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Energy: Wheat for oil - Views on News from Equitymaster
 
 
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  • Jan 8, 2001

    Energy: Wheat for oil

    Energy prices have declined substantially (down 30%) from the ten-year highs touched in the second half of 2000. However, the firm prices did create fears of the oil import bill derailing macro-economic indicators. Consequently, the Government has attempted to undertake several remedial measures.

    To curb the ballooning oil pool deficit the Government announced a hike in fuel prices in August '00. More recently, the Government was in talks with the oil producing nations to help bring down the energy bill of the country.

    In December '00 the Indian Government requested for certain concessions in energy transactions from the Organisation of Petroleum Exporting Countries (OPEC). The petroleum ministry lobbied for a concessional pricing mechanism to assist developing countries overcome the oil price shock.

    Under the mechanism developing countries should be offered a credit period of 90 days to repay their energy bill against the current 30 day credit period. If prices of the natural resource rise above $25 / barrel developing countries should be offered a discount of 20% on the incremental rise above $25 / barrel. Further, should prices breach the $28 / barrel mark payment by developing countries for the incremental amount above $28 / barrel should be allowed on deferred basis of 3 years at Libor (London Inter-bank Offer Rate). In the case of crude prices declining below $22 / barrel the package should permit payment of the prevailing price along with the differential between actual price and $22 / barrel towards outstandings if any.

    In addition to price concessions the Government is also in talks with Iraq and the United Nations (U.N.) for chalking out a wheat for oil deal. Under the arrangement India will offer its wheat in exchange for oil from Iraq. The barter could allow the country to procure oil for as low as $ 7 / barrel. Further, the deal has an additional benefit for the country, as it will create an avenue for the excess wheat crop in the country. Currently, the country has a surplus of 40 m tonnes of wheat. The deal has been forwarded to the U.N. sanctions committee and is awaiting approval.

    Any success in these deals will help the Government to reign in the spiraling oil pool deficit. In fact, the lower prices could bring back the oil pool account into the black.

     

     

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