Price Discovery of Crude Oil Cannot be Left Entirely Unregulated : Shri Reddy Extraordinary IEF Ministerial Meeting Held at Riyadh
The Minister of Petroleum, Shri S. Jaipal Reddy has emphasized the need for improving understanding of inter-linkages between the physical and financial markets to address the issues of price volatility and price discovery. Speaking at the International Energy Forum (IEF), Extraordinary Ministerial Meeting at Riyadh (Saudi Arabia) Yesterday, he added that oil price discovery cannot be left entirely unregulated. Shri Reddy underlined that unregulated over-the-Counter (OTC) transactions and trading in ‘paper barrels’, along with unbridled speculation activity were to blame for unprecedented oil price rise in 2008.
The Minister also called for strengthening current regulatory framework for commodity futures and derivatives markets. He said, “We need to consider establishing position limits and moving OTC activity on to regulated exchanges.” Shri Reddy stressed. The initiatives being taken in the US, UK and other countries are steps in the right direction, to bring in regulatory oversight of the physical and financial markets, he added.
Shri Reddy extended Indian support for further initiatives by IEF and other international organizations, for putting in place suitable regulatory mechanisms, to prevent a recurrence of 2008
The Extraordinary IEF Ministerial Meeting is the final stage of a process that started with the landmark Cancun Ministerial Declaration approved by 66 countries at the 12th IEF Ministerial Meeting in March 2010. The Cancun Ministerial declaration addresses two main points: an enhanced IEF framework to strengthen the producer-consumer dialogue and ways to reduce energy market volatility.
Following is the text of the address of the Petroleum Minister:
“At the outset of this historic IEF ministerial meeting, I would like to place on record our appreciation for the leadership provided by HRH Prince Abdulaziz bin Salman, Saudi Deputy Minister for Petroleum & Mineral Resources and Chairman, High Level Steering Group (HLSG) in the drafting of the IEF’s Charter, an exercise that has lasted nearly two years. With the new Charter putting in place a robust institutional framework, the IEF will emerge as a stronger and more dynamic institution for facilitating the global energy dialogue. As the world’s fourth-largest oil consumer and as an emerging economy growing at more than 8% per year, India looks forward to playing a meaningful role under the new Charter of the IEF to promote better understanding and cooperation between the producing and consuming countries.
Given the dual role that crude oil now plays both as a physical commodity and a financial asset, we need to improve our understanding of the inter-linkages between the physical and financial markets, if we are to address the issues of price volatility and price discovery in the oil markets.
One thing is certain: price discovery of such a vital and finite resource as oil cannot be left entirely unregulated, whether in the commodity derivatives markets or the financial markets. Most developing economies were faced with huge economic hardship during the unprecedented oil price rise in June 2008, when international oil prices exceeded $ 145 per barrel. Unregulated over-the-counter (OTC) transactions and trading in ‘paper barrels’, along with unbridled speculation activity were to blame.
Oil prices remain an important determinant of global economic performance. For an emerging economy like India, higher oil prices lead to inflation, a fall in tax revenues and an increase in the budget deficit, which drives interest rates up. An oil price rise typically leads to upward pressure on nominal wage levels. Net oil importing countries such as India normally experience deterioration in their balance of payments, putting downward pressure on exchange rates. As a result, imports become more expensive and exports less valuable, leading to a drop in real national income. All these call for appropriate policy responses.
The current regulatory framework for commodity futures and derivatives markets needs to be strengthened. We need to consider establishing position limits and moving OTC activity on to regulated exchanges. The initiatives being taken in the US, UK and other countries are steps in the right direction, to bring in regulatory oversight of the physical and financial markets. It is hoped that the roadmap adopted by the G-20 countries to strengthen regulation in this sphere, will render oil markets less opaque, dampen volatility and provide the much-needed stability in oil price formation. As an emerging economy, we support further initiatives by IEF and other international organizations, for putting in place suitable regulatory mechanisms, to prevent a recurrence of 2008”.
