Experts contest price band for crude oil

Prices are determined by supply and demand. So why is the finance minister trying to go against the market logic by proposing an impractical price band for crude oil? That is the predominant view of oil industry veterans and government officials associated with the sector.

"I don't think it will be feasible. Prices are not determined like this," according to a senior oil industry official, who did not want to be named.

In today's markets, it would be naive to expect oil consumers to opt for a price, when even the producers are not controlling prices. The handle of price is clearly in the hands of speculators and traders.

"Traders rather than producers have controlled the market. Decomposing the scientific oil price forecasts, speculative rebound is the largest component," said associate director at PricewaterhouseCoopers, Deepak Mahurkar.

Producers are also facing higher costs. In fact, middle of the pyramid companies are not earning higher returns today, than in 2000, when the WTI averaged $30 per barrel.

"A price band seems to be wishful thinking in this scenario," an industry official said.

The oil producers know that they are in a sellers' market and are in a position to command prices, since there is no serious substitute for crude oil. Why would they accept lower prices, asked a sector consultant.

Similar "not possible" sentiments echoed in the corridors of the petroleum ministry.

"The suggestion of a price band for global crude is not practical," said a senior official. According to the official, six years back (in 2000), the Organisation of Petroleum Exporting Countries (Opec) had attempted to control crude prices between $22 to $28 per barrel. However, that band was never realised.

But the economists were excited. "It is a proposal worth debating," said energy economist and principal adviser to CII, V Raghuraman.

"If it curbs price volatility, I think all countries will be looking at it with some interest," he said.

Controlling prices within a band though would be a very complex mechanism which would involve getting the band right, as well as its breadth.

It would need heightened co-operation between oil exporting countries and oil importing ones. And there is no visibility on how such a band would accommodate a hurricane Katrina or Rita?