The Hindu Business Line : Oil market is basically all about psychology

The Government is planning to convene a bilateral meeting with Pakistan on June 27, followed by a trilateral meeting between India, Pakistan and Iran on June 29, on the issue of the Iran-Pakistan-India gas pipeline to transport natural gas.

While the news does take the project one significant step further, it's still too early to assume that it will go ahead, says UK-based Mr Roger Howard, award-winning writer of books such as Iran Oil: The New Middle East Challenge to America and Iran in Crisis? Nuclear Ambitions and the American Response.

Speaking to Business Line on the challenges facing the proposed project and the various issues that directly and indirectly impact it, he said that it is not known for certain whether any firm agreement has been reached over the issue, which has been bogged down by disagreement over the price at which Iran will sell its gas and how much Pakistan will charge India in transit fees for moving the gas across its own territory.

"Even if preliminary deals are struck over this issue, they may not last. Circumstances can change considerably by the time any construction work properly begins on such a project."

Mr Howard added that other pipeline projects — "notably the Tabriz-Ankara pipeline" — have been seriously marred by similar disagreements.

According to him, even if any preliminary deal is struck in the days ahead, the realisation of the project is still a long way off, "not just because of the pipeline's daunting size and scale but also because the US Government will then start to turn on the political pressure on New Delhi and Islamabad."

This pressure will become all the more intense if Iran continues to pursue a defiant nuclear course, he said.

"The more intransigent Iran's nuclear stance becomes in the months ahead, the more vociferously Washington will condemn both India and Pakistan."

Mr Howard pointed out to the state of disorder in Pakistan's south-western province of Baluchistan, which he said could be another issue that could easily disrupt the proposed pipeline project.

"The Pakistani Army has been trying hard to quell these disturbances but they persist and could quite easily start to flare up in the months ahead. Even assuming that the pipeline project proceeds, it can easily come badly unstuck if the Baluchi tribesmen realise their threats to make life as hard as possible for Islamabad and hold the Government to ransom."

He added: "There has also been some wild speculation that some secret intelligence services have been fomenting the trouble, perhaps to scuttle the pipeline project."

The latest edition of the BP Statistical Review of World Energy 2007 estimates that India's oil reserves will last only 19 years or so before running dry.

While this is an improvement on the 2002 figure, which gave the reserves an estimated lifespan of only 17.2 more years, there are two main causes of alarm for India, according to Mr Howard.

"Most oil exploration companies are now very cautious about the prospects of making big onshore oil discoveries; therefore there is a strong case for assuming that Indian oil has `peaked.' The other is that BP's figure is based on the assumption that production of existing oilfields stays the same. But this cannot be taken for granted."

Oil consumption has soared in India over the past few years and will continue to do so if the country sustains a similar rate of economic and demographic growth.

In such a scenario, there would be more pressure on domestic producers to increase production, "particularly if there is any serious disruption of supply — in the event, perhaps, of a terrorist attack on Gulf nations, serious political trouble in, say, Nigeria, or US military action against Iran."

In his view, interpretation of oil data is essentially all about how optimistic or pessimistic the perspective happens to be.

"Optimists can easily read all they want into any such `estimates' — which are often fairly wild speculations in the oil trade."

However, given the wider global framework that the BP report is part of, most people would be more likely to take a pessimistic viewpoint.

"This is simply because since 2003 the price of a barrel of oil has spiralled, while China continues to experience a rapid rate of industrial growth. These are the `subjective' reasons why the BP report is more likely to cause alarm in New Delhi than complacency."

Mr Howard believes that though such pressures are likely to push New Delhi into signing the deal, it will then enter into a delicate balancing act as it tries to equate energy requirements with deep reluctance to alienate Washington.

"If it signs, India will proceed carefully, gauging the American reaction and taking the political temperature before taking one step at a time towards building, operating the pipeline and then keeping it running. At the moment, we are still a long way from even the first of these three steps."

On the dynamics of the oil market, he said: "This market is basically all about psychology — more specifically about the faith that oil consumers and producers have in the ability of supply to match demand."

In his opinion, even if domestic finds are made on a regular basis, they would make no difference to the policy of either the Government or those of individual Indian companies. "What matters is whether they think foreign sources of supply are liable to be exhaustible or not."

If a sense of insecurity prevails, no amount of domestic discovery inside India is likely to compensate and India will continue in its drive to search elsewhere in the world.

"In this respect, any policy in New Delhi of sponsoring state-owned oil companies to explore and develop oil in the world in order to find security of supply is arguably an irrational one. Again, it all boils down to market psychology: consumers simply feel reassured that they have a `security of supply' of any commodity that is perceived to be in short supply."

Arguing against fuel price regulation in India and the subsidies handed out by the Government, he said that one problem with state control of any sort is that it distorts the domestic market, tempting sellers to turn away and look elsewhere if prices there are higher and profits proportionately greater.

"So, Indian refiners are making the most of high oil prices by selling oil to foreign buyers. Consumers are likely to ultimately pay the price as oil becomes scarcer at home." He added that another disadvantage with subsidised prices is that they give no incentive to users to reduce consumption and economise.

"A jump in oil prices usually leads to a fall in demand as consumers tighten usage. This then prompts prices to fall. But this fairly familiar trend is unlikely to happen if prices are strongly regulated by the state and capped."

Speaking on India's efforts to increase energy supplies within the country, he said that in a country of India's size, it would be "surprising" if there weren't more important reserves of offshore gas waiting to be discovered. Technological progress should also make other deposits more accessible and productive.

Mr Howard is writing a new book on some of the unintended consequences of high oil prices — now and in the future. The book also deals with some of the military consequences of a tight oil market.

D. Murali
C. Ramesh