The Hindu Business Line : New Delhi's oil initiative

The flight into ambition on the part of the Union Petroleum Minister should be overlooked because it is clear that his main objective is to develop an integrated Asian crude market, the centrepiece of which would be an Asian pricing system. However, Mr Mani Shankar Aiyar's dream of an Asian oil market has a long way to go before it actually sees the light of day.

THE UNION Petroleum Minister, Mr Mani Shankar Aiyar, needs to be congratulated for not merely mooting the idea of an Asian oil market (at the Vienna meeting of OPEC last year) but also imparting concrete shape to the idea by getting the principal Asian oil producers and consumers across the table in New Delhi on January 6. To say this is not to suggest in any way that the proposed Asian market has been brought into existence.

Far from it, if only for the reason that the diplomatic and economic forces arrayed against implementation of the idea are extremely powerful, specially if brought to bear on the West Asian oil producers who are tied to the apron-strings of the West in more ways than one. Even so, the very fact that the participating producers (Saudi Arabia, Iran, Kuwait, the UAE, Oman and Qatar) have agreed to come to Delhi and attend the meeting with the main Asian oil importers (India, China, Japan and Malaysia) indicates that the project is not entirely hopeless and that there is a fair chance of success in Mr Aiyar attaining his goal.

Indeed, on rational grounds, Mr Aiyar's argument for developing an Asian market is persuasive, based as it is on the widely accepted premise that the emerging economies of Asia are poised to take an even bigger stride into the "growth zone" in the years immediately ahead which, among other things, will increase even further their oil imports.

Briefly, the cumulative impact of this development would be to make Asian consumption of crude oil even more important than it already is, thus making the Asian players in the international oil economy factors to contend with as far as the pricing of crude oil is concerned.

Mr Aiyar's contention is that, if this is in fact how things will turn out to be in the years ahead, it would simply not be fair to continue with the existing international crude pricing system, which depends entirely on standards set by the US and European markets (through Western Texas Intermediate for the US and Brent for Europe, respectively).

Admittedly, during the past half a century, this pricing system was entirely justified by the fact that the principal consumption centres lay in the US and Europe, not to speak of effective ownership and management control till the early 1970s. In fact, the logical acceptability of Mr Aiyar's contention lies in the fact that the same yardstick should be used now to have a new crude pricing system, which would take into account the vastly crucial role played by Asian consumption (current and projected).

Among other things, this would rule out the premia/discount over the US and European standards charged for crude supplied to Asia, which is nothing but an anachronism today reflecting an economic and political state of affairs which has receded into the history books. However, and very rightly so, Mr Aiyar has not stopped at a new Asia-friendly pricing formula.

As he put it, "Countries of (the Asian) region have to work towards strategic partnerships involving the oil business community", the overall goal being "stability, security and sustainability" of oil supplies to Asia. As a part of this partnership, he has envisaged Asian investment in the upstream chain of oil production and West Asian involvement in downstream segments like refining and petrochemicals.

Clearly, this is an ambitious idea, not least because it entails investments running into billions of dollars. Even if there was agreement in principle on this larger issue, there is little doubt that actual fruition would take years during which time so much could change on the ground.

This flight into ambition on the part of the Union Petroleum Minister should be overlooked because it is clear that his main objective is to develop an integrated Asian crude market, the centrepiece of which would be an Asian pricing system. Taking into account the diplomatic and other constraints within which the West Asian oil producers have to operate, this specific goal is attainable perhaps because it makes eminent sense for both producers and consumers to develop such a market. For Asia, there would be nothing as attractive as to have a specifically Asian pricing arrangement which would be more advantageous than the prevailing system. Second, longer-term contracts (a feature of the proposed new market arrangement) would add significantly to price stability, which would have favourable spin-offs for the importing economies concerned.

(According to one calculation, the Indian growth rate declines one per cent for every $5 increase in the price of a barrel of crude oil, while for the man on the street, a dollar's increase in the crude price results in an extra payment of 50 to 60 paise for every litre of fuel he uses.)

For the producers, forging closer market links with Asia makes a lot of sense not only because of the increasing importance of the growing Asian market but also because of the lack of clout of the latter to hit back at West Asian oil producers by regulating their own supplies.

In fact, this has been the experience of OPEC over the past decade or so: Every time the organisation has taken a tough stand as far as prices are concerned, there has been a concerted effort on the part of the oil producers in the West to increase their own output and reduce dependence on OPEC.

The policy has not always met with success, but that of course is another story. The very fact that Europe (including Russia) can produce crude oil in significant quantities is something that has not made the West Asian oil producers any the more comfortable because of the implicit threat contained in this ability to OPEC's own standing as an oil producing group.

As far as Asia is concerned, this threat is totally absent, which implicitly puts the West Asian oil producers in a better situation, thereby making them more amenable to the idea of entering into a new market arrangement with leading Asian oil consumers.

However, the most important hurdle in the way of Mr Aiyar's plans lies elsewhere — in the fact that OPEC comprises other members as well over and above the six which attended the meeting in New Delhi.

True, as reports indicate, a producer like Saudi Arabia has expressed an interest in holding the next meeting of the forum (ostensibly next year), the inference being that Riyadh is interested in the project and can perhaps be counted on (by virtue of its weight as the principal oil producer) to push through the idea and have it accepted by other Asian producers.

But it is of crucial importance whether the interests of OPEC as a unified body will be sacrificed by the New Delhi producer ginger group, a step which will not merely reduce the power of the oil cartel in the world oil economy but which will also be greatly welcomed by the West for reasons not difficult to guess.

Briefly, Mr Mani Shankar Aiyar's dream of an Asian oil market has a long way to go before it actually sees the light of day. However, to repeat, he needs to be complimented for having been able to hold the New Delhi meeting of Asian oil producers and consumers, an event which could either revolutionise the international oil market or turn out to be a damp squib mainly because of the pressure exerted by the economically powerful West on the participating oil-producing countries not to disturb the status quo.

Only time will tell whether the international oil economy is ripe for change - following a change in the structure of the world economy itself - or whether it will persist with the framework which was crystallised by OPEC flexing its muscles in the 1970s.

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