Opec has given India a window that should not be missed

Global oil prices are guaranteed to fall for a few more years, strangely courtesy of the world’s oil cartel. The latest summit of the Organisation of Petroleum Exporting Countries (Opec) failed to agree on any production curbs or a price target.

In other words, all members were free to pump as much as they wanted and guarantee that the present slump in crude oil prices would only continue. The combination of rising oil production and, thanks to a slowing China and greening West, stagnant demand has some analysts forecasting oil prices as low as $20 a barrel — half of the already low prevailing $40-45 Brent price band.

This will be reassuring to New Delhi. About one percentage point of India’s present growth rate and a large chunk of falling inflation is a consequence of the present oil price drop. If the upturn in India’s growth rate continues and is sustained, nothing could be more conducive than low fuel prices. The oil supply is 0.5-2 million barrels a day more than the demand, not an extravagant margin, given the world drinks over 30 million barrels a day.

The low price will lead to lower production: high-cost oilfields will shut down, investment in new fields will peter out and demand will jump. The lag time for this to happen will be greater than normal because of shale technology, climate concerns and the geopolitical requirements of oil producers like Saudi Arabia, Iran and Russia.

The last has meant many producers are increasing oil output and absorbing low profit margins and even losses — despite falling prices. The geopolitical motive is a key reason that the profit-driven Opec members squabble these days.

There are policy implications for India other than the good news for its trade balance. One, the country needs to reconsider its thinking on energy security. India’s addiction to oil and gas imports will worsen, thanks to cheap oil. Instead of chasing self-reliance, India should seek a policy that aims at long-term stable supply and prices, but one that involves foreign governments and agencies and accepts imports as part of the equation.

Two, the low crude oil prices — and concomitant fall in natural gas prices — provide an opportunity for India to straighten out its energy prices. At present the consumption and pricing of fossil fuels in India are largely siloed from each other. They are also distorted by subsidies and taxes.

A time when market prices for energy are low is the time when an integrated energy policy should be implemented. Opec has given India a window that should not be missed.

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First Published: Dec 08, 2015 21:05 IST