The age of oil is far from over, in spite of the global urgency to curb carbon emissions, the ‘plus’ avatar of the Organization of Petroleum Exporting Countries (OPEC+) has regained unity as a cartel, and, as global crude nears $80 per barrel, it is clearly time for India to ease domestic levies on fuel.
- The Organization of the Petroleum Exporting Countries (OPEC) is a permanent, intergovernmental organization, created at the Baghdad Conference in 1960, by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela.
- It is headquartered in Vienna, Austria.
- However, currently, the Organization has a total of 13 member countries only after Ecuador, Indonesia, Qatar and Gabon suspended it.
- The non-OPEC countries which export crude oil are termed as OPEC Plus countries. OPEC Plus countries include
- Azerbaijan
- Bahrain
- Brunei
- Kazakhstan
- Malaysia
- Mexico
- Oman
- Russia
- South Sudan
- Sudan
Our policy since the oil-price slide of 2014 has been to keep retail prices high and mop up the external windfall of lower import bills through taxes, but without offering relief when costs rise instead.
Apart from its heavy burden on fuel-users, this approach stokes inflation and makes it harder for our central bank to fulfil its mandate of price-stability.
It may still have been bearable if dearer oil were just a blip, but two widely-assumed factors of price moderation need interrogation.
First, can clean energy reduce oil demand enough to make a difference?
Second, to what extent has shale supply from US frackers loosened Opec+’s grip on the global market for oil?
With Saudi Arabia’s row with Russia that coincided with last year’s covid crash now well in the past, an Opec+ huddle is expected to take a call on a speedier revival in combined output than its current schedule of 400,000 daily barrels every month, as post covid combustion resumes.
By Opec’s latest forecast, the world’s oil market will regain its pre-covid volume of some 100 million barrels per day by 2023 and then expand to plateau at almost 108 million by 2035.
An economic slump in fuel-guzzler China could get in the way of that, but the cartel’s new projection of renewables making up less than a tenth of global energy use by then does look credible, given our slow progress against climate change that prompted Riyadh’s recent dismissal of a net-zero emission target by 2050 as a “La La Land” fantasy.
If Opec is confident of taking its share from a third of today’s market to 39% by 2045, attribute it to cost dynamics. This also explains why Saudi sway over prices persists in the face of America’s shale-oil gush.
Once US drillers began using advanced tools to fracture rocks and crack open elusive reserves about a decade ago, dozens of new frackers turned America into the world’s biggest oil producer.
Its 10.6 million daily barrels last month exceeded Saudi and Russian output by about 1 million each. But shale producers are estimated to break even at $40-45 a barrel, while Arabian desert oil costs less than a tenth to extract, with fixed assets long defrayed.
This lets Riyadh open and close its taps of supply at will, even if just to squeeze out high-cost rivals via a glut of cheap oil, as seen in the 1980s.
The past decade’s episode left US frackers battered, though with survivors far more efficient, and Opec with renewed power over international prices.
On balance, while oil’s $147-per-barrel peak of 2007 may not be hit again, it could yet stay at elevated levels set by Opec+.
The past decade saw data replace oil as the top source of monopoly profits and frackers relieve the US of its energy anxiety. With its economy better able to absorb oil shocks, like the stagflationary spike of the 1970s (and even slower upshoots, as seen in the 2000s), the US recently pivoted its geo-strategic focus from West to East Asia.
Momentous as this is, the economies of big importers like India remain vulnerable. Our post-independence tryst with self-reliance was taken apart by oil needs. And our import-dependency remains high. We can’t count on cheap oil. We have to slash fuel taxes.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.