Crude Oil Pricing

By : Neha Dhyani

Updated : Jun 3, 2022, 9:31

Due to Russia's attack on Ukraine, which wanted to break off oil supplies, world oil prices are at the highest in a decade. Russia is among the world's leading crude oil producers. On March 8th, the US restricted Russian oil and gas imports in response to Russia's unwarranted military intervention in Ukraine, forcing oil prices to skyrocket.

Why in News?

Crude Oil Pricing is increasing on concerns that Sanctions imposed over the Ukraine war could impede supplies from Russia, the world's largest crude oil exporter.

Crude Oil Pricing has risen despite the International Energy Agency's member countries committing to deploy 60 million barrels from massive reserves to cover the supply shortage caused by Russia's invasion of Ukraine.

The renewal of the Iran nuclear agreement, which is anticipated to enhance Iranian oil supplies and relieve supply constraints, is attracting investors' attention.

History of Crude Oil Pricing

The United States of America was a major oil producer in the late nineteenth and early twentieth century. Companies in the United States created the technique for turning oil into usable goods like gasoline.

After a Western-backed revolution in the 1950s, a group of American oil firms gained possession of Iran's crude oil output. As a result, crude oil prices were determined by the world's most powerful oil firms and enforced by import limitations. The United States was undoubtedly the world's top crude oil user and producer.

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Introduction to Organization of Petroleum Exporting Countries [OPEC]

The OPEC - Organization of Petroleum Exporting Countries was formed in 1960 to ensure the safety and security of Middle Eastern petroleum exporters in a growing market fixed - by the United States.

During this period, the United States' oil output declined precipitously, and the country became an oil importer. The Organization of Petroleum Exporting Countries (OPEC), which comprises the world's largest crude oil and natural gas holders, was its main source.

Emerging countries' exporters established the Organization of Petroleum Exporting Countries (OPEC) in Baghdad in 1960 to control local production and world supply.

The five inaugural countries were -

  1. Iran
  2. Iraq
  3. Kuwait
  4. Saudi Arabia
  5. Venezuela

There is a total of 13 members of the OPEC currently. Each OPEC member has one vote, and all members must approve all oil production decisions. The Organization of Petroleum Exporting Countries (OPEC) headquarter is in Vienna, Austria.

OPEC's 13 members are responsible for around 44% of global oil output and 81.5 % of the "proven" oil reserves. As a result, OPEC has a significant impact on the global oil price.

The role of OPEC is to organise and coordinate its member nations' petroleum policies and promote oil market stability to provide a reliable, cost-effective, and consistent supply of oil to customers.

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The Effect of High Crude Oil Pricing

Deficit of Current Account - The rise in oil prices would raise the country's import bill, causing the current account imbalance.

Increase in Inflation - Rising crude oil prices might exacerbate inflationary pressures.

Revenue Loss - If Crude Oil Pricing continues to rise, the government will be compelled to reduce taxes on gasoline and diesel, which would result in revenue loss and a worsening of the fiscal balance.

Slow Economic Recovery - Any rise in global prices will impact its import bill, boost inflation, and widen its trade imbalance, slowing its economic expansion.

The crisis between Ukraine and Russia has driven Crude Oil Pricing to its peak point since 2008. High energy costs raise the cost of almost all products and services, raising inflationary pressures further.

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FAQs on Crude Oil Pricing

Q1. What impact do crude oil prices have on the Indian economy?

A rise in Crude Oil Pricing entails an increase in the cost of manufacturing items. Consumers would eventually bear the brunt of this price increase, resulting in inflation.

Q2. How does Crude Oil Pricing affect petrol prices in India?

India imports around 85% of its Crude Oil, and increased prices often translate into higher diesel and petrol costs at the pump.

Q3. Why is high Crude Oil Pricing bad for the economy?

As it becomes financially sustainable for oil corporations to access higher-cost shale oil reserves, rising oil prices can spur job creation and investment. On the other hand, high oil prices increase transportation and production expenses for businesses and individuals.

Q4. How does OPEC keep the Crude Oil Pricing under control?

Oil price behaviour is determined not only by present supply and demand but also by future expected supply and demand. OPEC modifies member nations' production objectives depending on current supply and demand conditions and potential supply and demand.