry of petroleum and natural gas figures, India has imported 202.1 million tonnes for $64 billion in 2015-16 compared to $112.7 billion it had paid for 189.4 million tonnes in 2014-15. It has been a happy, or uncanny, depending on the point of view, coincidence that ever since the Narendra Modi government came to power in May 2014, global oil prices have been falling steadily. The price per barrel slid from $105.73 in May 2014 to $62.50 in May 2015 to $45.98 in May 2016. It was a windfall for the Modi government. As an emerging market economy, India’s stakes in the oil market are double-edged. It stands to gain from low crude oil prices as well as from an increase in prices. As the oil import bill is higher, a lower price is preferable.

The moot question on oil prices is that it has to be less arbitrary than it has been so far. And it has to reflect the pull and push of general economic trends. Problems perhaps could have been avoided if there was rational pricing in these years.  Opec is in control of the production output, but there is not much it can do about price fluctuations, which tend to swing from bubble to bust. It is, of course, futile to blame the manipulation of crude oil prices by the manipulators in Western markets. Opec needs to evolve its own rationale for pricing. Of course, there is the gratuitous advice offered to Opec members, especially those in the Gulf, that they need to diversify their economies and they should not remain a single-commodity setup. It is a call that the Arab governments need to take for themselves.