While the US Congress considers what, if anything, should be done to damp oil trading markets, where prices remain high by historical standards, nations outside the US are watching closely and hoping for big changes.
“Speculators have played a greater role in the market than either buyers or sellers,” Indian Finance Minister Palaniappan Chidambaram said in an interview, weighing in on a hotly debated theory about the price of oil.
Citing testimony given in congressional hearings, Chidambaram said the inflow of US$250 billion to commodities indexes indicates that speculators have had a big role in the run-up in prices.
Democrats and Republicans in Congress have introduced separate bills to curb what they contend is excessive speculation. These proposals are vehemently opposed by traders, banks and investors who speculate in oil.
“Why are these markets not regulated?” said Chidambaram, who has an MBA from Harvard and has spent most of his political career in economics and finance.
Chidambaram has become a vocal champion of some of the Asian nations whose fast-growing economies are threatened by high oil prices; countries that rely on oil imports but have little leverage over prices.
While rising oil and gas prices are pinching consumers’ wallets and corporate profits in the US and Europe, the consequences have been more drastic in many developing countries. Protests and riots are rife, newly blossoming businesses like airlines are being crushed and severe inflation looms.
“Four or five years of economic growth are being wiped out in one year,” Chidambaram said.
Economists say politicians in Asia are powerless.
“There is a general resignation in Asia that little can be done in the short term to influence the global price of crude oil,” said Matt Robinson, an economist with Moody’s based in Sydney, Australia.
Opposition party leaders in India’s increasingly fractured political landscape have called for the ouster of Chidambaram because of higher fuel prices.
“I wish I had a magic wand to bring down oil prices, and I don’t,” he said.
Chidambaram is one of the few politicians from oil-buying countries to propose concrete changes in the way the world’s crude markets work.
His suggestion is to create a “buyers’ group” that would represent nations that rely on petroleum imports, much like the OPEC represents producers. This group could sit across the table from OPEC and set an acceptable price band that would take into account future production and demand estimates, he said.
“I’m not suggesting a cartel,” Chidambaram said. “I’m only suggesting that all buyers get together and exchange views, like producers do.”
He presented this idea at an energy meeting in Jeddah, Saudi Arabia, last month and he acknowledged that the other attendees gave it a cold response, but attributed that in part to the lack of buying nations at the meeting. Any oil trading, in the spot or futures markets, would also have to stay within a price band, he suggested.
Such arrangements are not unprecedented in the commodity markets. OPEC set up an informal price band after the price collapse of 1998, with a target price of US$22 to US$28 a barrel.
While it was active, if the average price of oil strayed above US$28 a barrel, OPEC members would pump more oil so prices would fall a little, and if the average price fell below US$22 a barrel, production would be cut so that prices would rise. But this mechanism was eventually abandoned as demand for oil from emerging markets grew faster than OPEC’s ability to increase its supplies.
The effect of speculation on the price of oil, as well as its benefits and negatives, has been debated in the US and beyond this year.
While critics like Chidambaram blame speculators for high oil prices, some economists blame rising demand from developing nations, created by breakneck economic expansion and rising personal incomes.
US President George W. Bush criticized again last week the subsidies in many Asian countries that keep gasoline prices lower for their consumers, including China and India. Bush said such subsidies — which China and India have reduced somewhat — kept demand elevated. Despite subsidies, consumers in India still pay more for a liter of gasoline than consumers in the US.
On the other hand, investors in oil futures add liquidity to the system and smooth out price shocks. But their critics say the additional cash they bring to commodity markets artificially inflates prices to the point that they are detached from fundamentals like supply and demand.
India has already acted to tame other commodity prices. The country banned futures trading in several essential food commodities, including lentils, soy oil and rubber.
Prices in some of these commodities, like lentils, have declined, while prices in others, like rubber, have risen.
So far, India’s experience “does not point to any conclusions,” Chidambaram said, though “public sentiment seems to support banning futures trading” altogether.
Chidambaram is not the only non-US politician questioning speculators’ role as Congress examines the issue. Australian Prime Minister Kevin Rudd said last month that his government would do what it could to “act consistently on the question of the impact of speculation on global oil markets and any artificial manipulation of the oil price.”
A spokesman for the Australian government said Rudd was not suggesting anything beyond acting through existing international organizations. (He has, figuratively, suggested applying a blowtorch to OPEC to lower oil prices.)
MOST TO LOSE
Nations in South Asia and East Asia, including India, may have the most to lose if oil prices resume their steep rise, or stay at current highs. In a report called “Inflation Typhoon,” HSBC’s economists in Asia warned this month that increases in fuel prices could cripple the region.
In part because of rising energy costs, inflation in the Philippines will hit double digits in the coming months, Pakistan’s economy looks “precariously out of balance,” Malaysian petroleum prices are up 41 percent and Indonesian prices are up 30 percent, the report said.
In India, inflation was above 11.9 percent this month, higher than it has been in more than a decade, and HSBC predicts economic growth will slow to 7.6 percent this year, from 9 percent last year.
The report warned: “If commodity price inflation remains high, the inflation and growth impacts next year will be more severe.”