While talking to foreign diplomats based in Paris, Sarkozy came out with a rather unusual proposal: Fixing the crude prices at a level acceptable to both the producers and consumers.

"It is in everyone's interest to regulate the prices of raw materials, not just oil, not just gas, but all raw materials," said Sarokozy.

Crude could definitely be the first candidate for any such arrangement, and there are definite reasons for that. Wide swings are no good for anyone. Crude markets have a history of oscillating between extremes over short periods, bringing anguish to many and pleasure to virtually none in the overall process. This is a cyclical business in a real, real sense. Crude behaves much as any other commodity with wide price swings in times of shortage or oversupply, with the price cycle extending over to several years responding to changes in demand as well as OPECOPEC and non-OPECOPEC supplies. Adjustments to the ever-changing realities then become extremely difficult and problematic both for the consumers and the producers.

How can one forget 1998? Oil markets were languishing then at around $10 a barrel. There were calls within OPECOPEC to act swiftly -- as remains the case now -- to somehow bring the markets back to some sense. OPECOPEC appeared then to be striving to push the markets within its official, yet now forgotten, price band. Some then felt the OPECOPEC was targeting a market price somewhere in the upper half of the price band: Between $25-$28.

And then over the next few years, geo-political developments started to impact the psyche of this oversensitive market and strained the delicate balance between supply and demand as the appetite of emerging economies started to grow rapidly. Would the global supplies be able to keep pace with the rising demand? This became the moot question and remained under hammer in the energy fraternity. Quenching the growing global crude thirst became a real issue as the markets started to behave crazily -- in the opposite direction this time. Peak oil theory with the peak oil stalwarts was seen occupying the main stage. This was enough to unnerve the markets. No one seemed in real control of the markets, not even OPECOPEC, everyone agreed. And prices kept rising and rising.

With markets attaining one peak after the other, ultimately hitting the all time high $147 mark only about six months back, many questioned OPECOPEC's will, and indeed desire, to keep in view the impact of rising oil prices on the global economy. With clear signs and a major global recession just around the corner, this was of special importance. OPECOPEC became again the bad boy!

However, things again took a 360-degree turn, fairly in line with the historical trends, and crude is now again languishing in and around mid-$30s and with some projecting it to go even further down.

Could an industry survive amidst these wild swings -- the regular upturns and downturns of the markets? Isn't it time to somehow contain the vagaries of the swings of this very industry, so crucial for sustaining this civilization of ours?

All the players in the market today are talking of stability. The issue of "fair" prices is very much in circulation. Saudi Arabia has been projecting, for some time now from even the highest level, the price of $75 a barrel as a fair price for crude. Other OPECOPEC members have also been stressing that they would like to see the price of crude somewhere between $70-80 a barrel. Indeed, for Saudi Arabia to maintain a spare capacity, which may even touch 3-4 million barrels a day when all the incremental projects finally get on-stream, is a costly though very essential affair to maintain some sort of stability in the markets. Yet with prices going much below that, Saudi plans and programs are hampered.

And it is at this very moment that the idea of fair pricing is also being echoed from the consumers' side. "Let us seize this moment to extend a hand to oil-producing nations ... to tell them we developed nations are ready to examine with producing countries how to guarantee them a median acceptable level for the price of oil," Sarkozy told diplomats gathered around him in Paris recently. Sarkozy also had a point when he said that he believed oil producers might be receptive to such an idea now that prices have fallen from record highs. They would have been skeptical when prices were hovering around $150 a barrel, he argued.

This is a monumental development and global energy diplomats need to start to develop a working paper for the industry itself. For the sake of this civilization, let's try and capitalize on this development. Let's seize upon it. The idea deserves a much better attention.

There would definitely be ifs and buts. The first and the foremost issue would indeed be to come to an agreement, acceptable to both the producers and consumers, on the very issue of a fair price of crude.

Inflation and the prices of other commodities need to be taken into account before reaching a consensus on the issue of what could be described as a fair price to this very essential product. There is also the question of perception, lingering in certain quarters that in the long run there does not remain a link in the prices of resources extracted in the south and industrial products manufactured in the northern hemisphere of the world. Maybe a basket of products, including manufactured products, commodities and resources could also be used to determine the prices of crude on a regular basis.

Is this wish too Utopian? The recent moves definitely usher in a ray of hope that ultimately the produce in the southern hemisphere of the globe would finally receive a fair treatment from the industrial north. Could we be heading toward a more equitable world? Let's wait and see. Energy diplomats now have a real, real task in hand.

By Syed Rashid Husain

© Arab News 2009

 

Community Comments (2) - Comment on this article

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How to stabilize oil prices by Aaldert van Wijk, Student - 24-Jan-09
You're right mr. Husain, this idea does deserve attention. And since the idea is sound i would like to suggest a possible implementation. Using OECD oil reserves to stabilize prices. OECD members are obliged to keep 3 months of oil supply for there country is storage. If we decide to sell this when prices are going up, and buy new oil when prices are going down we could stabilize prices. This way we could both maintain some flexibility in the market to react to supply and demand issues but not in such a volatile way.

I would suggest the following scheme, for the top 10% of OECD oil reserves you say that you will sell them at 70$ a barrel buy back at 60$ a barrel. If reserves go below 90% you jump to the next band you sell for 80$ buy for 70$ this way buyers and sellers know that if oil reserves are between 80-90% prices will never go outside 70-80$ range.

Under normal circumstance oil is cheaper for long term delivery so OECD could easily keep it's supply's level with buying into future delivery's. Also suppliers would have more time to bring extra capacity on or offline. [Report Abuse | Email to a Friend | Reply to this Comment]

 

 

by Clifford Wirth, Ph.D., President, Peak Oil Associates International - 24-Jan-09
The top story of the year is that global crude oil production peaked in 2008: Rembrandt Koppelaar, Editor of “Oil Watch Monthly” (December 2008).

Independent studies indicate that global crude oil production will now decline from 74 million barrels per day to 60 million barrels per day by 2015. During the same time, demand will increase. Oil supplies will be even tighter for the U.S. As oil producing nations consume more and more oil domestically they will export less and less. Because demand is high in China, India, the Middle East, and other oil producing nations, once global oil production begins to decline, demand will always be higher than supply. And since the U.S. represents one fourth of global oil demand, whatever oil we conserve will be consumed elsewhere. Thus, conservation in the U.S. will not slow oil depletion rates significantly.

Alternatives will not even begin to fill the gap. There is no plan nor capital for a so-called electric economy. And most alternatives yield electric power, but we need liquid fuels for tractors/combines, 18 wheel trucks, trains, ships, and mining equipment.

With increasing costs for gasoline and diesel, along with declining taxes and declining gasoline tax revenues, states and local governments will eventually have to cut staff and curtail highway maintenance. Eventually, gasoline stations will close, and state and local highway workers won’t be able to get to work. We are facing the collapse of the highways that depend on diesel and gasoline powered trucks for bridge maintenance, culvert cleaning to avoid road washouts, snow plowing, and roadbed and surface repair. When the highways fail, so will the power grid, as highways carry the parts, large transformers, steel for pylons, and high tension cables from great distances. With the highways out, there will be no food coming from far away, and without the power grid virtually nothing modern works, including home heating, pumping of gasoline and diesel, airports, communications, and automated building systems.

Documented:
http://survivingpeakoil.blogspot.com/
http://www.peakoilassociates.com/POAn… [Report Abuse | Email to a Friend | Reply to this Comment]

 

 

 

 

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