A silver lining

On Thursday December 18, a day after the petroleum cartel OPEC decided to cut production by an unprecedented 2.2 million barrels a day, oil in the international markets was ruling close to the lowest level in four years.

At the most obvious level, it seemed to indicate the helplessness of the cartel to shore up the sagging oil prices that have plummeted from a record $147 a barrel in July to below $40 very recently. OPEC controls almost 40 per cent of the global oil supplies and its latest decision follows a move in September to reduce supplies by 2 million barrels a day.

The cartel’s inability to influence oil prices is further illustrated by the fact that two important non-OPEC countries - Russia and Azerbaijan - have also joined in the moves to restrict supplies: together they have pledged to cut output by 600,000 barrels a day. As the global economy is sliding into a sharp downturn, the demand for fuel has declined rapidly.

High fuel prices have deterred consumers in the West where alternative energy sources have become popular. OPEC has acknowledged that crude supplies entering the market are far in excess of actual demand and that the stocks in the OECD countries are well above their five-year average and are expected to rise further. High inventories with major consuming nations constrain the ability of OPEC to manipulate prices.

It is clear that cartelisation is unlikely to yield the intended results at least for now. For many countries, falling oil prices is the only silver lining in a bleak global economic scenario. In India the relentless upward march of oil prices until July posed serious threats to macroeconomic stability.

The dramatic decline since then is one of the major factors driving down inflation to tolerable limits. However, India and the rest of the world would welcome a more stable price regime and not just low oil prices.

It is the extreme volatility magnified by dire predictions that caused great damage. Consumers and producers including OPEC would be better off in agreeing to certain ground rules. One suggestion has been that they agree on a realistic price band for petroleum and a mechanism to administer it.

The fall in oil prices has not been an unmixed blessing. Several oil producers including Venezuela and Iran require a higher level of prices to continue with their planned expenditure. Low oil prices have acted as disincentives to more expensive exploration for oil, to adopting alternative energy sources, and to highly desirable conservation.

- The Hindu Editorial Dec 22.