A powerful strategy to bring down the Crude Oil prices

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All of us are hit hard by high and rising Crude Oil prices. Since the grains are being used to produce bio-fuels, food prices too has risen sharply. Due to rise in both food and fuel prices the inflation is scaling new heights across the globe. In India, current inflation rate is at a 13 year high.

Production cost and Demand-Supply situation

Most of the nations, for their oil need, are dependent on OPEC (an organisation of 13 oil exporting nations). For OPEC nations, the production cost of one barrel (1 barrel equals 158.9 litre) oil is around 15 to 20 dollars(Source: Business Today). In last one year, world oil consumption has increased from 85 million barrel per day to 86 million barrel per day. However, the oil production is stagnant at last year level of 85 million barrel per day.

Abnormal Oil price rise is due to speculation

Even though there is only 1.2 percent mismatch between demand and supply, the oil prices in last one year has doubled from about 70 dollar a barrel to 140 plus dollar a barrel. Clearly, this abnormal rise is not reflecting natural market forces of demand and supply.

This abnormal rise in oil prices is a result of very high level of speculation taking place in oil futures at NYMEX in New York and ICE Futures exchange in London. As per one estimate, speculators have taken huge positions of more than 12,000 billion dollars which is roughly seven times of world's annual oil bill of previous year(Source: The Economic Times). Since OPEC decides actual delivery prices on the basis of prevailing future prices, therefore, we (the oil consumers) are forced to pay an additional speculative premium. According to some experts, this premium is about 50 to 60 dollar per barrel.

The OPEC's inaction

World's top leaders including US President George Bush have requested OPEC to increase oil production and thereby check the price manipulation by speculators so that oil prices may come down and adjust to their natural level as guided by true demand-supply forces. However, OPEC is not interested in increasing oil production and thus leaving oil prices for manipulation by speculators.

Alternatively, Even without raising production OPEC can stabilize oil prices by completely disconnecting delivery prices from future market prices. If OPEC starts delivering oil at a fixed price for example @ 80 dollar a barrel, irrespective of future market prices, then even future prices will cool down immediately. However, by not taking a positive step, OPEC is indirectly supporting speculators.

Windfall gains to OPEC nations

In fact, OPEC has vested interest in high oil prices. At current price level of about 140 plus dollar a barrel, the OPEC nations will get 1,000 billion dollars extra, for same oil quantity, in current year compared to past year. And, this amount is equal to India's last year GDP i.e. the value of goods and services produced by 1100 million Indians in the whole year. And don't forget, India is world's tenth largest economy. In this manner, non OPEC world's wealth is quickly transferring to OPEC nations.