Global move to release oil stocks sends strong message to OPEC plus

An unusual effort by a group of countries to push back against the tyranny of the oil producing cartel has taken place in the last few days. India has joined the initiative, launched by the US, to prevent world oil prices spiralling and putting a burden on international oil consumers. Whether it works or not, it gives hope that the world does not have to be held hostage to the decisions taken by a small group of countries that control supplies of a critical energy source.

The move has been taken in the backdrop of the fact that most economies, whether in the developed or developing world, are struggling to get back on their feet after the devastating impact of the Covid pandemic. To add to their woes, global oil prices have risen to dizzy heights. Prices of the benchmark Brent crude reached 86 dollars per barrel at the end of October. The reasons have been a rise in demand as global economic revival sets in, while availability is not adequate due to major oil exporting nations containing output increases at relatively low levels.

Appeals to the oil cartel, OPEC along with its allies like Russia, to raise production further have not met with much success. The oil exporters'group, now known as OPEC Plus, sees no reason to enhance its scheduled output increases from the present level of 400,000 barrels per day, the plan set in motion last September. One of the factors for the slow pace is fears of a Covid resurgence that could again lead to a collapse in demand and drop in prices. The cartel is uneasy as it recalls the crash of April 2020 when prices fell to a rock bottom level of 16 dollars per barrel for a brief period.

But with fossil fuels like oil and natural gas remaining the primary energy source for most of the world, the current high prices are creating social unrest in many countries. In India, for instance, consumers are facing retail prices as high as Rs. 100 per litre for both petrol and diesel despite the central government having cut back on excise duties on these fields. Many state governments have also made matching cuts in value added taxes (VAT) but rates are still too high. Rising fuel costs have also created inflationary pressures on an economy that is still fragile as it seeks to return to higher growth.

Demands are being made for the government to further rollback excise duty that had been hiked during the lockdown last year by as much as Rs. 13 and Rs. 16 per litre respectively for petrol and diesel. So far it has only cut Rs. 5 and Rs. 10 per litre respectively. The problem is, further cuts could potentially affect efforts to contain the fiscal deficit. Though revenue collections have been surging this year, the government has argued there is a need to spend on the social sector, infrastructure development as well as on buying vaccines. Even so, given the growing burden on the consumer, it needs to seriously consider a complete rollback of the additional excise duty levied last year.

In such a scenario, India badly needs world oil prices to be brought down to manageable levels of 60 to 70 dollars per barrel. It has thus joined the unprecedented initiative led by the US to release oil stocks from strategic petroleum reserves in a bid to soften world prices. US President Joe Biden who has been facing consumers' ire over high gasoline prices in his country made several appeals to OPEC plus to ramp up output. Despite the close ties with the cartel's leaders, Saudi Arabia, these appeals have clearly not cut any ice with it. It has remained obdurate in its plans to continue at the current level of output.

The Biden administration thus reached out to a host of major oil importing countries including Japan, South Korea, the UK, India and even China. The response to this move from the oil importing bloc to take coordinated action has been surprisingly positive. Most countries will be releasing about one or two days' worth of stocks, which translates into about 50 million barrels for the US and 5 million barrels for India. The UK has agreed to release 1.5 million barrels while Japan's share is likely to be about 4.2 million barrels. South Korea has also given its assent while even China has joined hands with the group and stated it will be taking steps to release crude from its strategic reserves.

The announcement that these countries would be releasing oil from their strategic reserves initially brought oil prices down below 80 dollars per barrel but the pendulum has gone back up to about 82 dollars for Brent crude. West Texas Intermediate crude, however, is still depressed at about 78 dollars per barrel.

Though analysts stress that the release of oil reserves into the market can only bring about a temporary decline in prices, it definitely sends a powerful signal to the oil cartel that the importing bloc is no longer going to get pushed around. The cartel's stubborn stance of ignoring the pain being faced especially by the South due to soaring oil prices, has been disappointing, to say the least.

India's contribution to the effort may be small but is significant given its own domestic needs and size of its strategic reserves. It also strengthens the perception that it is gradually becoming a firmer ally of the US on long term strategic issues.

The move to release oil reserves into the market may not have a long term impact on the international market but the fact that so many countries are prepared to take these measures in a coordinated manner indicates that oil importing nations are flexing their muscles. In future, there is the prospect that more such steps could be taken by the group which may gradually even become larger. If so, these must be welcomed by all those seeking greater equity in supplies of this hydrocarbon to the world.