How OPEC’s oil production cut would spur investment in the clean-tech segment? How it impacts India’s economy?
The Organization of the Petroleum Exporting Countries and allied producers (OPEC+) have surprised the market with an extensive production cut. Saudi Arabia and other producers will make voluntary cuts of 1.16 million barrels daily (b/d), joining Russia’s current cut of 500,000 b/d. The cuts will begin in May and last through this year’s end, barring future adjustments. This sent Goldman Sachs to increase their forecast for Brent for December 2023 by $5 to $95 a barrel, while that for December 2024 was raised by $3 to $100 a barrel.
In the past year, soaring energy prices and Russia’s invasion of Ukraine have been accelerants and a curse for the transition away from dirty fuels. While they’ve underscored the downside of relying on commodities controlled by a handful of countries, the sudden crunch has pushed even the most climate-progressive nations to turn to coal and gas as a backup.
Clean-tech investments show robust growth
The US Inflation Reduction Act (IRA), passed last year, allocates more than $370 billion in funding to mitigate climate change. In comparison, the EU Green Deal could potentially dedicate more than €1 trillion in public and private funds to the fight. Together, these measures may open up more opportunities for investors in a market that McKinsey estimates could reach $9 trillion to $12 trillion in annual investment by 2030.
Climate investing experienced a period of breakout growth in capital formation over the past four years. From 2019 until the end of 2022, private-market equity investors launched more than 330 new sustainability, environmental, social, and governance (ESG); and impact funds. The cumulative assets under management in these funds grew threefold, from $90 billion to more than $270 billion.
OPEC worried about global demand slowdown
The cut suggests that OPEC is worried about the demand picture. It is hard to envision a strong second-half increase in global demand without a big uptick in China. If the country delivers anywhere near the 960,000 b/d in demand growth that the International Energy Agency anticipates, it may well create a tighter crude oil market. This is likely to give a strong policy push for leadership in clean tech and Europe’s fast-developing response creating near-term and strategic investment opportunities.
Push for clean-tech in the EU
The European Union (EU) also aims to speed up the deployment of funds and to build out clean tech at home, driven by a search for energy security and competitiveness. The U.S. Inflation Reduction Act of August 2022 unleashed a slew of production incentives in areas tied to the transition to lower carbon emissions. The EU already had a robust transition policy. An expanded carbon pricing program encourages EU firms to expedite transition plans, with the price of carbon recently passing €100 per tonne.
The EU also had put even more public investment in aggregate on the table (see the chart). But an estimated $400 billion of that is still unspent, and the EU had less focus on encouraging domestic production of low-carbon technology. This year, the EU responded to the U.S. with its Green Deal Industrial Plan (GDIP). This aims to boost European manufacturing of key transition technologies via domestic production targets, provide easier access to funding and fast-track permitting.
In our view, the US and European policy initiatives are about getting a slice of the growing clean-tech pie and reducing reliance on China for minerals and metals needed for the transition. We see this as the start of a clean energy race as countries rush to adopt similar policies – a strategic priority against a backdrop of growing geopolitical fragmentation. The UK, Canada and Australia are all set to jump in, and this race fits with the view that the transition is likely to accelerate.
The decision to cut production has both political and economic dimensions — and perhaps, consequences. As the Financial Times noted in the explanation of its story, which quickly led to its website: “Initiative to boost prices shows Saudi Arabia’s determination to pursue different energy strategy to Washington.”
India’s trade deficit to rise
For India, the OPEC move will have an adverse impact on the trade deficit. India’s crude oil import bill nearly doubled to US$119 billion in the fiscal year that ended on March 31, 2022. Every $10 per barrel rise in crude oil price will increase India’s import bill by $15 billion annually.
OPEC’s share—mainly from the Middle East and Africa—of India’s total crude oil imports was 71.6% in fiscal 2022 and 71.9% in fiscal 2021, according to data from Reuters. This is expected to be lower for the previous fiscal with the increase in imports from Russia after the European Union put a cap on Russian crude oil at $60 per barrel.
In October last year, Russia surpassed traditional sellers like Iraq and Saudi Arabia for the first time to take the number one spot. Russia, which accounted for just 0.2% of India’s crude oil imports in 2021–22, supplied 1.19 mbpd last December. It is about 25% of India’s total crude oil imports. The December figure was higher than the 9,09,403 bpd of crude oil India imported from Russia in November and the 9,35,556 bpd it imported in October, according to Vortexa Ltd.