|
KAUTILYA
Why
OPEC Has Risen Again
The
1980s and 1990s began with an oil bang. This decade too is very similar.
By
Jairam Ramesh
 The
11-nation Organisation of Petroleum Exporting Countries (OPEC) whose exports
account for 60 per cent of oil that is internationally traded is dramatically
back in the headlines. In the past few days, crude prices have touched
$38 a barrel, a level not seen since the Gulf War a decade ago. What a
change from just 24 months ago when in the wake of the East Asian financial
catastrophe, oil prices had plummeted to $10 a barrel. True, when adjusted
for inflation, crude prices are now about a third of what they were 10
years ago. But nominal prices, that is actual prices, have more than trebled
to record levels in less than two years time.
 It
was only six months ago in March that OPEC announced it would maintain
a price band. If crude prices fell below $22 a barrel, OPEC would cut
oil supplies. If crude prices went up beyond $28 a barrel, it would bring
more oil into the market. The price band was widely welcomed as an instrument
to impart stability to a volatile market and to balance the needs of producers
and interests of consumers.
But very
soon the price band broke down. A series of factors contributed to heightened
panic and speculation in oil markets. Robust growth in the world economy-4.7
per cent in 2000-has boosted demand for oil substantially. On the eve
of winter, always a vulnerable moment, stocks of heating oil in the US
were seen to have touched an all-time low. The markets also perceived
spare refining capacity for conversion of crude oil into consumer products
like petrol, diesel and kerosene to be scarce. To make matters worse,
Iraq once again began coveting the oilfields of Kuwait.
OPEC itself
was badly split with Saudi Arabia advocating caution but being outflanked
by the rest under the aggressive leadership of the Americaphobic Hugo
Chavez, president of a bankrupt Venezuela. Incidentally, Chavez came to
power in February 1999. It is from this date that oil prices started their
upward climb. Venezuela is known for producing Miss Worlds with unfailing
regularity but now it threatens to occupy centrestage for another reason.
It is special since it is the second largest supplier of crude and oil
products to the US, just marginally behind Canada.
To be sure,
when crude prices zoomed, the cartel met in the first week of September
and announced that it would enhance production quotas by about 0.8 million
barrels a day or about 3 per cent of normal OPEC supply. The world expected
oil prices to fall. But for three reasons this did not happen. First,
the quota increase was not immediate but was made effective October 1.
Second, the quota increase was to be for just two months instead of the
usual six months. Third, the market perception was that the quota increase
would not bring in additional supplies but would only legalise what was
going on illegally-namely, cheating on quotas by some OPEC members. Also,
markets could not but be aware that oil storage and tanker shipping capacity
are not sufficient to handle quick additions to oil supplies.
Petrol's
the Driving Force: OPEC was not bothered about this because it escaped
public condemnation. In Europe, for example, where massive protests took
place through much of September, the target was not OPEC itself but European
governments whose taxes account for between two-third and three-fourth
of fuel prices. What the protesters overlooked is that high taxes had
given them protection against wild price swings, a protection not available
to US consumers since taxes constitute less than one-fourth of petrol
prices there. And ultimately, it is the petrol market that drives crude
prices.
What finally
cooled price pressures was the decision of President Bill Clinton a few
days back to release about 30 million barrels from the US' strategic petroleum
reserve of 571 million barrels. Thank god that this was an election year
in the US! The effect was immediate and for the time being the increase
in oil prices has been halted. The key to further moderation in prices
lies, as always, with Saudi Arabia which is the only producer that has
surplus production capacity and can bring large quantities of oil into
the market at short notice.
The recent
price surge means that India will have to pay an extra $4-5 billion for
oil imports in 2000-01. In the next few weeks, therefore, the supply of
dollars into the country has to be stepped up to keep the rupee from depreciating
further and to prevent the hardening of interest rates. The quickest way
to do so is to go back to overseas Indians with Resurgent India Bonds-II.
This has already been announced by the State Bank of India. But servicing
these bonds will be costly. If increased software exports could absorb
half of the extra oil import bill, then it might be worthwhile to use
$2-3 billion of our foreign exchange reserves to meet the oil import bill.
(The author is with the Congress party. These are his
personal views.)
Top
|
In
India, youth is marked by impetuosity and prevented from getting ahead.
Elsewhere, of course, the young rule the world, says INDIA TODAY Deputy
Editor Swapan Dasgupta in 
