New Delhi: India’s year-old suggestion of an oil price band to reduce volatility in the crude oil market has won the backing of Nigeria, Russia, France, Japan, South Korea and the US, but experts say the proposal may be difficult to implement in the absence of a broader agreement between oil producing and consuming nations.
The proposal was discussed at a Group of Eight (G-8) energy ministers meeting held in Rome on 24-25 May, which was also attended by representatives of oil producers and consumers. Italy’s Eni SpA, one of the large crude oil producers, favoured a $60-70 (Rs2,928-3,416) price band per barrel of crude.
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“The idea of a price band floated by India last year has found favour now,” petroleum secretary R.S. Pandey, who attended the meeting, told Mint.
“We had earlier suggested a buyers group which would represent nations that rely on petroleum imports and set an acceptable price band that would take into account future production and demand estimates,” he added. “While Russia and United States are in favour of price stability, Nigeria is in favour of a price band.”
While Nigeria is a member of the Organization of Petroleum Exporting Countries (Opec), Russia rivals Saudi Arabia, which is the world’s biggest oil exporter and de facto leader of the cartel.
The price band will help oil producers secure a steady income and protect consumers against abrupt price spikes. While price controls may draw the ire of free market proponents, the proposed band can work in the case of crude oil because any price fluctuation affects economies across the world.
Extreme volatility has marked the crude oil price, which reached a record $147 per barrel in July and has since fallen by about half. Because of the decline in price, the International Energy Agency (IEA) says investments in the upstream sector—oil exploration and production—are expected to fall by 21% in 2009 from 2008.
Energy issues: (from left) India’s petroleum secretary R.S. Pandey, Egyptian minister for electricity Hassan Younes and China’s deputy director of national energy administration Sun Qin at the G-8 energy ministers’ meet on 25 May in Rome. India, the world’s fifth largest energy consumer, imports 75% of its requirements. Andreas Solaro / AFP
Countries such as India that are dependent on imports to meet their oil needs are particularly vulnerable to price volatility.
India—the world’s fifth largest energy consumer—imports 75% of its requirements and accounts for some 3.5% of global consumption. It will become the world’s third largest oil importer after the US and China before 2025, with its energy demands expected to almost double by 2030, IEA estimates.
Then finance minister P. Chidambaram, the present home minister, proposed the oil price band at an Opec meeting in Jeddah, Saudi Arabia, in June last year.
Chidambaram blamed “unregulated over-the-counter markets and futures trading” for the then rocketing oil price. He suggested that consuming countries must guarantee that the price will not fall below an agreed level and producers that it will not rise above a guaranteed level.
“There is unanimity between crude oil producers and consumers now. Too low and too high prices impact the budgets of all economies. We had suggested last year a price band which has found favour now, with Eni SpA suggesting a price band of $60-70 per barrel,” Pandey said.
“Let an expert group comprising international bodies such as International Energy Agency and International Energy Foundation fix this band,” Pandey said.
Eni SpA, with estimated net proven reserves of 6,600 million barrels of oil equivalent, is Italy’s largest energy company and among the biggest hydrocarbon exploration and production firms in the world.
“Low oil prices are the worst enemy of energy savings, investments in alternative forms of energy and scientific energy research, not to mention the revenues of the producing countries. On the other hand, if prices are too high, they pose a threat to global growth and the development of many emerging economies,” Eni chief executive officer Paolo Scaroni said at the meeting.
France, Japan and South Korea welcomed Eni’s proposal, an Eni spokesman told Mint in an emailed response.
However, the price band may become a reality only when Opec—whose members include Nigeria, Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela—with a daily output production quota of 24.84 million barrels—accepts it and a broader agreement is in place between oil producers and consumers.
“While the idea is very novel, it will be difficult to implement it as it will require discipline, commitment and harmony between oil producers and consumers,” said Monish Chatrath, partner, national management, at consultancy Grant Thornton India.
“While the oil producers will have to guarantee that the upper band will not be breached, the consumers will have to maintain the lower band,” he added. “Opec may not necessarily have the ability to influence discipline amongst all oil producing and consuming countries.