Although the call came from none other than French President Nicolas Sarkozy, the call failed to generate the ripples that it truly deserved. The call was significant in more ways than one, to say the least. An opportunity seems open, waiting to be seized.
While talking to foreign diplomats based in Paris, Sarkozy came out with a rather unusual proposal: Fixing the crude prices at a level acceptable to both the producers and consumers.
“It is in everyone’s interest to regulate the prices of raw materials, not just oil, not just gas, but all raw materials,” said Sarokozy.
Crude could definitely be the first candidate for any such arrangement, and there are definite reasons for that. Wide swings are no good for anyone. Crude markets have a history of oscillating between extremes over short periods, bringing anguish to many and pleasure to virtually none in the overall process. This is a cyclical business in a real, real sense. Crude behaves much as any other commodity with wide price swings in times of shortage or oversupply, with the price cycle extending over to several years responding to changes in demand as well as OPEC and non-OPEC supplies. Adjustments to the ever-changing realities then become extremely difficult and problematic both for the consumers and the producers.
How can one forget 1998? Oil markets were languishing then at around $10 a barrel. There were calls within OPEC to act swiftly — as remains the case now — to somehow bring the markets back to some sense. OPEC appeared then to be striving to push the markets within its official, yet now forgotten, price band. Some then felt the OPEC was targeting a market price somewhere in the upper half of the price band: Between $25-$28.
And then over the next few years, geo-political developments started to impact the psyche of this oversensitive market and strained the delicate balance between supply and demand as the appetite of emerging economies started to grow rapidly. Would the global supplies be able to keep pace with the rising demand? This became the moot question and remained under hammer in the energy fraternity. Quenching the growing global crude thirst became a real issue as the markets started to behave crazily — in the opposite direction this time. Peak oil theory with the peak oil stalwarts was seen occupying the main stage. This was enough to unnerve the markets. No one seemed in real control of the markets, not even OPEC, everyone agreed. And prices kept rising and rising.
With markets attaining one peak after the other, ultimately hitting the all time high $147 mark only about six months back, many questioned OPEC’s will, and indeed desire, to keep in view the impact of rising oil prices on the global economy. With clear signs and a major global recession just around the corner, this was of special importance. OPEC became again the bad boy!
However, things again took a 360-degree turn, fairly in line with the historical trends, and crude is now again languishing in and around mid-$30s and with some projecting it to go even further down.
Could an industry survive amidst these wild swings — the regular upturns and downturns of the markets? Isn’t it time to somehow contain the vagaries of the swings of this very industry, so crucial for sustaining this civilization of ours?
All the players in the market today are talking of stability. The issue of “fair” prices is very much in circulation. Saudi Arabia has been projecting, for some time now from even the highest level, the price of $75 a barrel as a fair price for crude. Other OPEC members have also been stressing that they would like to see the price of crude somewhere between $70-80 a barrel. Indeed, for Saudi Arabia to maintain a spare capacity, which may even touch 3-4 million barrels a day when all the incremental projects finally get on-stream, is a costly though very essential affair to maintain some sort of stability in the markets. Yet with prices going much below that, Saudi plans and programs are hampered.
And it is at this very moment that the idea of fair pricing is also being echoed from the consumers’ side. “Let us seize this moment to extend a hand to oil-producing nations ... to tell them we developed nations are ready to examine with producing countries how to guarantee them a median acceptable level for the price of oil,” Sarkozy told diplomats gathered around him in Paris recently. Sarkozy also had a point when he said that he believed oil producers might be receptive to such an idea now that prices have fallen from record highs. They would have been skeptical when prices were hovering around $150 a barrel, he argued.
This is a monumental development and global energy diplomats need to start to develop a working paper for the industry itself. For the sake of this civilization, let’s try and capitalize on this development. Let’s seize upon it. The idea deserves a much better attention.
There would definitely be ifs and buts. The first and the foremost issue would indeed be to come to an agreement, acceptable to both the producers and consumers, on the very issue of a fair price of crude.
Inflation and the prices of other commodities need to be taken into account before reaching a consensus on the issue of what could be described as a fair price to this very essential product. There is also the question of perception, lingering in certain quarters that in the long run there does not remain a link in the prices of resources extracted in the south and industrial products manufactured in the northern hemisphere of the world. Maybe a basket of products, including manufactured products, commodities and resources could also be used to determine the prices of crude on a regular basis.
Is this wish too Utopian? The recent moves definitely usher in a ray of hope that ultimately the produce in the southern hemisphere of the globe would finally receive a fair treatment from the industrial north. Could we be heading toward a more equitable world? Let’s wait and see. Energy diplomats now have a real, real task in hand.