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Boiling Oil Prices Vs Buyers Cartel

Imagine a commodity, a single thing, that can boast to change the face of entire world?s economy. Yes, it is unquestionably the crude oil and the prices of the oil. The days are not far when this crude oil would be traded at unbelievable prices. It is also believed that the law of demand and supply does not drive the present price rise. The traders of oil have played their role, too. In any case, when the graph of oil price has dashed so Northward in post-Iraq war, it has become fatal to the economies of many developing countries. Much debated sanctions by US against Iran would add fuel to the fire. It would push the prices still onward, if no amicable solution of the Iranian issue is forthcoming.

Unequivocally the oil is backbone of every economy, especially the emerging economies. The spade-like prices of oil are quite efficient in breaking the backbone of any developing country. The fast running trains of the countries like India, China and Brazil could be derailed. It could slowdown the pace of global economy, too.

Here it would be necessary to know about the vagaries of crude oil. It is natural law that whenever any wealth is found below the earth, in the mines or from the wells of petrol, that country gets an absolute right to charge the other countries for using that wealth. In pure economic terms such a charge is cold ?Rent?. This rent may be higher in certain commodities having more demand and less supply. Agreed. But in the case of the liquid gold, the oil it is not absolutely so. Though the demand for oil is increasing day by day, its supply can be arranged to match the demand just by increasing the extraction of the oil from the wells. But there are exporters and importers countries, as the oil deposits are concentrated in certain areas. In fact the cost of extracting the oil is too low in comparison to its sale prices that are quoted in market. And through the co-ordinated manipulation of the oil supply, too, the seller companies have virtually taken the importer countries in ban.

For the smaller nations, to oppose the oil exporter?s monopolistic behaviour is just like to dig a well with a needle. If the major users of oil come together to fight the price-rise of oil, then there are chances of checking the prices. Even that might be dragged downward. Take the case of Asian buyers. There are four major buyers: China, Japan, India and South Korea. Today India imports two third of its total needs and China imports 40% that could be increased considerably in near future. If these Asian countries collaborate, they can influence the Arab nations on oil price matters. For countering the ill effects of the price rise, these countries can form a buyers? cartel for purchasing oil from the exporter countries.

WHY THE OIL PRICES ARE RISING AT ALL

Do you know why the prices of oil are rising? There are factors; all the factors are man-made. The crisis or Iraq and now the probable crisis of Iran have played a pivotal role. But it is not the case that this inflammable commodity is a rare one. Its production can be increased to meet the demand for the same. It is the present unrest in Middle East that helps the price rise. And all the oil companies, mainly owned by USA and other western countries, have vested interest in oil prices. The Arab countries are more than happy to see their Dollar account balances inflating with unbelievable speed.

The Arab nations should understand that by charging abnormal prices for their natural wealth, the oil, they are behaving antagonistically towards the whole world. But today the importing countries have no alternative except to abide by the rules of the play the big oil companies and the oil exporting countries play. Under these circumstances the formation of buyers? cartel can be an effective tool to fight this hostile situation.

WHAT IS THE BUYERS? CARTEL?

Cartel is a formal agreement among the members of the group forming it. Under the arrangement of cartel, the members decide to act cooperatively in the matters of sale and purchase of a particular commodity. They agree on volume of its stock and level of production of a particular commodity. Formerly such cartels were formed by the producers who wanted to create ?near the monopoly? situation in respect of the goods they produced.

Now there has emerged the concept of the buyers? cartels, too. This is an arrangement resembling the Group Purchasing Organizations functioning in USA and in some other countries. In today?s competitive world, each nation has to defend its own wicket. If the countries like China and India form a buyers? cartel for crude oil, they would quote the prices to the exporters collectively. The exporters will have to accept or decline the prices referred by the cartel.

Under this arrangement the cartel members would jointly quote the prices on give-it-or-live-it basis. While doing so the buyers will have to be ready to face the exporters? certain ?no? at the outset. But in the case of crude it is not so easy for the exporters. The big buyer like China, India and Japan, if come together they can force the oil exporter countries to lower the prices, as these are the buyers who lift the major portion of the oil supply.

THE EFFECTS OF BUYERS' CARTEL

Under these circumstances the cartel members will have to be ready to face initial supply problem. The exporter would initially react in negative, as the cartel is targeted against their interests. Most of the big buyers will have to think sooner or later in this direction. Sooner would be better. The rising oil prices would add fuel to the fire of inflation. And inflation could change all the statistics of planning of the government; it can affect all the social spending adversely, resulting in the lesser welfare of the citizens. Today only India is dong better in the sphere of inflation, keeping it as low as 3.5%. In China it is bubbling at more than 6%.

If the buyers? cartel for oil comes into existence, it can be either institutionalise or can be operated through the representatives from the member countries. If big oil importer countries become members, such an arrangement can create major changes in the oil market and the prices.

Firstly, it can affect the bilateral trade between the member nations and the oil exporter nations. But there is nothing wrong in doing what is necessary for safeguarding one?s own interest.

Secondly the major oil producers would possibly cut the production. They can do so for a short period. It could create artificial shortages of the oil supply, forcing the cartel members for coming to the terms. The importer members can counter this problem through various ways and means. They can cut the existing consumption up to a rational level. In addition, if possible they would try to find out alternative sources of energy. China and India have the benefit of an alternative. They can use their coal resources for the generation of electricity. This could decrease the demand for oil substantially, as the electricity generating plants consume the better portion of the oil imported.

It may happen that the trucks and cars would be in queues at the petrol pumps for refilling their empty fuel tanks. It may happen that some of the private vehicles would be off the roads, for economy of due to shortage of the fuel. But this would not hurt the economy if not prolonged for a couple of months.

The third and final effect could be a good sign for the cartel members. The oil exporters cannot act against the union of the importers, the cartel, for long. They would realise the risk of being isolated in the world economy. And the major oil exporting countries import most of the goods to meet their domestic needs. They cannot go without the foreign trade going on. They will have to come on the table for deciding a mutual level of oil prices. Here the cartel members can call the shots of their own.

The article sent is original one, and I am not connected with any person or company attached with publishing business. I write the articles using what I have read in various newspapers and websites freely available to the public.

Apart from doing literary writing-I'm a writer, a novelist-I try to see how a particular event would and could affect people living in its immediate surround.

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