core sector communique

Jaipal Reddy Urges for Greater Transparency & Predictibility in Global Oil Markets Petroleum Minister Addresses OPEC Seminar at Vienna

The Minister of Petroleum & Natural Gas Shri S. Jaipal Reddy has called upon oil producing and consuming countries to work together to build trust and share market data to establish demand certainty in international oil markets. Addressing a Session on “Oil and World Economy” at 5th OPEC International Seminar at Vienna today, Shri Reddy also advocated instilling confidence among oil producing countries to undertake required investments to produce larger quantities of incremental oil & gas, and reduce the influence of extraneous factors in oil price formulation. The Minister further emphasized that in an oil-importing country like India, higher international oil prices lead to domestic inflation, increased input costs, an increase in the budget deficit which invariably drives up interest rates and slows down the economic growth. Higher oil prices raise the cost of fertilizers, and hence the cost of food, thus hitting hard the poorest of economies. He added that high oil prices benefit neither oil producing nor consuming countries. Following is the text of Minister’s speech:  “We are meeting in difficult times. The Euro zone crisis, the continuing recession in the global economy, rising geopolitical tensions, a sustained phase of high and volatile international oil prices, extraneous factors continuing to influence the price formation of oil – all these pose serious challenges to the health of the global economy and stability of the world’s financial system. The current global financial crisis, which has lasted longer than we thought in 2008, is the greatest threat faced by the global economy since the Great Depression eight decades ago. Excellencies, since India is the world’s fourth largest oil importer, I will naturally talk on today’s subject ‘Oil and the World Economy’ from the perspective of an emerging economy. We are all agreed that oil prices critically affect global economic performance. In an oil-importing country like India, higher international oil prices lead to domestic inflation increased input costs, an increase in the budget deficit which invariably drives up interest rates and slows down the economic growth. Higher oil prices raise the cost of fertilizers, and hence the cost of food, thus hitting hard the poorest of economies. Net oil importing countries 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. There could not be a more direct cause and effect relation than high oil prices retarding economic growth of oil importing countries. Between the Financial Year 2010-11 and 2011-12, India’s annual average cost of imported crude oil increased by 27 dollars per barrel, making India’s oil import bill rise from 100 billion dollars to 140 billion dollars. Further, since we could not pass on the full impact of high international oil prices, we had to shell out subsidies to consumers amounting to 25 billion dollars. It is estimated that a sustained 10 dollar increase in oil prices lead to a 1.5% reduction in the GDP of developing countries. We have seen evidence of this in our own country: India’s GDP grew at 6.9% during the last financial year down from the 8% plus growth rate experienced in the past few years. If we survey the current literature on oil prices and the global economy, we can discern two schools of thoughts: one school holds that the global economy has built up enough resilience to absorb oil price hikes due to (a) stronger demand from emerging economies and, (b) more enlightened Central Bank policies; the other school is categorical that high oil prices are one of the primary reasons for the weak conditions in the economies of the US and Europe. We subscribe to the latter view and hold that very high and volatile oil prices will continue to weaken global efforts for an expeditious recovery from the ongoing global economic recession and financial crisis. Excellencies, in this august gathering, I cannot but highlight the dual role that crude oil now plays both as a physical commodity and a financial asset, and the need to improve our understanding of the inter-linkages between the physical and financial markets. The questions I would like to pose are: Is the price discovery of oil today an outcome of the economic fundamentals of demand and supply or are their extraneous factors at play? If oil has such a large impact on the health of the global economy, can we afford to leave the price discovery of such a vital and finite resource as oil entirely unregulated in the commodity derivative markets or the financial markets? Are the oil futures markets adequately performing their functions of price discovery and risk transfer? For oil importing countries, these questions need to be squarely addressed if we are to address the challenge of global energy security. We are enthused at the efforts of the G-20 to strengthen regulation of oil futures markets and trade in paper barrels. Such efforts, if pursued to their logical end, will render oil markets less opaque, dampen volatility and provide the much-needed stability and predictability in oil price formation. It is our belief that excessively high and volatile oil prices benefit neither the producing countries nor the consuming countries. In fact, they lead to ‘demand destruction’ in consuming countries thereby inhibiting fresh investments by the producing countries, leading to a vicious cycle of higher prices and falling supplies. Excellencies, the global population is projected to increase to 9 billion by mid-century. Providing easy access to energy at affordable prices in an environmentally sustainable manner is the major challenge that confronts policy planners today. We all agree that oil and gas will remain the dominant fuel in the world’s energy mix till 2030. The question critical to the world economy is: are we making sufficient investments for ensuring production of the incremental quantities of oil and gas required in the days ahead? The answer to that question must necessarily be in the affirmative if the global economy is to be in sound health. Excellencies, Ladies and Gentlemen, the perspective that I have just shared with you is that of a net oil importing country’s but would also apply to the global economy in general. Unless we understand the strong linkage between oil price stability with the overall health and stability of the global economy, we will not be able to come up with the prescriptions for a quick recovery. In our highly inter-connected and interdependent world, we must swim or sink together. Let us, oil producing and consuming countries, work together to build trust, share market data to establish ‘demand certainty’, instill confidence among oil producing countries to undertake the required investments to produce larger quantities of incremental oil and gas, reduce the influence of extraneous factors in oil price formation, and bring greater transparency and predictability to the international oil markets. By doing so, we would be contributing our bit for an early recovery of the global economy.”