India-China oil buyer's group: All that you need to know

Do you know about Asian Premium? Asian Premium' is a discriminatory pricing policy adopted by OPEC due to which countries like China and India are forced to pay a higher price for their crude imports from OPEC. Recently, an idea of a 'buyer's group' consisting of the two countries has been in the news. This article tries to look at the proposed plan and why such a plan is the best way going forward.

Most of you must have heard about the OPEC or the Organisation of Petroleum Exporting Countries. This is a group led by Saudi Arabia and consisting of other leading oil exporters (both gulf and non-gulf countries) that together controls the world oil supply. OPEC has consistently acted as a cartel, often limiting world oil supply to artificially raise oil prices and thereby earn profits at the expense of the consuming countries like India and China.

To end the dominance of OPEC over the global oil market, India and China have recently come together in Joint-Secretary level talks to form a Joint Working Group. This group will think of ways to cooperate on energy-related matters, with the ultimate aim being to rein in oil prices. The final goal, at least from India's side, is to constitute a 'buyer's group' that would be able to control the oil market from the demand side. In other words, India and China in the future would be looking to coordinate their energy demands and thereby control prices.

Why a buyer's group?

One of the reasons why such a 'buyer's group' is needed has already been stated above. The need is to provide oil at affordable prices to the people of the two countries. Despite the efforts to replace oil with non-conventional fuels, oil still remains a major source of energy for these two countries. Therefore, if India and China can come together to bargain for better prices then it would doubtless be welcomed by all.

But another reason why a 'buyer's group' is a necessity is the so-called 'Asian Premium'. This refers to the higher price that Asian countries have to pay for the crude oil which they buy from the OPEC countries. The 'Asian Premium' originated during the late 1980s when Saudi-led OPEC announced its policy to supply oil to USA and EU countries at a lower price. To recover that, they began to charge a premium on oil bought by Asian countries. The ostensible reason given by OPEC was that Asian countries were not as reliable as buyers (that is, their demand was not constant). Their demand for oil wasn't very great during that period. Therefore, back then, China and India couldn't argue against the 'Asian Premium'. But constituting a buyer's group can help in putting added pressure on OPEC to discontinue this blatant discrimination. Anyway, the reason which was originally given for the higher price is no longer there. China and India are, as of now, two of the biggest importers of OPEC oil.

Failures in the past

The present discussions have been begun after Minister of Petroleum and Natural Gas, Dharmendra Pradhan floated the idea in last year's International Energy Forum in April. However, the idea of a 'buyer's group' is not new at all. It first came into focus during Mani Shankar Aiyar's tenure as minister in 2005. Back then, unfortunately, China didn't show any kind of interest in the plan (although we were able to get Japan on board) and the proposal ended then and there. There was also an attempt made during the tenure of Veerappa Moily but this too ended in failure.

The reasons for the failure of these two previous attempts are not very hard to guess. Considering the trust deficit which has historically existed between the two countries, they are very less likely to cooperate on issues such as these. Also, the market dynamics of India and China's oil imports are considerably different. In that case, we have to wait and see what kind of common procurement policies these two countries can formulate. The agreement of pre-decided prices may also lead to situations where the gains which could have been made from spot market prices would be lost (spot market price = price currently prevailing in the market). To prevent this, an extremely complex series of negotiations might have to be undertaken.

Regardless of this, a 'buyer's group' may be the best move going forward. This is because, although India and China have been making big strides in the promotion of electric vehicles and renewable sources of energy, these steps will need at least a couple of decades before oil can be fully replaced. At the moment at least, our need is for cheaper oil.

However, like all diplomatic initiatives, this might also take a considerable period of time. Remember, the idea was floated in April 2018. Till now, only a Joint Working Group has been constituted. We might have to wait for at least four more years before the idea materializes (fingers crossed, we might break the jinx this time!).

Closing remarks

There is at least one reason why the OPEC might be willing to accommodate the demand to scrap the Asian Premium this time around. This is because, as already stated, both India and China currently are the biggest importers of oil from OPEC. Also, apart from OPEC, we have got other options as well, including the USA, which has recently become an oil supplier from an oil importer. The availability of a diversified market in front of India and China may well bring OPEC to the negotiating table sooner than the 'buyer's group' idea.

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