DAMMAM, 7 April 2005 — As talks of a “super spike period” in the global crude markets that could eventually “push prices to as high as $105 a barrel” gathers momentum, the issue of an Asian oil exchange is also gaining in currency. While total consumption in Asia almost equals its production, the region, unlike North America and Europe, lacks a developed oil market.
There are two clear schools of thought on the issue. On one hand there are people who think Asia is being short-changed. According to this group, most of the world’s supplies are controlled by OPEC members. The main oil consumers in North America, Europe and developed Asia have their energy watchdog International Energy Agency (IEA) to take care of their interests in the global energy equation, whereas, the newly emerging industrial states of Asia, China, India, Pakistan and other south Asian economies find themselves relegated to a position where there is no space available to them.
According to Alan Hegburg, a senior fellow at the Washington based Centrer for Strategic and International Studies (CSIS), the Asian initiative was an attempt to “cartelize” the market at a time when the Organization for Economic Development (OECD), a group of mostly wealthy countries, was prepared to cut demand to ensure that there was adequate oil for the rest of the world. “The Asian regional idea says: we’ll try to cartelize the market, in other words, we take liquidity out of the market,” Hegburg deduces.
“There is global oil market and trade. There is global oil market and investment. It is competitive. If you start setting up regional groupings to try to deal with that, you are in danger of doing more damage than leaving it as it is,” he argued. “If you say everything on investment is decided for political reasons, you can actually retard investments. And in oil we need investments. The entire world markets needs investments,” Hegburg forcefully puts forward.
The idea of an Asian oil market was first mooted by India during a meeting of major crude producers and some of the major countries of Asia, early this year. The basic idea was to ensure and bring about long term and possibly cheaper oil supplies to the region, as a means to stabilize the volatile markets and indeed the economies of the region. The volatility of the markets was indeed hurting the growing and emerging Asian economies more than the developed economies of the west, many then argued. Hence ways to stabilize these was imperative, some felt. The idea was mooted by proposing, “With a view to bringing greater stability in Asian trade in petroleum and petroleum products, can we think of an Asian market where long term contracts become longer, price discovery is transparent, facilitating greater stability in formulae for pricing in long term contract, where petroleum exchanges are established and used, derivatives are integrated into market practices, where, in short, an Asian market emerges.”
This debate raged and the oil markets continued to behave erratically - on one pretext or the other. Market prices continued to oscillate at higher levels, despite the fact that as per the EIA, the US crude oil inventories rose by 5.4 million barrels last week. Distillate however, fell by 1.1 million barrels and gasoline stocks fell by 2.9 million barrels to 214.4 million barrels, the fourth decline in a row. It seems crude supply is currently not the real issue. Rather the decline in US gasoline stocks was affecting the market sentiments adversely.
Production problems over the past couple of weeks have compounded concerns if refiners will be able to meet gasoline demand coming summer. The fears have been exacerbated by a number of factors. A 485,000 bpd refinery in Venezuela was shut down by a power failure and a fatal explosion at BP’s Texas City refinery also added fuel to the fire. Market sentiments were getting itchier by the day, in the wake of news that US gasoline demand has in fact been two percent higher than the same time a year ago. This was despite record pump prices.