The Hindu Business Line : Oil sense

If confirmation was needed that the Finance Minister, Mr P. Chidambaram’s suggestion made at the Jeddah oil talks — that a crude “price band” should be set, and enforced, by the oil-producers — was way off the mark as a workable solution to the explosion in global crude prices, it was provided by the price spurt which greeted his proposal the very next day. Mr Chidambaram had squarely blamed commodity speculators for the price volatility, sayi ng that the cause of the “current pandemonium” lay in “the unregulated over-the-counter markets and futures trading in oil”. On Monday the speculators reacted by bidding up prices, telling the world they are not merely playing an important role behind the price-explosion but are also a powerful force to contend with.

The conference host, Saudi Arabia, announced an increase in its output by 200,000 barrels a day in July, that is, nearly two per cent of its current output of 9.5 mbd which, as is apparent, had no impact on the crude price. Indeed, to some observers, there is no reason for the oil price to decline in response to the Saudi measure, given the rising global demand scenario. Recently, the International Energy Agency indicated that consumption this year would increase by 800,000 barrels a day, a forecast that not only eclipses the Saudi production-increase but also comes at a time when production in Russia and Norway is expected to stagnate, and decline marginally in other non-OPEC countries. Speculators cannot be faulted if they buy into a commodity, the price of which is expected to rise. The answer for consumers lies therefore not in pleading with oil producers for compassion, but in actively modifying the supply-demand equation. Global oil supply needs to be increased appreciably, but that appears a bleak prospect if data on current investment in new oilfields and exploitation of existing ones are any indication. What this, therefore, means is that energy consumption must be reduced.

Clearly, reducing the demand for oil must apply to both the developed and developing economies, but to the former, in particular, given their gluttonous consumption and their wherewithal to find alternatives. For countries such as India and China too, there is no option to pursuing a more energy-efficient path to economic growth, a policy prescription already mooted by the Prime Minister, Dr Manmohan Singh. Effective implementation of such a policy is unavoidable; it could turn out to be far more useful in dousing the crude price than the Jeddah “price band” proposal which, even if adopted, is certain to be observed more in the breach.

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