The Hindu Business Line : Jeddah meet: No respite for oil importing countries

India’s proposal for a price band may not seem practical as many OPEC countries are reluctant to increase production and are also happy about the current level of crude prices.

G. Srinivasan

The unilateral move by Saudi Arabia among the 13 members of the world’s powerful cartel, the Organisation of Petroleum Exporting Countries (OPEC), to convene a meeting of the oil producers and consumers to devise a way out of the unrelenting rise in crude prices has predictably given little respite to the rest of the world.

Participants of the Jeddah meeting on June 22 drew attention to the detrimental consequences of the current oil price levels and the attendant volatility it has caused to the global economy. The one-day conclave made a subdued pitch for concerted policy efforts to improve the functioning of the oil market.

In short, participants (both the developed and the developing countries) concurred that restoring oil market stability involved concerted moves to implement a broad set of policy measures, including increased oil investment, strengthened pass-through of price signals to end-users and improved oil market data.

The First Deputy Managing Director, Mr John Lipsky, representing the IMF at the meeting, did not mince words when he said that slow growth of new capacity and continued strong demand for oil in emerging economies had led to declining spare capacity and tight market conditions.

He maintained that financial factors played a temporary role in the recent run-up to oil prices. But he also said that it was difficult to establish a lasting impact of financial commodity investment on oil price trends over the past few years.

In contrast, the Finance Minister, Mr P. Chidambaram, who attended the Jeddah meeting, rejected the idea that rising demand was the cause of spiralling oil prices.

Chidambaram’s rebuttal

He described how large financial institutions, pension funds and hedge funds had funnelled billions of dollars into commodity investments and derivatives and the demand for oil generated by these funds was purely speculative.

Thus, the role of financial commodity investment and financial speculation and strong demand for oil in the emerging economies remained a point of discord at the meeting.

India’s proposal of a price band with consuming countries guaranteeing that oil price would not fall below an agreed floor and producing countries guaranteeing that oil price would not rise above an agreed floor may not be pragmatic, given the predilections of those in the OPEC such as Iran, Iraq, Libya and Venezuela and Algeria which are not only opposed to increasing output but are also happy about the current high prices.

Though the Saudi government would provide $1.5 billion to help the poorest countries cope with higher oil and food prices, this would benefit only a few , leaving many reeling under the double-whammy of crude prices and inflation.

IMF view

IMF contends that the deterioration in the investment climate and the oil investment regime in a host of countries, as well as limits on the cooperation of national oil companies with international oil companies remain policy constraints plaguing several countries.

The perception that a meaningful supply response to high prices may be slow in coming has been one reason for the increasing market pessimism and a steady increase in long-dated futures prices, IMF said.

Energy analysts argue that at a time when resource nationalism is on the rise among resource-rich countries, it would be unrealistic to expect much help from them unless they genuinely seek to benefit by trading those resources at reasonable prices and not at fancy prices as is the case with the oil producers.

But rich oil-consuming countries that are home to multinational oil companies such as Exxon, Mobil, Shell, Chevron and BP and which have heavy stakes in oil producing countries would not be overly keen on taking the 13 members of OPEC to task.

This is because these big oil companies would get pauperised if their countries resort to trade sanctions against the combined OPEC members.

Moreover, high oil prices benefit these MNCs as they are silently raking in the moolah, even while swallowing their pride in not being able to resist the might of a dozen or so countries.

Only countries with heavy dependence on imported crude, such as India, and net oil importing developing countries see no silver lining on the dim energy horizon.