Will India gain from an Asian oil block?

Jan 13, 2005 01:00 AM

by Aroonim Bhuyan

The first week of 2005 saw India launching a major diplomatic initiative by bringing together Asian oil consuming and producing nations and setting the process for the formation of an Asian oil block. Union Petroleum Minister Mani Shankar Ayer took the lead in this initiative which is expected to bring about stability, security and sustainability in the Asian oil market.
The meeting in New Delhi on January 6 -- attended by India, Japan, China and Korea as consuming countries and Saudi Arabia, Oman, Iran, Qatar, UAE, Indonesia and Malaysia as producers -- also decided to create a separate marker for the Asian market. Unlike OPEC, which consists of only oil producing countries, the proposed Asian forum will comprise both oil consuming and producing nations.

What is a marker in the oil market?
A marker is benchmark price against which crude is bought or sold. Globally, there are three major markers. The United States uses the Western Texas Intermediate as its benchmark crude. In Europe, North Sea Brent serves as the marker. The Gulf uses Mideast Dubai as its major benchmark crude.
This apart, there are a large number of region-specific markers. The Malaysia Tapis is one such benchmark.

Why is there a need for an Asian oil market?
Major oil consuming countries in Asia are paying a premium for oil. That is for their not being united in their negotiations with the powerful Organisation of Petroleum Exporting Countries or OPEC. OPEC’s presence in the oil market is all powerful. Given the volatile global oil market today, the need for Asian nations to come together has become all that more important.
As Iran Petroleum Minister Bijan Zanganeh put it in the meeting, "Asian countries like rapidly growing economies of India and China are in need of long-term energy supply security just as oil producing majors are concerned about demand security. This is where an Asian interdependence may best serve the interests of all."

The European oil consuming nations, with North Sea Brent as the benchmark crude, keeps bargaining with OPEC. The United States, with the Western Texas Intermediate as its marker, handles OPEC alone. But the Asian nations, in the absence of their own marker, have to depend on European or American benchmarks to negotiate prices with OPEC. As a result, Asian countries end up paying more than the Western nations.
In the New Delhi meeting, vice-chairman of the China National Development and Reforms Commission, Zhang Xiaoqiang said, "Differences exist in crude oil price among different regions, and East Asian nations usually have to pay a higher price for crude oil than European and American countries. This is not in line with the market principle of fairness and impedes regional economic development."

How big is the Asian oil market?
Asia is emerging as fastest growing economic zone. Asia accounts for 40 % of consumption of global oil production of 82 mm bpd. China, India, Japan and Korea are the four major oil consuming nations of Asia. In 2004, global oil consumption increased by about 3.3 %. In Asia, the figure went up by over 5 %.
Percentage-wise, Asia consumption of global oil production is expected to go up to 43 % over the next 20 years. In that period, the Middle East is likely to be the major supplier to meet this demand -- producing 31 % of the world's total oil production. Hence, Asia's total consumption almost equals production in the region.

How strong is OPEC’s hold on the oil market?
The Organization of Petroleum Exporting Countries, a cartel of petroleum exporting countries, controls almost 65 % of global crude reserves. OPEC was formed in 1960 by Iran, Iraq, Saudi Arabia, and Venezuela to maintain stability in the oil market for the benefit of producers and consumers. Indonesia, Libya, Algeria, Nigeria, Kuwait, Qatar and the UAE later joined the cartel.
Today, OPEC members collectively possess more than three-quarters of the world's total crude oil reserves. It accounts for around 40 % of the global oil production. As of today, excluding Iraq, OPEC has a total production capacity of 28.7 mm bpd. But, in recent times, production has been averaging about 27.7 mm bpd, leaving just 1 mm bpd spare capacity.

How powerful is OPEC’s influence in Asia can be gauged from the aftermath of the Asian financial crisis in the late 1990s. Rahul Deep Singh writes, "In its (the Asian financial crisis) aftermath, oil prices crashed to $ 9 per barrel in December 1998.”
OPEC responded, points out Singh, removing about 4.3 mm bpd of supplies from the market -- over 10 % of the then prevailing global oil trade of 40 mm bpd. This had the desired effect and prices soared. By March 2000, the price of the OPEC basket had tripled from its nadir, which sent alarm bells ringing across the world. In the distant future, the OPEC countries will be the only ones left with oil to drive the global economy. As such, they will have all the power to set world oil prices.

What is the state of the world oil market today?
The world has been seeing a volatile oil market in recent times. Prices have been going up for a number of reasons, ranging from a looming cold wave in the northern United States to strikes in Russia and Nigeria and supply outages in Iraq, the US Gulf of Mexico and the Norwegian North sea.
US crude futures were 26 cents higher to $ 45.86 a barrel while Brent crude in London was 30 cents up at $ 43.42 a barrel, near the top of their six-week range. Forecasts of a colder US winter have sparked off fears of shortages of heating fuel. This apart, sabotages in the northern Iraq pipeline and power problems in the southern part of that country have also hurt supplies. Baghdad has been forced to cut all its February-June Basra Light sales contracts by 10 %, or about 160,000 bpd.

Fears have also risen about Iraq supplies getting further affected post that country's elections as Osama Bin Laden has made it all too clear that the al-Qaeda will target that country's oil pipeline. Meanwhile, OPEC implemented its 1 mm bpd output cuts from January 1. Top producer Saudi Arabia has also informed some global customers that they could expect even less oil in February than in January.
All these glitches in the global oil market are harshly affecting the Asian oil consuming countries.

How does India stand to gain from the proposed Asian oil block?
As the fourth largest economy in the world, India's oil demand is high and is expected to shoot up further as the economy picks up. A Goldman Sachs report says that India's oil consumption will double in 10 years. As of now, India imports 75 % of its crude oil needs for $ 25 mm. The figure is expected to jump to 85 %.
According to the Economic Survey, the increase in volume coupled with firm international oil prices led to a 15 % jump in India's oil import bill in 2003-04. Crude oil and petroleum product import bill grew to Rs 93,159 crore in 2003-04 over Rs 85,042 crore in the previous year as the refiners resorted to heavy exports of refined petroleum products.

India exported 14 mm tonnes of petroleum products for Rs 16,101 crore in 2003-04 as compared to 10.28 mm tonnes exported the previous year for Rs 10,868 crore. The net oil import bill (import minus exports) was Rs 77,058 crore in 2003-04 as against Rs 74,174 crore (Rs 741.74 bn) in the last year.
India is faced with rising demand, lower than normal fuel inventories and rising concerns about the security of Middle East supplies. Today, India ranks sixth in terms of energy demand in the world. So, if the Asian oil block becomes a reality, India will stand to gain immensely.

It is not only price negotiations with the OPEC that such an Asian entity will promote. It will encourage investments too. Investments will bring about oil security and India will have to pay much less than what it is paying now. If India gets to saves the millions it spends as "Asian premium" now, then it will stand to benefit in a major way. Given the fact that India's oil demand is going to shoot up as it strives to sustain 6 % economic growth, the need to save what it pays as Asian premium is all the more important.
Also, the formation of such a block at India's initiative will go a long way in reasserting India's position as an emerging global economic and political power.

Source: The Economic Times Online
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