If a supplier-cartel with immense influence over a commodity critical to a nation’s economy and energy security is either unwilling or unable to ensure reasonable prices over the long-term, what options does the hapless buyer have? One response is to float the idea of a counter-cartel, an oil buyer’s club which India recently discussed with China in response to the inability of the Organization of Petroleum Exporting Countries (OPEC) to stabilize global oil prices despite assurances following the unilateral and capricious US sanctions on Iran. The Indian government has also diversified sources of supply, encouraged alternative fuels and signaled its inclination to subsidize lithium-ion batteries for electric vehicles.
However, the 14-member OPEC which controlled 42.6% of global oil production as of 2017 has been working in tandem with Russia to reduce oil supply by 1.2 million barrels per day in the first half of 2019. The effect of this production cut will likely send oil prices soaring from the current $55 a barrel back to $80 a barrel, a price range that bled Indian consumers in mid-2018 and spurred calls to eliminate high oil taxation. Even as India, with 83.7% import dependence and a massive $87.7 billion import bill struggles with petroleum dependence on the West Asian (Middle East) region that is both vulnerable to the involvement of outside great powers and to OPEC’s imperative for high oil prices to sustain its authoritarian petro-states, a brief snapshot from America’s relations with OPEC merits special attention.
Before the advent of shale oil, US energy relations with OPEC were often likened by American policy elites to that between a junkie and a drug dealer. Exasperated Americans have for decades excoriated their oil-guzzling country’s crippling dependence on the Middle East, an important reason for its propping up of authoritarian regimes and interventionist wars exacting a heavy toll on blood and treasure.
More recently, the US has emerged as the largest oil producer and its much-ballyhooed shale revolution has reduced its oil dependence from 66% in 2007 to just 38% in 2018, improving its annual fossil fuel trade balance by a massive $233 billion as estimated by the Wall Street Journal. The shale boom is projected to help the US shake-off its dependence on Middle Eastern oil in 2021 resulting in a new American discourse of triumphalism.
But even before the shale revolution presented the US with supply-side leverage, it ingeniously used demand-side efficiency to humble OPEC and to deter it from price gouging. The resolute American response to the 6-month oil embargo imposed by OPEC in October 1973 to punish the US for aiding Israel during the Yom Kippur War merits detailed attention.
Irrespective of one’s views on Israel and American policies in the Middle East, understanding the determined American response purely in terms of a buyer reacting to the capricious whims of a seller-cartel provides valuable insights. Stung by the embargo which consisted of production cuts and price increases that quadrupled oil price from $3 to almost $12 per barrel, American policymakers decided that they would produce oil, by consuming less of it. Even as mile-long queues formed outside gas stations and the ominous red sign indicating that a gas station had run out of stock became ubiquitous, the US Congress reduced the speed limit on highways to 55 miles (88.51 kms) per hour to ensure greater fuel efficiency.
A Strategic Petroleum Reserve was proposed to ensure 90 days-worth of buffer stocks to guard against future oil shocks. Congress also enacted the Corporate Average Fuel Economy Standards (CAFÉ) in 1975 requiring gas-guzzling US cars to double their mileage to 27.5 miles per US gallon by 1985. Such was the impact of the crisis on the American psyche that many Americans skipped or rationed pleasure trips, put on the extra sweater to save up on furnace oil, bought smaller cars and gravitated towards simple living philosophies.
And the result? A monumental 87% decrease in imports from OPEC by 1985 alongside a 50% reduction in oil imports. This stunning reversal of the junkie sticking it to the drug dealer was made possible by a combination of nimble American energy efficiency policies combined with deft international diplomacy that made available new energy supplies by 1985. The US economy continued to register robust growth after the initial energy shock.
The unexpected American demand-side adjustment stunned OPEC, loosening its veto power over oil pricing and sending oil prices plummeting. Unfortunately, the passing of the crisis ushered in a wave of American complacency allowing Americans to buy military-size, gas-guzzling Sports Utility Vehicles (SUVs). The US took its eye of the ball and lost its shot at energy independence for the next two decades.
India does not have the luxury to indulge in American-style shale oil extraction via hydraulic fracturing due to its high-water demand and environmental contamination risks. But India can take a leaf out of America’s book and periodically rock OPEC with nimble demand-side fuel efficiency measures that drive home the point that if oil supply can be used as an extortionist tactic, oil savings by a continent-sized customer can be equally potent.
- Prof. Chaitanya Ravi, Assistant Professor – Centre for Public Policy