'Russia will...': Ex-CEA Kaushik Basu explains implications of oil supply cut by OPEC+

A week after OPEC+ announced cuts in oil supply, India's former chief economic advisor Kaushik Basu on Sunday said the move will help Russia, which is facing severe sanctions from the US and Europe for its military attack on Ukraine.

Last Sunday, Saudi Arabia and other members of the OPEC+ oil producers announced voluntary cuts to their oil production. Saudi Arabia would be cutting its oil output by 500,000 barrels per day (bpd) from May until the end of 2023. The production cut is aimed at pushing the crude prices up, which had been declining from nearly $120 in July last year to $70 in the first week of April.
     
On Sunday, Basu said much was being written on OPEC+'s new curb on oil supply and how it would fuel inflation. "The more important implication of this is by pushing up the price it will offset the Western sanction on buying Russian oil," the economist said.

"Russia will sell less but earn more per unit. Total earnings may rise," Basu, who teaches economics at Cornell University, said. Basu was the Chief Economist of the World Bank from 2012 to 2016. He also served as India's chief economic advisor from 2009 to 2012 under then Prime Minister Manmohan Singh.

In a statement on April 3, the major oil-producing countries said the move of cutting supply was "a precautionary measure aimed at supporting the stability of the oil market". Saudi Arabia, which is the de-facto leader of the cartel, announced the highest supply cut. The move will also help Moscow from avoiding the pain inflicted on it by the US and Europe by capping the prices of its oil.    

In December last year, G7 members announced a price cap on Russian oil at $60 per barrel. This price cap applies to crude oil, petroleum oils, and oils obtained from bituminous minerals which originated in or were exported from Russia.  

However, despite the cap, India and Japan have been buying Russian oil above the set prices. Japan got the US to agree to the exception, saying it needed it to ensure access to Russian energy, The Wall Street Journal reported on April 2. The report further said while many European countries have reduced their dependence on Russian energy supplies, Japan has stepped up its purchases of Russian natural gas over the past year.

Days after the oil production cut announcement, a top energy analyst said crude oil at $100 could soon become the new normal. Speaking to CNBC, Paul Sankey said Saudi wanted higher prices, and they have basically said the price of $95 is what they aspired to. "They haven't specifically said that, but that's what we're kind of led to understand. So I think that would be the next target, definitely," he said.

Sankey warned the supply side of the oil market was not looking great. "We really only have growth in Guyana outside of OPEC+ and almost nothing else to speak of. So structurally, the market to me looks like it'll be a $100 market in the future simply by lack of supply growth," the analyst said.

Also read: Saudi Arabia, UAE, Kuwait and other OPEC nations to voluntarily cut oil output significantly: Report