NEW DELHI: INDIA on Sunday blamed speculators for the rise in international oil prices and advocated a price band mechanism to save the world from crude shocks. While finance minister P Chidambaram urged oil producing nations not to remain a “passive spectator of speculation” at an energy ministers’ meeting in Jeddah, world’s top oil producer Saudi Arabia too came out strongly against speculators. The “abhorrent acts” by a group of elements are responsible for the quick and unjustified increase of petroleum in recent times, Saudi King Abdullah said at the opening of the oil summit.
“Questions have been raised about the fundamentals of the oil industry. There is a need for the oil industry to re-assert its leadership in price formation and not remain a passive spectator of speculation and paper trading in oil,” Mr Chidambaram said. “The global hydrocarbon community must address this situation through appropriate supply-side responses and calm the oil markets,” he added.
“There is ample evidence that large financial institutions, pension funds, hedge funds, etc, have channelised billions of dollars—nay, trillions of dollars—into commodity investments and derivatives,” Mr Chidambaram said. He said the demand created by these funds, through unregulated and highly opaque transactions, were purely speculative. “The time has come for producers—especially OPEC—and consumers to wrest control over oil trading from the hands of the speculators.”
Speculative premium $60 per barrel
ANEWS agency quoted petroleum secretary M S Srinivasan as saying the “speculative premium” in crude oil prices was an estimated $60 per barrel. Blaming speculators working on the New York Mercantile Exchange for crude oil prices touching an all time high of $140 per barrel, Mr Srinivasan added, “Speculative trading amounts to a few trillion dollars currently.” Cautioning the oil producers that they would also suffer in case the global economy slows down or slips into recession due to high oil prices, Mr Chidambaram, who is accompanying petroleum minister Murli Deora as part of the Indian delegation to the summit, said both oil producing countries and consuming countries must find a common ground. “We propose that we adopt a price band mechanism.”
According to his plan, while consuming countries will ensure that oil prices will not fall below an agreed level, producing countries will guarantee that they won’t rise beyond a certain point. “In the band between these two levels, let prices be determined by market forces. This is the only way to shelter the world from volatility and unpredictability in oil prices,” Mr Chidambaram said.
Rejecting the suggestion that rise in demand is the cause of spiraling prices, Chidambaram said that demand and supply dynamics cannot explain what has happened over the last twelve months.
“How is that oil prices were $70 a barrel in August 2007 and how is it that they have doubled when there has been no dramatic change in demand? The causes for the current pandemonium in oil prices lie elsewhere: in unregulated overthe-counter markets and futures trading in oil,” Mr Chidambaram said, rejecting the claim that it’s demand that’s pushing oil prices up.
He said India has acquired the capacity to end poverty but global oil prices were endangering it capabilities. “I speak with great anguish because the goals that we have set for ourselves are in great peril,” Mr Chidambaram said. India is battling it’s worst inflation in 10 years, induced mostly by the runaway crude oil prices in the international market.
“Oil prices threaten to wipe out the economic gains made by developing countries in recent years. The irrational escalation in oil prices is a cause of diversion of cash resources from education, health and other social sector schemes,” he said. Maintaining that situation would eventually hurt all, Mr Chidambaram said that three weeks ago India passed on barely 9% of the required price increase to customers and the result was that inflation crossed 11%.
He noted that even oil producing countries like Indonesia, Russia, Saudi Arabia and Venezuela face double digit inflation.
