Oil pact between Russia, OPEC could be historic

“The politics behind the proposed meeting looks much stronger than the mere economics of it,” feels Lydia Powell, energy analyst with the Observer Research Foundation.  She agrees that Russia and OPEC (a 14-member oil cartel) which together produce about half of the global oil are indeed capable of using the oil market for political gains and vice versa. But as Russia and Saudi Arabia, two of the biggest oil producers, are actually the rivals in the oil market, “I do not see a firm agreement coming out of the proposed meeting”, says Powell.  And, whether Iran (OPEC’s founder member), which has come back to the oil market after years of exile, agrees to any such cap, is another reason that, many feel, would scuttle the likelihood of any such agreement being reached. Many (poor) members of OPEC like Venezuela and Algeria would indeed be supportive of any move which takes the oil prices up.

But what if foes do become friends to make a bigger (than OPEC) cartel?  Even then “oil prices would respond more to demand and supply dynamics rather than on such moves,” says Powell. Many analysts agree that while geo-politics may have some influence on prices, the predominant catalyst for oil prices would come from global demand which continues to look un-inspiring. Oil analysts feel that only a meaningful cut in production levels (rather than freezing at current levels) can actually cheer the oil prices.

Oil prices going up may not be a desirable thing for India. “Besides being (politically) favourable to the Narendra Modi government, low energy prices have worked well for the Indian economy as a whole,” says Powell. Lower prices have emboldened the government to undertake structural reforms on the fuel subsidy front, besides keeping the twin deficits within a desired range.