India asks OPEC to adopt a 'price band mechanism'

India has asked the oil producing nations to control the spiralling prices as the oil prices in the international market has risen not because of any unexpected demand but due to unregulated over the counter markets and future trading in oil. By adopting a “price band mechanism”, oil producing countries can blunt the edge of inflation in which both the producers and consumers would assure each other to tame the prices for the interest of both.

Speaking at the meeting of the Energy Ministers of Oil Producing and Consumer Countries in Jeddah, Saudi Arabia, the Finance Minister of India, P Chidambaram who was there with Union Oil and Petroleum Minister Murli Devra on Sunday said, “We reject the suggestion that rising demand is the cause of spiralling oil prices. Surely, demand and supply dynamics cannot explain what has happened over the last 12 months. How is it that oil prices were US$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 over-the-counter markets and futures trading in oil,” added Chidambaram.

Pointing the reason behind skyrocketing prices of crude oil, FM said, “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 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 demand.”

Alleging to Organisation of Petroleum Exporting Countries (OPEC) and rich nations, FM Chidambaram said, “Oil prices threaten to wipe out the economic gains made by developing countries in recent years. The irrational escalation in oil prices is the cause of diversion of scarce resources from education, health and other social sector schemes.”

“Three weeks ago, India passed on barely 9 per cent of the required price increase to consumers: the result is that inflation measured by wholesale prices has crossed 11 per cent,” said Chidambaram. The government has raised the prices of petrol, diesel and cooking gas by Rs. 05, Rs.03 and Rs.50, which lead the inflation of India to over 11 percent.

Adding in his speech, Chidambaram said that not only the poor nations but also the oil producing countries like Indonesia, Russia, Saudi Arabia and Venezuela were also facing double-digit inflation rates ranging from 10.5 per cent to 29.3 per cent.

Chidambaram asked the oil producing countries not to be passive over the speculation and paper trading in oil, but to enhance the production of the oil and calm the oil market, as he said, “There is a need for the oil industry to re-assert its leadership in price formation and not remain passive spectator of speculation and paper trading in oil. The global hydrocarbon community must address this situation through appropriate supply-side responses and calm the oil markets.”

Warning to OPEC, he added that oil producer nation can also be fall in the range of global impact of inflation and recession and the spiralling prices of oil would neither in the interest of producers nor the consumers.

Suggesting the formula of ‘Price band mechanism’, Indian FM said, “We propose that we adopt a Price Band Mechanism. Consuming countries must guarantee that oil prices will not fall below an agreed level and producing countries must guarantee that oil prices will not rise above a guaranteed level. 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.”

In account of moderating the price of oils, FM called the OPEC to wrest control the oil trading as he cited, “ In our view, the time has come for producers - especially OPEC - and consumers to wrest control over oil trading from the hands of the speculators.”

Saudi Arab, the largest oil producing nation has announced to enhance the oil production to partial fulfill the demand by July this year. Announcing in this regard, Saudi King, Abdullah in the summit said, “Saudi Arabia will increase daily oil production to 9.7 million barrels from 9 million to counter the sharp rise in international oil prices.”, while the other oil producing countries are still not ready to increase the oil production.