Opec’s cut in crude output shows the futility of Western sanctions. India must brace for tougher times indiabusinessport.com

Two independent developments this week again highlight the challenges facing the global economy in the near future. Oil prices are likely to remain elevated as the supply cartel Opec plus, which includes Saudi Arabia and Russia, decided to trim production in a bid to keep the price high. The grouping, which produces a little more than 50% of the world’s crude, plans to reduce output by 2 million barrels/day beginning November by using August’s production as a benchmark. It’s about 2% of production. Therefore, the planned cut will most likely set a floor to any price decline.

Separately, WTO forecast growth in merchandise trade volume will slow in 2023. It’s now projected to grow at 1%, lower than 3.4% forecast a few months ago. Trade volume growth is being dragged down by the economic slowdown in three major economic engines, the US, Europe and China. WTO thinks the ongoing monetary tightening in the US will soon bite hard, while the energy shock in the form of a 350% year-on-year increase in gas prices in Europe will lead to reduced consumer spending. China’s zero-Covid strategy has taken a toll on its growth.

The energy shock is partly on account of self-defeating economic sanctions imposed by the US and Europe on Russia following its invasion of Ukraine. While Europe took the biggest hit because of its dependence on Russian gas, the rest of the world felt the impact through both an oil price surge and upward pressure on prices of key food items. Ongoing US-led sanctions on other oil producers such as Iran and Venezuela are also hugely counterproductive and have restricted the free flow of oil.

India’s policy makers have to grapple with the dual challenge from the external sector. Supply pressure on key commodities can keep domestic inflation elevated while a global slowdown will act as a drag on growth here. The monthly average price of the Indian basket of crude peaked at $116/barrel in June and later declined to $91/barrel in September. Pump prices of petrol and diesel, however, remain unchanged since May 22, ring-fencing the domestic economy from global oil price movements. What may emerge as the main challenge again is a relative slowdown – a purchasing managers’ survey for services in September showed the lowest reading in six months. Monetary and fiscal policies need to be flexible to adapt to a highly uncertain scenario.


This piece appeared as an editorial opinion in the print edition of The Times of India.


Source link

Leave a Comment

Your email address will not be published. Required fields are marked *

%d bloggers like this: