India calls for oil price band as mechanism to check surge (Lead)

June 22nd, 2008 - 7:20 pm ICT by IANS  

A file-photo of P. Chidambaram
By Aroonim Bhuyan
Dubai, June 22 (IANS) Battling a 13-year high inflation rate, India has called for a price band mechanism to bring spiralling global oil prices under control. Finance Minister P. Chidambaram has said that the only way to check the sky-rocketing prices and the resulting inflation is for both producers and consumers to find common ground and that a price band mechanism would instill mutual confidence.

“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,” Chidambaram said, speaking on behalf of the Indian delegation at the ministerial segment of the conference of oil producing and consuming countries in Jeddah, Saudi Arabia, Sunday afternoon.

“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,” he said in the course of the speech.

The Jeddah meeting is taking place at the initiative of the Saudi Arabian government to discuss what it said was an “unjustified rise” in prices of petroleum products. Global oil prices have doubled from $50 a barrel in August last year to between $135 and $150 now.

Saudi Arabia says market fundamentals did not justify the rise.

Chidambaram and Petroleum and Natural Gas Minister Murli Deora are heading the Indian delegation, which also includes Petroleum Secretary M.S. Srinivasan.

Member countries of the Organisation of the Petroleum Exporting Countries (Opec) are also participating in the meeting.

The Opec, which meets over a third of the world’s oil requirement, is under pressure to increase output to ease the adverse impact of high prices on world economy.

Stating that he was speaking with a heavy heart and a sense of foreboding, Chidambaram said the goals that India and other developing nations had set for themselves were in grave peril because of the oil crisis.

“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,” he said.

The finance minister said that after India passed on only nine percent of the required fuel price increase to consumers three weeks back, the result was that inflation measured by wholesale prices crossed 11 percent.

“We are sorry to note that even oil producing countries such as Indonesia, Russia, Saudi Arabia and Venezuela face double-digit inflation rates ranging from 10.5 percent to 29.3 percent,” he said.

He called upon the oil producing nations to re-assert their 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,” he said.

Stating that the vulnerability of the supply chain to temporary supply disruptions stood exposed, Chidambaram said: “Global oil consumption grew by 1.1 percent or 1,000,000 barrels per day (bpd) in 2007 whereas the global oil production fell by 130,000 bpd.

“Spare capacity, across the supply chain, has dwindled considerably. This has added to risks and uncertainty,” he pointed out.

That was why there was an urgent need to boost investments in oil production.

“As per the estimates of the International Energy Agency (IEA), our future oil and gas needs call for massive investments of the order of US$10 trillion by the year 2030. Such fund mobilization can be achieved,” Chidambaram said, adding that fresh investments were not materializing perhaps because of the anticipated fall in demand.

“This is plainly wrong. The cyclical behaviour of oil markets is amply established and we know that oil production provides attractive returns in the long run. High oil prices have improved the balance sheets of oil-producing nations and companies. It would be reasonable, therefore, to expect oil producers to fund capacity expansion.”

He also rejected suggestions that the high oil prices were because of rising demand.

“Surely, demand and supply dynamics cannot explain what has happened over the last 12 months. How is it that oil prices were $70 a barrel in August 2007 and how is it that they have doubled when there has been no dramatic change in demand?” he asked.

“The causes for the current pandemonium in oil prices lie elsewhere: in unregulated over-the-counter markets and futures trading in oil.”

According to Chidamabaram, there was ample evidence that large financial institutions, pension funds and hedge funds have channelised billions of dollars into commodity investments and 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,” he said, while urging producers and consumers to wrest control over oil trading from the hands of speculators.

Soon after their arrival in Jeddah Saturday evening, Chidambaram and Deora held a meeting with Saudi Arabia’s Minister for Petroleum and Mineral Resources Ali I. Al Niami.

“The Indian delegation has also planned meetings with the delegations from Iran and Venezuela today (Sunday),” a diplomatic source told IANS from Jeddah.

The India-Iran oil pipeline issue would come up for discussion during the meeting, television reports quoted Deora as saying.

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