The Minister of Petroleum, Shri S. Jaipal Reddy has emphasized the need for improving understanding of inter-linkages between the physical and financial markets to address the issues of price volatility and price discovery. Speaking at the International Energy Forum (IEF), Extraordinary Ministerial Meeting at Riyadh (Saudi Arabia) Yesterday, he added that oil price discovery cannot be left entirely unregulated. Shri Reddy underlined that unregulated over-the-Counter (OTC) transactions and trading in ‘paper barrels’, along with unbridled speculation activity were to blame for unprecedented oil price rise in 2008.
The Minister also called for strengthening current regulatory framework for commodity futures and derivatives markets. He said, “We need to consider establishing position limits and moving OTC activity on to regulated exchanges.” Shri Reddy stressed. The initiatives being taken in the US, UK and other countries are steps in the right direction, to bring in regulatory oversight of the physical and financial markets, he added.
Shri Reddy extended Indian support for further initiatives by IEF and other international organizations, for putting in place suitable regulatory mechanisms, to prevent a recurrence of 2008
The Extraordinary IEF Ministerial Meeting is the final stage of a process that started with the landmark Cancun Ministerial Declaration approved by 66 countries at the 12th IEF Ministerial Meeting in March 2010. The Cancun Ministerial declaration addresses two main points: an enhanced IEF framework to strengthen the producer-consumer dialogue and ways to reduce energy market volatility.
Following is the text of the address of the Petroleum Minister:
“At the outset of this historic IEF ministerial meeting, I would like to place on record our appreciation for the leadership provided by HRH Prince Abdulaziz bin Salman, Saudi Deputy Minister for Petroleum & Mineral Resources and Chairman, High Level Steering Group (HLSG) in the drafting of the IEF’s Charter, an exercise that has lasted nearly two years. With the new Charter putting in place a robust institutional framework, the IEF will emerge as a stronger and more dynamic institution for facilitating the global energy dialogue. As the world’s fourth-largest oil consumer and as an emerging economy growing at more than 8% per year, India looks forward to playing a meaningful role under the new Charter of the IEF to promote better understanding and cooperation between the producing and consuming countries.
Given the dual role that crude oil now plays both as a physical commodity and a financial asset, we need to improve our understanding of the inter-linkages between the physical and financial markets, if we are to address the issues of price volatility and price discovery in the oil markets.
One thing is certain: price discovery of such a vital and finite resource as oil cannot be left entirely unregulated, whether in the commodity derivatives markets or the financial markets. Most developing economies were faced with huge economic hardship during the unprecedented oil price rise in June 2008, when international oil prices exceeded $ 145 per barrel. Unregulated over-the-counter (OTC) transactions and trading in ‘paper barrels’, along with unbridled speculation activity were to blame.
Oil prices remain an important determinant of global economic performance. For an emerging economy like India, higher oil prices lead to inflation, a fall in tax revenues and an increase in the budget deficit, which drives interest rates up. An oil price rise typically leads to upward pressure on nominal wage levels. Net oil importing countries such as India normally experience deterioration in their balance of payments, putting downward pressure on exchange rates. As a result, imports become more expensive and exports less valuable, leading to a drop in real national income. All these call for appropriate policy responses.
The current regulatory framework for commodity futures and derivatives markets needs to be strengthened. We need to consider establishing position limits and moving OTC activity on to regulated exchanges. The initiatives being taken in the US, UK and other countries are steps in the right direction, to bring in regulatory oversight of the physical and financial markets. It is hoped that the roadmap adopted by the G-20 countries to strengthen regulation in this sphere, will render oil markets less opaque, dampen volatility and provide the much-needed stability in oil price formation. As an emerging economy, we support further initiatives by IEF and other international organizations, for putting in place suitable regulatory mechanisms, to prevent a recurrence of 2008”.
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