India proposes oil ‘price band’

JEDDAH: India yesterday rejected the widespread view in the Western world that demand is causing the phenomenal rise in the price of oil.

Speaking at the Jeddah Energy Meeting that has brought together oil-producing and oil- consuming nations, Finance Minister P. Chidambaram said: “We respectfully reject the suggestion that rising demand is the cause of spiraling oil prices. The causes for the current pandemonium in oil prices lie elsewhere: In unregulated over-the-counter markets and futures trading in oil.”

The Indian view is completely opposed to the American one. Addressing a round table on the sidelines of the conference, US Energy Secretary Sam Bodman insisted that huge demand was driving up the prices of oil. He refused to accept that speculators were the reason for the volatility of the market. Chidambaram said that there was ample evidence that large financial institutions, pension funds, hedge funds had channelized billions of dollars into commodity investments and commodity derivatives. “It is common knowledge that these financial transactions are unregulated and highly opaque. The demand for oil generated by these funds is purely speculative. In our view, the time has come for oil producing nations and consumers to wrest control over oil trading from the hands of the speculators.” Suggesting that the only way forward is for both producers and consumers to find common ground, Chidambaram proposed a “price band mechanism.”

Explaining the details of the proposal, he said: “Consuming countries must guarantee that oil prices will not fall below an agreed level and producing countries must guarantee oil prices will not rise above a guaranteed level. In the band between these two levels, let prices be determined by market forces.”

Chidambaram felt such a price-band mechanism was the only way to “shelter the world from volatility and unpredictability in oil prices.”

The minister called for the oil industry to reassert its leadership in price formation. “It should not remain passive spectator of speculation and paper trading in oil. The global hydrocarbon community must address the situation through appropriate supply-side responses and calm the oil market.” The presence of Chidambaram at the conference underlined the huge importance India has placed on this unprecedented oil summit. “This conference was basically meant for the world’s petroleum ministers. Chidambaram is the only finance minister from outside Saudi Arabia attending the meeting. In the normal scheme of things, Murli Deora, the petroleum minister, would have the only person attending this meeting,” said an Indian diplomatic source.

With inflation reaching a record high in India and general elections looming on the horizon, the two ministers wanted to explain to the world community about the negative impact the oil prices are having on India.

This was admitted by Chidambaram during his intervention at one of the sessions of the conference. “Oil prices threaten to wipe out the economic gains made by the developing countries in recent years. The irrational escalation in oil prices is the cause of diversion of the scarce resources from education, health and other social sector schemes.

Three weeks ago, India passed on barely nine percent of the required price increase to the consumers: The result is that inflation measured by wholesale prices has crossed 11 percent and we are sorry that even oil producing nations such as Saudi Arabia, Russia, Indonesia and Venezuela face double-digit inflation rates ranging from 10.5 percent to 29.3 percent,” the minister said.