An unprecedented oil deal

The Oil and Petroleum Exporting Countries (Opec) agreed to slash production by 10 percent (10 million barrels per day) from 1st May, reportedly the largest cut in output in its history. The deal was struck after US President Donald Trump exerted considerable pressure on both Saudi Arabia and Russia, two of the major oil producers, to cut output in line with the dramatic fall in world demand due to the global lockdowns caused by the coronavirus pandemic, estimated at about one-third of pre-pandemic demand. In terms of actual output, production cuts would be eased to 8 million barrels a day between July and December 2020 and further to 6 billion barrels per day from January 2021 to April 2022. Mexico that had initially resisted an output cut agreed after Trump offered to pick up some of the slack and be reimbursed later; however, details of how much slack the US would pick up have not been released.

The US objective in pressurizing and brokering the deal emanates from the impact of the low cost of oil in the international market prior to the deal on its domestic fracking industry that was no longer economically viable leading to laying off workers. The question that arises today is whether the deal would achieve this US objective? According to independent oil analysts, the market is not in the mood to take the cut in production at face value as it believes that the previous Opec output figures were inflated in any case and hence any agreed decline in output would have to take account of that factor.

Analysts further argue that demand for oil maybe even less than what is being projected, best projections are at 18.5 million barrels per day, which would imply that the price of oil may not rise to the level that would enable the US to continue its domestic output. Some analysts have forecast around 20 dollars to the barrel in the summer months with coronavirus' rampage continuing unabated at a time when demand in the West declines in any case.

To further complicate the situation Sandy Fielden, director of Oil Research at research firm Morningstar, maintained that the deal is unprecedented "because it's not just between Opec and Opec+... but also the largest supplier in the world which is the US as well as other G-20 countries that have agreed to support the agreement both in reducing production and also in using up some of the surface supply by putting it into storage." Any possible logjam based on the emerging needs of individual oil exporting and importing countries in general and in trading blocs like the European Union in particular would compromise the deal.

Pakistan would benefit from low international oil prices which together with the deferred oil facility from Saudi Arabia, to the tune of 3 billion dollars, for three years would further reduce pressure on the current account deficit. This should pave the way for a readjustment of the existing tight monetary policy through reducing the discount rate in line with other countries in the world grappling with the stifling of economic activity due to the coronavirus. At the same time, the government would need to revisit its current tax rates on petroleum and products to ensure that the rates, as during previous administrations, do not reflect an inordinate focus on generating ever-rising revenue but on restarting economic activity by enabling it to be competitive with other regional countries.