Speculation and paper barrel trade blamed for volatile crude prices

Union Petroleum and Natural Gas Minister Jaipal Reddy, on Tuesday, blamed speculation and paper barrel trade for the excessively high and volatile crude oil prices which, in turn, was hurting the economic growth of developing countries.

“One of the key challenges facing capacity expansion and investment in petroleum sector, today, is the rise in speculative investment flows and the impact of this on crude prices,” Mr. Reddy said while addressing a special Ministerial session at the Petrotech 2012 conference here.

“India, like, other oil-importing countries, is adversely affected by such volatility, as it leads to domestic inflation, increased input costs, and increase in the budget deficit. This invariably drives up interest rates and slows down economic growth,” he told the delegates at Vigyan Bhavan.

Mr. Reddy said it was estimated that a sustained $10 increase in oil price leads to a 1.5 per cent reduction in the gross domestic product (GDP) of developing countries. India’s GDP growth in the first quarter declined to 5.5 per cent. Its annual average cost of imported crude oil rose by $27 per barrel between 2010-11 and 2011-12. “It is our belief that excessively high and volatile oil prices benefit neither the producing counties nor the consuming countries. We subscribe to the view that high oil prices are one of the primary reasons for the weak conditions in the economies around the world,” he added.

Mr. Reddy called upon oil producing and consuming countries to work together to build trust and share market data to establish demand certainty in international oil markets. “Such a move will instil confidence among oil producing countries to undertake investments to produce incremental quantities of oil and gas and reduce the influence of extraneous factors in oil price formulation. This energy demand for India is estimated to double by 2030. The current global financial crisis, which has lasted longer than we thought in 2008, is the greatest threat faced by the global economy since the Great Depression eight decades ago,” he said.