Oil pool dynamics

Oil, it is often said, drives politics. But the reverse is equally true: good politics can also determine the supply and price of oil. India has recently taken two laudable initiatives for the political management of oil. First, somewhat more belatedly than China, it has opened up avenues for Indian companies investing in overseas oil exploration. But, more importantly, it has taken the lead in convening the Asian round table on oil cooperation.

This round table had two components. The first was to see if oil supplies can be secured on long term price contracts rather than left hostage to the vagaries of a volatile oil market. Securing long term price contracts would certainly give oil prices greater predictability and help investments. South Korea took the lead in this kind of contract by signing an unprecedented ten-year oil supply contract with Kuwait last year. There is a potential risk in that if actual market prices fall below contract prices, India might be paying out more than it ought to. But the trade-off between stability in oil prices and the possible risk of higher payments is something that we ought to at least consider. The second component is to pool the collective bargaining strength of the Asian economies to negotiate more favourable contracts for the region as a whole. This is an inspired political initiative in so far as it pools the resources of the Asian economies to improve their collective bargaining power in the energy market. The Asian economies will be the biggest source of increased demand for oil. On current projections, India8217;s import dependence is likely to be as high as 75 per cent. And similar figures apply to other Asian economies. This kind of collective bargaining is one important way of reducing their shared vulnerabilities. Such cooperation could in future also be extended to the realm of foreign currency fluctuations where Asian economies pool in their resources to prevent over reliance on the Euro or the dollar.

The response from the oil-producing states of the Gulf has so far been encouraging. They have as much interest in price stability as the consumers of oil, and they can presumably leverage their Asian contracts into securing better deals with Europe and the United States as well. But this dialogue highlights the fact that oil prices are not sui generis but the product of political management. The OPEC and the US had been engaging in this kind of political management for some years now. It was high time that the Asian economies woke up to their potential power in determining the stability of world prices. India can take some pride in the fact that it has taken the initiative in this matter.