The United States may have just started another war that it cannot win. This time it is in the oil market, the foe is the powerful OPEC+ cartel and the prize is lower oil prices.
President Joe Biden has roped in a new, motley set of allies in China, India, Japan, South Korea and the UK, which, together account for a little less than half the total oil consumption in the world.
In an unprecedented move, the group has initiated steps to release crude oil from their respective strategic reserves that together add up to about 70 million barrels.
The move appears aimed as much at cooling rising prices as sending a signal to the OPEC+ that the patience of its consumers is wearing thin.
Though the angst is justified, neither of the two objectives may be achieved simply because the balance of power — control over oil reserves — rests with the OPEC+.
Though prices may be nudged downwards in the short term — and that has not happened in the 24 hours since the move was announced — in the long term they are bound to bounce back simply because the firepower that the group commands is limited in its ability to influence supply dynamics.
Yes, the United States has over 600 million barrels in its strategic reserve and China has another 238 million barrels (as of 2017, the last available official data) while India has 38 million barrels, all of which add up to a substantial number.
But these are meant to be drawn down only when supplies are blocked either due to war or a natural calamity. There is a limit to which they can be used to influence prices.
The OPEC alone, in comparison, lords it over more than 1,100 billion barrels, which is 80 per cent of global oil reserves.
The equation is clear. Ironically, oil prices moved up after the announcement by the US and India on Tuesday, partly because the move was already priced in by the markets and partly because the market anticipates the OPEC+ to retaliate.
Chances are that the cartel may decide not to go ahead with a planned increase of 4,00,000 barrels a day in order to nullify the impact of the release from strategic reserves. Such a move would drive home the message to the US-led group that the weapon they are brandishing is blunt and limited in power.
President Biden’s move has to be seen in the backdrop of the friction between the US and Saudi Arabia in recent times with the former refusing to play ball with the Mohammed Bin Salmanled Saudi Arabia in the backdrop of the killing of journalist Jamal Khashoggi.
Where does all this leave India?
Given the limited size of its reserves which add up to just about a week’s consumption, India may have erred in joining the US initiative. There is unlikely to be any gain in terms of lower prices; if anything, there will be a cost to this move as the country will have to top up its reserves again at the current high prices.
The focus of the government ought to be on building additional storage to increase the reserves to at least a fortnight’s consumption, rather than squander parts of it in symbolic exercises that fail to advance its national interests.
OPEC Counties:-
India’s Strategic Oil Reserves:-
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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.