Context: Recently, the price of Brent crude crossed the $60 per barrel mark after over a year. The rise in prices is because of production cuts by oil-producing countries and expectations of improvements in global demand as the Covid-19 vaccine is rolled out across the world.

About Crude Oil

• Petroleum also known as crude oil and oil is a naturally occurring, yellowish-black liquid found in geological formations beneath the Earth’s surface.
• It is commonly refined into various types of fuels.
• Components of petroleum are separated using a technique called fractional distillation, i.e. separation of a liquid mixture into fractions differing in boiling point by means of distillation, typically using a fractionating column.
• It consists of naturally occurring hydrocarbons of various molecular weights and may contain miscellaneous organic compounds.
• The name petroleum covers both naturally occurring unprocessed crude oil and petroleum products that are made up of refined crude oil.

Oil Pricing

• Generally, the Organization of the Petroleum Exporting Countries (OPEC) used to work as a cartel and fix prices in a favourable band.
• OPEC is led by Saudi Arabia, which is the largest exporter of crude oil in the world (single-handedly exporting 10% of the global demand).
• OPEC has a total of 13 Member Countries viz. Iran, Iraq, Kuwait, United Arab Emirates (UAE), Saudi Arabia, Algeria, Libya, Nigeria, Gabon, Equatorial Guinea, Republic of Congo, Angola, and Venezuela.
• OPEC could bring down prices by increasing oil production and raise prices by cutting production.
• The global oil pricing mainly depends upon the partnership between the global oil exporters instead of a well-functioning competition.
• Cutting oil production or completely shutting down an oil well is a difficult decision, because restarting it is immensely costly and complicated.
• Moreover, if a country cuts production, it risks losing market share if other countries do not follow the suit.
• Recently, OPEC has been working with Russia, as OPEC+ to fix the global prices and supply.
• In 2016, OPEC allied with other top non-OPEC oil-exporting nations to form an even more powerful entity named OPEC+ or OPEC Plus.

Why has the price of crude oil risen sharply?

• Major oil-producing countries had cut oil production last year amid a sharp fall in demand due to the Covid-19 pandemic.
• However oil-producing countries have continued to limit production despite an increase in prices with Saud Arabia cutting its own oil production by 1 million barrels per day to strengthen crude oil prices.
• Expectations of strong improvements in demand with the global rollout of the Covid-19 vaccine have also put upward pressure on crude oil prices according to experts.

How will this impact India?

• The rise in the price of Brent crude will lead to an increase in India’s import bill.
• India imports of 80 per cent of its crude oil requirements and the average price of Indian basket of crude oil has already risen to $54.8 barrel for January.
• The upward move in crude prices will also put upward pressure on petrol and diesel prices across the country which is already at all-time highs.

Signs of no remedy

• The government had hiked central taxes on petrol and diesel by Rs 13 per litre and Rs 11 per litre in 2020 to boost revenues amid lower economic activity.
• The increase in taxes had prevented consumers from getting the benefit of low fuel prices as international prices crashed during the first quarter of last fiscal.