OPEC’s output pact proposal

Context

The latest round of meetings among the OPEC+ group of oil-exporting countries has stalled as the UAE has pushed back proposals making an increase in crude oil supply conditional on an extension to an output agreement.

About the pact proposal

• In 2020, the OPEC+ group of countries entered into a two-year agreement, which entailed steep cuts in crude production to deal with a sharp fall in the price of oil as a result of the Covid-19 pandemic.
• The price of Brent crude hit an 18-year low of under $20 per barrel in April 2020 as economic activity around the world crashed as countries dealt with the pandemic.
• The OPEC+ group ran into sharp criticism from developing economies, including India, for deliberately maintaining low supply levels to raise prices.

UAE’s objection to the existing agreement

• UAE did not agree to a condition that the two-year production agreement is extended by six months. The UAE’s key objection to the existing agreement is the:
  • Reference output used to calculate the total production apportioned to each oil-exporting country.
  • The baseline production level reference used in the current agreement was not reflective of the UAE’s production capacity and, therefore, led to the UAE being apportioned a lower share of the total production of crude oil.
  • The baseline reference production levels were unfair and that it would be open to extending the agreement if baseline production levels were reviews to be fair to all parties.

Impact on India

• If the UAE and other OPEC+ nations do not reach an agreement to increase production in August, expected relief in the form of lower crude oil prices could be delayed.