Opec and Shale Oil battle and the Indian oil diplomacy | pump-at-will policy | OPEC Members

Opec and Shale Oil battle and the Indian oil diplomacy | pump-at-will policy | OPEC Members

Organization of Petroleum Exporting Countries (OPEC)

The Organisation of Petroleum Exporting Countries (OPEC) was formed in 1960. It has 14 major exporters of oil; it was founded in Baghdad, but the headquarters are in Vienna, Austria. 

OPEC Members

The OPEC is an international cartel that coordinates petroleum policies of the 14 states to stabilize the oil prices and ensure supply to the consumers. 

The current OPEC members are the following: Algeria, Angola, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, the Republic of the Congo, Saudi Arabia (the de facto leader), the United Arab Emirates, and Venezuela. Former OPEC members are Ecuador, Indonesia, and Qatar.

opec members map

India has been an old buyer of oil from the OPEC states. In recent times, the US discovered shale gas. The discovery of shale was perceived by OPEC as a threat to the oil trade. 

In 2014, the oil minister of Saudi Arabia Ali Al-Naimi advised the OPEC states to take steps to pre-empt the US to use shale to grab the OPEC markets of oil. So, in 2014, OPEC decided to increase the production of oil. As the production of oil increased, the prices of oil began to decrease. As the prices decreased, OPEC began to offer its clients huge discounts. Since 2014, India too witnessed benefits out of the OPEC policy. 

Indian Oil Diplomacy

For India, the oil import became cheaper, and India was able to save a lot of foreign exchange in oil imports. Such discounts in oil prices by the OPEC affected the export revenues of the OPEC states. The OPEC government states began to pump money to compensate export revenue losses. 

This policy of the OPEC even hurt the shale industry, as the decrease in the oil prices affected the fracking process. à May 2016, Naimi was succeeded by Khalid Falih as the new oil minister of Saudi Arabia. Khalid decided to reverse the policy of Naimi and decided to cut the oil output with the intention to increase the oil prices. But the policy of Khalid was short-lived as Russia, an important negotiator, increased oil production. 

As Russia did not cut the oil production, it succeeded in displacing Saudi Arabia as a core exporter of oil to China. The overall effect of the policy of Khalid did increase the oil prices slightly. This led to rising in US oil production and the US began to emerge as an exporter of oil once again. 

Pump-at-Will Policy

Though Trump visited Saudi Arabia in 2017, Saudi Arabia is not happy with the US conquering markets of Saudi Arabia. In 2017, Saudi Arabia and Russia have decided to cooperate and continue to production cuts till 2018 to push up the oil prices to take them to around USD 50 per barrel. To achieve this, both have decided to follow the 'pump-at-will' policy. The US traders have followed a policy of using capital markets to raise money. 

The US traders have decided to resort to future and options markets to hedge against low oil prices. In this price war, Saudi Arabia and OPEC did not realize that fracking (the method of hydraulic fracturing to produce shale) is a more predictable method than the Wildcatter model of drilling oil (a method of pumping money on the ground to gush out oil). But the bigger issue is that all such measures are short-term only. 

Does OPEC have a long-term plan as states are trying to switch over to cleaner fuels?

(By 2040, four European states have decided to ban sales of gasoline cars.) India picked up the issue of Asian Premium (charged by the OPEC to poorer importers of Asian states) in 2017 during the Vienna meeting. 

India has asserted for the first time that if the security of supplies is not maintained, India can look at new avenues like the US, Iran, and Canada. 

By 2040, India's oil demand will rise by 150 percent and the global share will rise from 4 percent to 9 percent. India has started oil imports (shale) from the US. This will rectify the Indo-US trade imbalance. India has invested 5 billion dollars in shale business assets in the US. It will lessen the engagement with traditional buyers if new avenues open up.

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