Expedite Subsidy Reforms

After protracted wrangling, members of the Organization for Petroleum Exporting Countries (OPEC) agreed on November 30, 2016 to reduce their combined output by 1.2 million barrels a day. Likewise, 11 non-OPEC countries led by Russia decided on December 10, 2016 to knock off over 550,000 barrels from their supplies. The agreement is effective from January 1, 2017. These developments need to be viewed in the backdrop of a steep drop in the price of crude from its peak of US$ 114 per barrel in mid-2014 to US$ 27 per barrel in February, 2016 and had recovered only marginally to US$ 40 per barrel by November-end. The price of LNG which follows the trend in crude also plummeted from a high of US$ 13-14 per mBtu (million British thermal units) to USD 6.5-7 per mBtu during the same period.

- Uttam Gupta

After protracted wrangling, members of the Organization for Petroleum Exporting Countries (OPEC) agreed on November 30, 2016 to reduce their combined output by 1.2 million barrels a day. Likewise, 11 non-OPEC countries led by Russia decided on December 10, 2016 to knock off over 550,000 barrels from their supplies. The agreement is effective from January 1, 2017. These developments need to be viewed in the backdrop of a steep drop in the price of crude from its peak of US$ 114 per barrel in mid-2014 to US$ 27 per barrel in February, 2016 and had recovered only marginally to US$ 40 per barrel by November-end. The price of LNG which follows the trend in crude also plummeted from a high of US$ 13-14 per mBtu (million British thermal units) to USD 6.5-7 per mBtu during the same period.

The low price realization from the sale of oil and gas had led to substantial erosion in profits/surpluses of exporting countries devastating a number of economies (overwhelmingly dependent on earnings from oil export), viz, Venezuela and Nigeria and destabilizing budgets of even most prosperous countries such as Saudi Arabia. These countries were desperate to reverse this trend.

The price is primarily a function of global demand-supply balance. If it is easy, the price will decline; this is precisely what happened during the last 30 months (June 2014 to November 2016). On the other hand, if the balance is tight, the price will increase. This is what OPEC and non-OPEC countries are trying to achieve by their joint and concerted action to cut supplies.