India, China need to rope in other oil consumers to counter OPEC

Sunilchandra Dal
Sunday, 18 November 2018

Bloomberg says either outcome would cut oil demand by 50 per cent or more by mid-century, as the Paris goals require and would signal the end of the petroleum era.

The Organization of the Petroleum Exporting Countries (OPEC) is considering lowering output of oil to drive up oil prices to higher levels. This artificial jacking up of oil prices hurts the economies of developing countries. Experts feel that OPEC is holding the global economy to ransom. A hike in crude oil prices would slow down growth in India,China and other countries. India and China announced that they are considering forming an Oil Buyers’ Club to counter OPEC. However, it is time for both countries to speed up the formation of the club and involve more oil consuming countries to have an impact.OPEC is a cartel of 15 countries which collectively decide how much oil to produce and at what price to sell it. OPEC countries account for around 44 per cent of oil production. It was founded in 1960 by five founder members namely Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The other members are Qatar, Libya, the United Arab Emirates, Algeria, Nigeria, Ecuador, Gabon, Angola,Equatorial Guinea and Congo. Bloomberg adds that the cartel prices transfer excessive wealth to petrostates and hurts the rest of the global economy.

OPEC functions mainly by cutting down oil output, so that supply is less and so prices go up and remain high. It also gluts the market with oil when other countries or private companies are planning to invest in oil fields so that the investment becomes unviable. According to Bloomberg, the periodic low prices of crude oil also prevented alternative fuels to oil from being developed.

The Oil Buyers’ Club is one solution to the jacking up of prices by OPEC. According to Bloomberg, the announcement by China and India that they are joining forces to challenge OPEC’s high price strategy is likely to attract support from Japan and Europe.

The United States is unlikely to join as its President Donald Trump claims America is a net oil producer, not a consumer.

However, China, India,Europe and Japan could together be a strong negotiating bloc. Bloomberg suggests that the oil buyers should tell OPEC that transportation is shifting towards electricity and the shift could be gradual if all sides agree on moderate prices of $30 to $50 a barrel. But if OPEC is 
going to hike prices to $60, $80 and $100 a barrel, the nations of the counter cartel could go for rapid electrification and far more oil will remainin the ground.

Bloomberg says either outcome would cut oil demand by 50 per cent or more by mid-century, as the Paris goals require and would signal the end of the petroleum era.

According to OilPrice.com, India and China account for a combined 17 per cent of global oil consumption and they would be the hardest hit if prices of oil rise as a result of OPEC’s actions.

OilPrice.com says as the shift to electric vehicles is facing challenges, it makes more sense to form an Oil Buyers’ Club.

Another reason why OPEC succeeds in commanding oil prices is that there is no cheap ready alternative to oil. One obvious solution is to shift to electric vehicles. 

However, this is likely to take decades. France aims at phasing out all fuel-based vehicles and using only electric vehicles by 2040. India too needs to review its electric vehicle policy and set a firm deadline for phasing out fuel-based vehicles.  

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