Fire with fire

Fire with fire

Only way to counter Opec cartel is to bring about cooperation among oil buyers.

In an engagement with executives of the world’s top oil companies and representatives of Saudi Arabia and UAE, Prime Minister Narendra Modi observed this Monday that the oil market is producer driven and they determine the prices. It was a polite way of indicating that oil consumers are at the mercy of a cartel. In contrast, US President Donald Trump was blunt when he addressed the UN last month. He accused Opec of “ripping off ” the world.

These are not baseless charges. Around two years ago, the ‘Algiers Accord’ led to an agreement among Opec members and Russia, an important non-Opec oil producer, to compress supply. Consequently, output was adjusted downward by about 1.8 million barrels a day. To make matters worse the US announced unilateral sanctions on trade with Iran, disrupting oil supply agreements. The impact of these developments showed up in the price trend. The monthly average price of the Indian crude basket increased 75% in the last two years to $77.88 a barrel. For India, the increase in oil price has put its balance of payments under some pressure, strained household budgets and led to input cost escalation for industry.

As a cartel Opec, led by its largest producer Saudi Arabia, has functioned in a way which has often hurt large oil consumers like India. The best way to insulate India’s oil economy from the adverse impact of cartelisation is to cooperate with other buyers. Four large oil importers are in Asia: China, India, Japan and South Korea. A few months ago, minister for petroleum and natural gas Dharmendra Pradhan suggested there should be cooperation among buyers to get a good deal. It is an idea whose time has come.

India should take the lead in securing cooperation among buyers. Given its deepening ties with Japan and South Korea, and overlapping interest with China in this matter, there is a powerful case to bring about a mechanism to foster cooperation. Undermining a supplier’s cartel will help India which remains vulnerable to spikes in oil price. Appeals to fair play are unlikely to work in this case. Opec exists to get its members a good deal at the expense of others. The only way buyers can bring about a fair deal is to recognise a common interest and act upon it.