By R. Sasankan
‘Tis all a Chequer-board of Nights and Days
Where Destiny with Men for Pieces plays:
Hither and thither moves, and mates, and slays,
And one by one back in the Closet lays.’
- Edward FitzGerald's Rubáiyát of Khayyám
Demand and supply serve as the economic equivalent of the cosmic
principle of yin and yang which influences prices and the cost of
transactions in the financial landscape. In Chinese mythology, yin and
yang were born out of chaos and worked together – in harmony – to bring
order to the universe. At a more mundane level, demand and supply try to
provide the same impulse in the world of financial transactions and the
elusive goal is to strike the right balance between the two so that no
one really loses out.
But in the real world, it doesn’t often work that way. Resources may be
scarce; demand may outstrip supply and the struggle to find that balance
may not work because of competing interests of the players on the
opposite sides of each transaction trying to game the system to their
advantage. The world of petroleum is a very good case in point. When
energy demand spiralled during the 20th century, the quest for fossil
fuels – oil in the first instance, and later gas – sparked a mad
scramble for prospecting sites across the globe. In turn, this spawned
the Big Game on a gigantic, geopolitical chequer board which continues
to play out till today. In his book The Prize, Daniel Yergin chronicles
the 20th century obsession among governments and corporations to secure
mastery over oil and the wealth benefits that flowed from the
exploitation of fossil fuels.
By
the late fifties, the countries in the Gulf wizened up to the Game and
they formed the Organisation of Petroleum Exporting Countries with the
agreement eventually being signed at Baghdad in Iraq in September 1960.
The founding members were Iran, Iraq, Kuwait, Saudi Arabia and
Venezuela. The club grew quickly – and some withdrew later, leaving the
organisation with 14 member countries today.
The OPEC has been a very successful cartel. Even when they were at war,
Iran and Iraq continued to be members of the organisation. Saudi Arabia
and Iran have extremely strained relations today but both continue to be
in the OPEC. By collectively regulating the supply of oil to the world,
the OPEC has been able to “manipulate” the price of oil, especially
after it started collaborating with non-OPEC producers like Russia.
But if the suppliers banded together, there was no attempt to create a
club of buyers who would collectively negotiate for better prices. That
could change now. But will it be effective?
With India emerging as the world’s third largest importer of crude oil,
Prime Minister Narendra Modi floated last year the idea of an oil
consumers’ club. He first mooted the idea during a meeting with Chinese
President Xi Jinping in April 2018 in Wuhan. A formal announcement on
the formation of a buyers’ club is expected when Xi Jinping visits India
later this year.
Energy experts acknowledge that if India and China, major oil importers
in Asian region, can come together and create such an institutional
arrangement, it will be a major development in the world of petroleum
and could create the “yang” to the OPEC’s “ying”.
In 1974, soon after the first oil shock, OECD countries formed the
International Energy Agency (IEA) to ensure energy security. It did not
have an implicit or explicit goal of influencing the oil price. But the
IEA has since emerged as a force in the international energy scene.
There are a lot of issues between China and India and they distrust each
other immensely. However, on business matters, China is generally seen
as more dependable and this seems to have prompted Narendra Modi to take
the initiative to propose the formation of a crude oil buyers’ club for
Asia.
If shaped well, it could certainly be a feasible strategy. Western
Europe, for example, managed to gain some leverage by collectively
negotiating the price of Russian gas. The problem in extending this idea
to oil and gas trade in Asia is simply the lack of convergence because
of the geopolitical considerations of China and the rest of the
countries in the region.
China is a far bigger importer of crude and gas than India. It has been
pursuing a deliberate energy sourcing strategy. As a result, it is not
as vulnerable as India in dealing with oil and gas suppliers. Among
major Asian importers, China has the greatest flexibility in obtaining
oil and gas through the pipeline network it has built through Russia,
Central Asia and Myanmar. The Japanese and Koreans will be driven by
pure commercial considerations that will include sourcing from Russia
and Australia.
The strategy behind the proposed oil importers’ club has not been
clearly articulated so far. India’s petroleum ministry has not stated
that the goal is to influence OPEC prices. However, some energy pundits
have hinted that this is one of the goals. Some have even suggested that
such a combination can change the global energy architecture. This may
be wishful thinking, springing from insufficient understanding of the
oil market.
But the proposed club can still have an enormous impact if it succeeds
in pressuring the oil producers to eliminate certain unethical trade
practices. This is where the IEA has succeeded. Middle East crude
producers have been charging an Asian Premium from crude importers of
Asia ($ 5 a barrel). Many believe this premium is charged to provide the
kickback that is passed on to the corrupt leadership in a few importing
countries. Can this practice be stopped? It won’t be easy.
This is precisely why some acknowledged experts say the club will remain
a possibility in principle alone. Kickback from oil and gas deals is
considered an essential lubricant to move the political machinery in
these countries.
As a journalist covering India’s petroleum scene for many years, I
remain sceptical about the usefulness of such a club in the near future.
Without going into details, let me recall the events that led to the
political crisis that erupted in 2003, triggered by a fracas over the
sharing of kickbacks from oil deals. The then Tamil Nadu Chief Minister
J. Jayalalitha withdrew support to the coalition government headed by
A.B. Vajpayee which faced a no-confidence motion in the lower house of
parliament. The government did not fall as expected. Jayalalitha’s fury
was sparked by Vajpayee’s refusal to sack petroleum minister Vazhapadi
Ramamurthi which she had demanded.
Ramamurthy was the lone member of a party called Thamizhaga Rajiv
Congress, who was elected because of the support he received from
Jayalalitha’s party, the AIADMK. Ramamurthi was made the petroleum
minister on the recommendation of Jayalalitha and this was based on an
irrevocable understanding on the sharing of the slush money generated
from petroleum deals. Ramamurthi defaulted on his commitment, obviously
under pressure from other alliance partners who wanted a part of the
share. The Kuo oil deal during Mrs Indira Gandhi’s rule was an equally
big, political scandal.
Over the last 40 years or so, the petroleum sector in India has been the
main source of funds for the party in power. The money has been
funnelled through above- and below-the-table discounts given by Middle
Eastern and some South American suppliers.
Right or wrong, there is a perception that in India no deal is
transacted on purely commercial considerations. India’s energy diplomacy
remains totally confused and the country has failed to clearly
enunciate a policy on the sourcing of fossil energy. An oil consumers’
club -- like the one proposed by Modi - can become an effective and
beneficial institutional setup only if these issues are first addressed.
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