India and China to Set Up an ‘Anti-OPEC’ Buyers Club to Curb Power of Oil Producers
The world's 2nd and 3rd largest oil importers want to negotiate prices with suppliers collectively
The old power structure of world oilNSE 0.66 % markets could be on the verge of a great, potentially far-reaching shift, thanks to India and China.
Reports have revealed that the two Asian powerhouses — world’s second and third largest importers of oil — have neared a momentous deal to set up a buyers’ bloc that could dramatically tilt bargaining power in favour of importers.
A high-level representative from China’s National Energy Administration had visited India last week to put the deal on fast track.
The Mint newspaper said in a report that the upcoming buyers’ bloc will bargain collectively on oil supplies. Over time, this joint sourcing mechanism could significantly erode OPEC’s sway on all things oil.
In the long run, the coming together of the two Asian giants is likely to bode well for other Asian oil importers too. The story says that the buyers’ bloc might push OPEC to “reduce the premiums placed on oil sold to Asian countries”.
The Asian premium
At the heart of one of India’s longest-running oil grouses lies a phenomenon known as the ‘Asian premium’.
Asian countries are mostly dependent on West Asian producers for their oil requirements. This dependence tilts the scales heavily in favour of the producers who force buyers to pay a premium.
The US and the EU countries do not have to shell out this extra money when buying West Asia’s oil. India has lobbied long and hard against this charge, so far to no avail.
The joint oil sourcing plan being put together by India and China will help in cutting better deals with oil producers, making this undesirable premium a thing of the past.
Cutting OPEC to size
The share of imports in India’s oil consumption has risen sharply in the last two decades. The country currently imports over 80 per cent of its oil needs, with the result that a rise in oil prices impacts inflation and growth noticeably.
The share of imports in India’s oil basket is slated to go up to 90 per cent, which means the risks for India from price fluctuations will also go up.
For India, the first signs of a comeback of oil troubles are already emerging. Following OPEC’s production cut and recently tightened US sanctions against Iran and Venezuela, oil has hit $75 a barrel for the first time this year.
The US had given a conditional waiver to eight nations to keep buying oil from Iran. The deadline for that waiver is set to end on May 2, following which the oil equation is set to get more complicated for Iran’s top buyers like India and China.
Analysts say the joining of hands by India and China on joint oil sourcing could fundamentally alter the inner workings of global energy markets — where OPEC with 40% share of total global production currently calls the shots.
Power to the buyers
India has been striving to reduce supply risks in the backdrop of rising geopolitical uncertainties. It has engaged other producers to make sure Iran’s blacklisting doesn’t leave a gaping hope in its oil basket. Experts say that while availability won’t likely be a problem even after Iran’s exit, a possible pricing play by producers in the post-Iran era could put India at a substantial disadvantage.
India can’t expect supplies after May 2 at the same rates as Iran’s, the Mint story said quoting an official who didn’t want to be named.
With a buyers’ bloc up and running, uncertainties like these will likely cease to matter to buyers like India.
Efforts are also on to make Japan and South Korea, the world’s fourth and fifth biggest oil importers, to join the bloc, which — if it happens — could turn the entire global oil math on its head, leaving all big oil powers dancing to India and China’s tunes.
Source: The Economic Times