India, China join hands to set up oil buyers club

With Opec initiated production cuts playing havoc with oil prices, India has decided to break the dominance of the oil cartel by forging a strategic alliance with China to set up an ‘oil buyers club.’ The grouping would get a better bargaining power to negotiate better terms with sellers. India and China are among the largest economies in the world and the two are also the biggest importers of oil. With the two countries joining hands, oil market could quickly turn from sellers market to buyers market.

After maintaining a steady decline in 2015-16, oil prices have begun to rise since the middle of the last year and the increase has picked up pace in the last couple of months. Crude oil price has surged by almost $10 to $80 per barrel in the last one-and-a-half months. In fact, with international oil prices hitting a four-year high last month, retail price of petrol and diesel in India increased by up to Rs 4 per litre.

The idea for ‘oil buyers club’ was floated by petroleum and natural gas minister Dharmendra Pradhan at the International Energy Forum (IEF) held at New Delhi in April.
To take the process forward, Indian Oil Corporation (IOC) chairman Sanjiv Singh travelled to Beijing early this month to meet Wang Yilin, chairman of China National Petroleum Corporation (CNPC), sources privy to the development said.

Among the set of ideas behind the proposed buyers club is getting additional quantities of US crude to Asia to keep the oil cartel under pressure and prevent it from taking decisions that could impact volatility in the oil market and take prices up. The Organisation of Petroleum Exporting Countries (Opec) is the largest supplier of crude oil to India and accounts for 60 per cent of the country’s oil needs.

The development has come at a time when even the US has expressed its unease over Opec’s attempts to keep oil prices high by capping its production. “Oil prices are too high, Opec is at it again. Not good!” US president Donald Trump tweeted.

The plan is to bring in other major Asian oil buyers such as Korea and Japan into the club so that their united voice is heard louder by the suppliers who continue to charge a premium on crude oil supplies into Asia.

India is the world’s third-largest oil importer after China and the US. Japan is the fourth largest importer and South Korea is right behind it. The four nations account for over a third of the oil imports in the world.

At the IEF meeting, India and China agreed to join hands to have a collective bargaining power against cartelisation of oil producers. Singh’s visit was to take this forward with concrete proposals for cooperation, sources said.

So far, India has not been able to bargain better rates from the west Asia-based producers of the oil cartel Opec. Instead of getting a discount for bulk purchases, producers such as Saudi Arabia, charge a so-called ‘Asian Premium’ for shipments to Asian buyers, including India and Japan, as opposed to Europe.

According to expert estimates, the Asian Premium annually costs somewhere around $5-10 billion for Asian importers.

The idea for a buyers club is not new.  In fact, this is India’s third attempt to unite major Asian energy importers to beat the producers’ cartel.

In 2005, the then oil minister Mani Shankar Aiyar had hosted two ministerial roundtables to impress upon the need for a reasonable oil pricing and getting rid of discriminatory Asian Premium — the first involved major Asian consumers such as China, Japan and South Korea and the other roped in alternative oil producers of North and Central Asia.

Aiyar proposed a common front on oil to China’s National Development and Reforms Commission vice-chairman Zhang Xiaoqing. That proposal resulted in a memorandum of understanding in 2006 but it was lost in the complexities of bilateral ties.

Another attempt for joint energy sourcing with Japan was made towards the end of the UPA government when Veerappa Moily was the oil minister. It, too, failed to see the light of day.

At the 16th IEF ministerial meet in April this year, India and China, which together accounted for 17 per cent of world oil consumption last year, agreed to look for ways to leverage the combined size of their imports for a better bargain from West Asian crude producers.

By 2023, oil demand will hit 104.7 million barrels per day, up 6.9 million bpd in 2017, according to the International Energy Agency. “As has been the case for some years, China and India together will contribute nearly 50 per cent of global oil demand,” the agency had said in a report.