Finance minister P. Chidambaram made an eloquent plea in Jeddah for the adoption of an oil price band mechanism in which consuming countries guarantee that prices would not fall below an agreed level while producing countries undertake that prices would not rise above a guaranteed level. How feasible is this idea? The assumption is that oil producers like Saudi Arabia have the say in price fixation. Not surprisingly, he also asked them to reassert leadership in price formation from speculators.
The surge in oil prices to $140 a barrel, unfortunately, has little to do with Saudi’s actions or demand-supply imbalances, for that matter. Global demand for oil this year is pegged at 86.6 million barrels per day while global supply is identical at 86.7 million barrels per day, according to the US Energy Information Administration. Global oil supplies have been increasing 2 per cent per annum and is adequate to meet demand. In this milieu, the mere perception of supply disruption or rumours can result in prices spiking upwards.
Can Saudi Arabia, as Organisation of the Petroleum Exporting Countries’ (Opec) swing producer, really make a difference with its promise of higher production of 200,000 barrels a day to 9.7 million b/d? For starters, this is hardly sufficient for oil prices to decline, as there is no unity within the oil cartel regarding lowering prices. The expected rise in output is also neutralised by prospects of lower output from Nigeria. Markets are also jittery regarding the prospect of a US strike against Iran’s nuclear facility. Speculators are naturally having a field day.
Mr Chidambaram’s oil band mechanism, thus, might sink without a trace. A far better idea is for India to take up what former petroleum minister Mani Shankar Aiyar proposed couple of years ago. It makes more sense to form an Opec-like organisation among Asian buying countries and negotiate hard with Saudis and Opec for better prices, including eliminating the Asian premium of $1.5-2 a barrel. Getting better prices like this is better than getting special and differential treatment from a divided cartel.