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Monday, Jun 23, 2008
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India seeks price band to regulate oil prices

Atul Aneja

P. Chidambaram

DUBAI: India has urged oil-producing and consuming countries to evolve a mechanism that would regulate oil prices, by allowing them to fluctuate within a fixed range.

Speaking at a meeting of oil-producing and consuming countries in Saudi Arabia’s port city of Jeddah, Finance Minister P. Chidambaram proposed the adoption of a “Price Band Mechanism.”

“We have a proposal that will instil mutual confidence. 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,” the Minister observed. He added that market forces should be allowed to determine prices “in the band between these levels.”

Voicing concerns of the developing world, Mr. Chidambaram said the current level of oil prices was neither in the interest of oil-producing countries nor the consuming countries. “If the global economy slows down or slips into a recession due to high oil prices, that will eventually hurt all of us.”

The Minister stressed that the rising demand for oil was not responsible for the surge in prices. Instead, speculators had played a key role in pushing the price to record highs within the last one year. “Respectfully, we reject the suggestion that rising demand is the cause for spiralling oil prices. Surely, demand and supply dynamics cannot explain what has happened over the last 12 months. How is it that the oil price was $70 a barrel in August 2007 and how is it that it has doubled when there has been no dramatic change in demand?”

Mr. Chidambaram added that the current pandemonium in oil prices lay in “unregulated over-the-counter markets and futures trading in oil.”

“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. 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. 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.”

The Minister acknowledged that heavy investments were required in oil exploration and refining to augment long-term supplies. He proposed that oil-producing countries, which benefited from high prices, should fund capacity expansion requiring an investment of $10 trillion.

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