Countervailing power

On the face of it, the formal mechanism established by five leading oil importers to try and get lower oil prices, is an effort to use countervailing power —when faced with suppliers who’re cartelising, buyers also cartelize and, if all goes according to plan, the stronger cartel (the buyers’ one!) wins. Given that much of the oil price hike some months ago was a result of speculation rather than a supply shock or a surge in demand, oil consumers are within their rights to form such a cartel. Yet, it will take more than such a body to get lower prices. Ram Naik, petroleum minister in the NDA government, used to talk of the Asian premium, essentially the practice of Opec countries charging Asian countries like India and China $1-2 more per barrel than they did to US and European buyers, but was unable to do much about it. His first successor in the UPA, Mani Shankar Aiyar, did talk to his Opec counterparts about the Asian premium, but also tried another tack, to get countries like China and India to collaborate instead of competing for oil fields abroad—the logic being that if countries bid lower prices for oil fields, the long-term costs of oil would automatically decline. Nothing much emerged from this initiative.

For such cooperation to succeed, the approach will have to be more sophisticated than just asking producers for an across-the-board price cut and threatening a boycott if one is not made available. A blunt attack of that sort will not work since producers know that buyers need the oil to keep their industrial fires burning; typically, producers have better staying power in that they can survive for a longer period without oil revenue, whereas an oil-dependent economy could be brought to its knees in a matter of weeks. A better tack therefore would be to play off the marginal producers against the larger ones—Reliance Industries, for instance, is able to buy Venezuelan crude at a substantial discount to West Asian prices, since its refinery can process a larger range of crudes. It is not certain, however, whether such an approach works for countries who account for half the global oil demand today—that’s the share of the US, Japan, South Korea, China and India, the countries whose oil ministers have established the oil initiative. A more realistic bargaining mechanism would be one that involves sitting down with oil exporters and exploring alternative energy scenarios. For instance, oil importers need to explain to the oil-supplying countries that they will move to alternative sources of energy if oil prices move above pre-specified levels for any sustained period. Nor is this an entirely empty threat. One of the reasons why the global economy did not collapse when oil prices rose to historic highs some months ago was the decline in the energy-intensity of most developed economies. Once OPEC countries realise that future demand sources will dry up, either due to greater energy-saving technology or due to using of alternative energy sources, an organised group of buyers should be able to nudge prices downward. And since every dollar-per-barrel saving on the price amounts to billions of dollars, the effort is certainly worth it.