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Press Release [FREE Access]
Petro Intelligence » Oil Buyers’ Club: A Noble Idea, But Will It Work?

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.

Daniel YerginBy 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.



To download the latest issue 'Volume 26 Issue 11 - September 10, 2019', click here
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