That the agreement to cut oil output in Vienna on 30th November, 2016 by Opec is no less than a marvel is a fact. According to Qatar's energy minister and the current President of Opec conference, the cartel will lower its monthly output by 1.2 million barrels per day to 32.5 million barrels with effect from 1st January, 2017. Saudi Arabia will take the lion's share of cuts by reducing output by almost 0.5 million barrels to 10.06 million barrels while its Gulf Opec allies - the UAE, Kuwait and Qatar - would cut oil output by a total of 0.3 million barrels. Iraq which had insisted on higher output quota to fund its fight against Islamic State also, unexpectedly, agreed to reduce its production by 0.2 million barrels. The agreement was, however, believed to be a major victory for Tehran as it was allowed to raise production slightly from its October level. Another advantage for Opec was that non-Opec producers also joined the efforts to reduce output this time. It has been revealed that Russia is expected to reduce its output by 0.3 million barrels. Non-Opec Azerbaijan and Kazakhstan said that they may also cut their production.
It may be recalled that Opec has now agreed on its first oil output cuts since 2008 and this was only possible after Saudi Arabia accepted "a big hit" on its production and dropped its demand on arch-rival Iran to slash output. Prior to the present agreement, negotiations were bogged down due to a conflict of interests and continuous tussle between Opec's three biggest producers, Saudi Arabia, Iraq and Iran which were required to make important decisions regarding their output flows to the major importing nations. Seen against this background, the present agreement represents a dramatic reversal from Opec's Saudi-led strategy of flooding the markets to pressurise its rivals, especially Iran, and shale oil producers in the US. The fact that non-Opec countries have also offered to help reduce supplies would increase the effectiveness of the deal. So far its impact was concerned, it is no secret that Opec produces one-third of global oil, or around 33.6 million barrels per day and a combined output reduction of 1.8 million barrels by Opec and non-Opec would represent almost 2 percent of global output which would help the market clear sizable stocks of overhang and raise the prices by a considerable margin which had earlier crashed from levels as high as dollar 115 a barrel seen in mid-2014. Such a huge decline in oil prices had shot the Opec members' finances to bits and caused heavy drain on their foreign exchange resources. This historic agreement would definitely help rebalance the market, reduce the stock-overhang and replenish the foreign exchange reserves of Opec. As the world's largest producers agreed to curb production for the first time since 2008, oil price in the international market soared to over dollar 50 a barrel. It is hoped that oil prices will continue to strengthen because of the deal but the sudden sharp gains could be limited as market scepticism lingers about the effectiveness of cuts due to the lingering conflict between Saudi Arabia and Iran. The gains may also be short lived due to the renewed attractiveness of the shale oil and its likely higher production in the US due to higher oil prices. Overall, however, while oil consumers would not welcome more expensive fuel, Opec and other oil producers would of course gain from the deal depending on the level of implementation of the agreement.
Insofar as Pakistan is concerned, the rise in oil prices as a consequence of the agreement would immediately put pressure on the trade deficit and C/A balance of the country. Budget deficit is also likely to worsen as the Prime Minister appears to be unwilling to pass on the full impact of the rise in international prices on to domestic consumers. Inflation would certainly soar while rupee will come under further pressure in the exchange market. Competitiveness of Pakistani exports could also suffer further as the government is reluctant to depreciate the Pak rupee according to the market conditions. However, an increase in home remittances could be a major benefit to the country due to a better fiscal position and larger allocation of funds for infrastructure projects in the Middle Eastern countries which would increase the demand for labour force. In a situation like this, we will urge upon the authorities to take a serious notice of the latest Opec agreement and monitor its implementation with a view to assess its impact on Pakistan's economy and devise an appropriate response.
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