‘Price discovery of oil cannot be left entirely unregulated'

With the political unrest in the Middle East triggering a sharp increase in crude oil prices, which touched a record $108 a barrel, India on Wednesday called for regulation of oil markets and asked the Organization of the Petroleum Exporting Countries (OPEC) to increase production to deal with the emerging crisis.

Addressing the extraordinary International Energy Forum (IEF) meeting at Riyadh in Saudi Arabia, Petroleum and Natural Gas Minister Jaipal Reddy said crude oil prices had touched a two-and-a-half year high of $108 a barrel. The need of the hour was to regulate oil markets, particularly paper trading, to avoid excessive volatility impacting importing nations, he remarked.

He said it was time OPEC should address the issue of high crude oil prices and it must raise the output to cool the markets that had gone up not because of any demand-supply constraint but because of the political unrest across the Arab world.

“Given the dual role that crude oil now plays — both as a physical commodity and as a financial asset — we need to improve our understanding of the inter-linkages between the physical and financial markets, if we are to address the issues of price volatility and price discovery in the oil markets,'' Mr. Reddy said.

Mr. Reddy said oil price discovery could not be left entirely unregulated. “One thing is certain. price discovery of such a vital and finite resource as oil cannot be left entirely unregulated, whether in the commodity derivatives markets or in the financial markets,'' he said.

“Unregulated over-the-counter (OTC) transactions and trading in ‘paper barrels', along with unbridled speculation activity are to blame,'' he said. He called for strengthening the current regulatory framework for commodity futures and derivatives markets. “We need to consider establishing position limits and moving OTC activity on to regulated exchanges,'' Mr. Reddy said.

U.S., U.K. initiatives

The initiatives being taken in the U.S., Britain and other countries were steps in the right direction to bring in regulatory oversight of the physical and financial markets, he added.

“Net oil importing countries such as India normally experience deterioration in their balance of payments, putting downward pressure on exchange rates. As a result, imports become more expensive and exports less valuable, leading to a drop in real national income. All these call for appropriate policy responses,'' he said.

Keywords: OPECoil crisis

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