In today's Finshots we see how countries like the US and India are planning to take on the oil cartel

The Story

The facts are simple. There is growing public frustration about  high fuel costs across the world. And when this kind of frustration simmers for extended periods, it usually reflects poorly on the popularity of incumbent leaders. It doesn’t matter who you are. You do not want to be testing people’s patience for this long. So something’s gotta give. Or somebody.

And that somebody is OPEC.

The notorious oil cartel — made up of oil-producing countries predominantly from the Middle East — has for months refused to increase oil supply. Granted there was a time last year when there was excess supply floating everywhere. But now, with a post-pandemic recovery, demand for oil is through the roof. We know it. They know it. Everybody knows it. Ideally, they should be coming in and ramping up supply to aid this recovery. But they’re not budging, despite the fact that they’re responsible for most of the world’s oil production. And many oil-consuming nations including India, China and Japan are getting desperate.

They’ve been requesting the cartel to somewhat expedite production so prices don’t get out of hand. The Indian government for example made its case in March. Our oil minister Dharmendra Pradhan urged Saudi Arabia and OPEC to pump more oil and stabilize prices. In response, Saudi Arabia’s energy minister cheekily called on India to use its strategic crude reserves.

Elsewhere, US president Joe Biden is also wary of rising fuel prices. As many polls show, the President’s approval ratings have plummeted in recent days after runaway inflation (mostly induced by high fuel costs) has been denting consumer confidence. Even the US is rattled it seems and they’ve been trying to get the Saudis to reason. But as the de facto head of the cartel, the Saudis have refused to concede and there’s been a stalemate.

But now, the US has had enough and it’s going on the offensive. They’re fighting back and they’re seeking co-operation from some of the world’s biggest oil consumers to take on the OPEC. And in a first of its kind attempt, the US, China, India, Japan, South Korea and the UK have decided to release a portion of their strategic petroleum reserves in a bid to tame crude oil prices.

Think of strategic reserves as an emergency stockpile of crude. It’s only meant to be used in truly desperate situations — like wars or natural calamities. However, since there’s no explicit mandate preventing its use in other not-so-desperate situations, countries like India and the US can still part with their reserves if they wish to do so.

And that’s what they’re doing right now. The US for instance is releasing 50 million of the near 700 million barrels of strategic reserves they’ve stockpiled so far. India is contributing its fair share by releasing 5 million barrels from its own reserves. The likes of China, Japan, South Korea, and the UK are also following suit and by all accounts, this seems like a frontal assault on the oil cartel.

However, does it mean it will actually scare the wits out of OPEC?

Most likely not.

See the idea has some merit. As of today, there are renewed fears about extended lockdowns across Europe and other parts of the world. This effectively means we could have excess oil supply floating once again if things don’t improve. Oil prices could once again crater if lockdowns become commonplace. Add to it the fact, that many countries have chosen to release extra reserves, this could in fact impact prices in the short term.

However, strategic petroleum reserves are typically amassed to tackle emergencies. They are reserves. And they weren’t ever intended to be used as a tool to affect change in prices. Meaning, even if there was a massively coordinated effort, the meagre volumes wouldn’t move prices in a big way. For instance, India’s plan is to release 5 million barrels right now and while that number may look massive, it’s the quantum of oil we consume over the course of one full day. It’s really not a lot.

And OPEC doesn’t even need to fight back. They could simply wait it out. In fact, they are probably amused by these developments. The cartel has already issued a statement suggesting that will most likely respond (when they meet next week) by calling off any plans to up their own production. And this could escalate matters and negate any positive effect the coordinated effort may have on oil prices.

So yeah, even if we end up gambling away a portion of our precious reserves, we eventually will have to build it back again. And the whole thing may not really bode well for us considering we’ll have to purchase most of this stuff from the same oil-producing countries.

Until then…

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