Monday, May 20, 2024

Oil must not get to spoil economic expectations

Large parts of the world are reeling from inflation, even as interest rates rise and most economies stare at growth slowdowns, but the Opec+ cartel of oil exporters has made it clear that it would rather defend its revenues than let weakening demand offer importers relief. On Sunday, the group declared a plan for an output cut of over 1 million barrels per day. Though this is about 1% of global demand, it would suffice to push up prices, which had been trending down after last year’s war spikes. Saudi Arabia, the ‘central bank’ of crude oil liquidity, led the move. It expects to account for half the cutback, with Russia playing a role as well. As recently as March, Riyadh had signalled its comfort with existing output quotas and a crude price of around $80 per barrel, so this news is a source of dismay. Apart from pressure on India’s current account deficit, dearer oil also clouds the outlook on retail price levels. The Reserve Bank of India’s (RBI) estimate of 6.5% retail inflation in 2022-23, marking a failure of its mandate, was based on the Indian basket of oil assumed at an average $95 per barrel. As required, RBI hopes to get inflation below 6% in 2023-24. To avert another miss of its target, RBI’s policy approach this fiscal year may need to assume almost similarly adverse conditions. Regardless of special supply deals with Moscow, we cannot count on a return to cheap oil. Blame the fractious world we have today.

Oil volatility has been a geopolitical threat ever since the price flare-up of 1973 caused by a Saudi-led embargo in protest against US support for Israel. Importers suffered a shock, but the oil wealth generated gave the Opec idea of a supply-squeezing cartel a long lease of life. At one level, a free market gone missing for this vital commodity warped world trade and made it difficult for free-trade theory to demonstrate its benefits. At another, it gave Opec a handle on economic outcomes around the planet. Almost every big recession of the past half century in the West has been preceded by an oil upshoot (including the Great Recession). Till about a decade ago, the US would use its military heft—and role as guarantor of Saudi security—to glare Opec back. No longer. The US shale revolution turned it into an oil major itself, so its import dependence vanished, while Opec’s oil-glut tactics to push costly shale out of business drew Russia into its fold, which boosted the cartel’s clout. Riyadh recently had the nerve to rebuff a call from the White House. Meanwhile, a push for clean energy has reduced investment in oil projects, leaving existing suppliers with an advantage. As it is, the world’s shift away from fossil fuels will not reduce demand at a pace that can soften oil prices. And then we had Russia’s invasion of Ukraine, which revealed the post-Cold War order as unstable and a Western will to weaponize not just trade, but also its financial enablers, making old arrangements harder for others to rely on. Add to all this the rise of autocratic China, whose influence in oil-rich West Asia has risen, and a reactive US retreat from barrier-lowering globalization. With Moscow and Beijing clearly in cahoots, Cold War II seems underway. Expect further instability.

The world needs to embrace globalization based on open-market principles. For this, global amity is a must. Like other economic weapons, oil cannot be disarmed with the world’s powers pulling apart. As G20 president, India must remind the other 19 countries of what’s in everybody’s interest. Among other things, like war, man-made inflation is not.

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