Price band for crude?

At the Oil Consumers and Producers meet at Jeddah on Sunday, Finance Minister P Chidambram proposed a price band for international crude prices and urged oil producers to stop being "passive spectators of speculation". But, there have been no takers for this proposal, at least publicly.

Was the Finance Minister being over ambitious when he suggested international crude prices should be governed by a price band? History would certainly suggest so.

In 2000, a price band mechanism was set up by OPEC - If oil traded above USD 28 per barrel for 20 consecutive trading days or below USD 22 per barrel for 10 consecutive trading days, production adjustments would be made.

Since its inception, the price band mechanism was activated only once, before it was formally disbanded in 2005.

Considering OPEC did not go through with its idea of a price band as a signal for its own production levels; experts say it is highly unlikely for oil producers to agree to one now at the behest of India. There are other concerns as well.

Subir Gokarn, Chief Economist - Asia Pacific, Standard & Poor said, "OPEC no longer is the only producer; there are others like Russia, but there's no unity among producers."

RK Batra, Distinguished Fellow at the The Energy and Resources Institute, said, "India may agree to USD 100, but other countries like Bangladesh might find even that difficult."

Chidamabram also blamed speculators in the futures market for the recent oil shock. Even as the United States is conducting an investigation, analysts say it will be difficult to establish a coorelation between the futures market and rise in prices.

Gokarn said, "It's difficult to establish a relationship between future trading and price hikes; we are already struggling with that back home with agri commodities."

The FM himself has earlier spoken about a cartel among the oil consuming countries to meet the current crude price situation. For now there seem to be no takers for Chidambaram's proposal, atleast not publicly. But if crude continues to surge, other consuming conutries may decide to throw their weight behind India.