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INDIAN STRATEGYTODEAL WITHOPEC

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Contents

EXECUTIVE SUMMARY

OPEC – The Organization

OPEC – History

THE WORLD CRUDE SCENARIO

AVAILABILITY AND CONSUMPTION PATTERN

THE OPEC FACTOR

WHY ARE PRICES RISING

THE INDIAN SCENARIO & ITS STRATEGY

FUTURE ROAD MAP

REFERENCE

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Executive Summary

The history of OPEC and formative years are described. OPEC has evolved as a cartel with immense influence on World economy and this has

happened over a period of time mainly through the moves and countermoves between OPEC and rest of the world led by the US. Some of the

main reasons behind the success of OPEC are that the economies of its member countries are largely dependent on oil and high prices mean

prosperity, also religion plays a major role many of these countries are Islamic as well as Geo-Political factors such as regional protectionism and

fear of supremacy of the US if they fail to stay united keeps OPEC remain strong.

The reasons behind the immense clout of OPEC are explored by taking a holistic view of world supply and demand of oil, the geo-political

factors, roles of speculators and the US as the largest consumer of oil. It is interesting to note that most of the oil refining capacity is in the Non-

OPEC countries of the world while OPEC countries have majority of oil reserves.

The recent third oil shock situation is analyzed from the perspective of the accuser and the accused i.e. rest of the world vs. OPEC. While OPEC

has maintained that main culprits for soaring oil prices are a weakening in dollar prices and excessive buying by speculators, rest of the world led

by the US has put pressure on the cartel to increase production of oil to curb the rising prices. More recently price of oil has started coming

down due to adoption of a multi pronged strategy by the US and other Non-OPEC countries. Diplomatic pressures forced Saudi Arabia, the

largest producer of oil among the OPEC countries to increase oil production and a conscious move by the American people to cut consumption

of oil and wide publicity of falling demand for oil and threat of an imminent attack on Iran by the US, led OPEC to rethink its strategy. Also

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forecast of a moderate winter in the US and Europe gave an indication that the demand for oil/gas is not going to increase at any time in the

near future. All these factors led to a decrease in the oil prices.

India and China among other emerging economies are among the most affected countries by rising oil prices as high growth rates mean higher

consumption of energy resources and soaring oil prices increase these countries vulnerability by adversely affecting their BOP accounts as they

rely mainly on imports of oil to meet their oil demands. While the US and other developed economies are growing at a rate of 1%-2% these

countries are growing at a rate of 8%-10% so they are more vulnerable to any oil shocks. The demand for oil in these countries is fuelled not only

by increased industrial activity but also due to emergence of a newly affluent middle class with ever increasing dependence on personal

automobiles as well as absence of good public transport system. India also adopted a multi-pronged strategy to deal with OPEC by using its good

diplomatic relations with Saudi Arabia influenced their decision to increase production and exercising other options available.

As the recent examples show the cartel is vulnerable on many accounts like lack of unity among its member countries, awareness and increasing

activism among public, concern for environment and extinction of world oil reserves, emergence and increasing demand for non-conventional

energy sources etc. If the public opinion swings against OPEC and they start perceiving it as a villain who is holding the world at ransom just to

earn more profits then OPEC stands to face its biggest challenge ever because in the US the excessive demand is more of a hedonistic nature

than of a necessity and the same trend to a smaller extent is emerging in the rapidly developing countries such as India and China. The demand

for battery operated vehicles soared as a consequences of soaring oil prices and if world shifts to non-conventional options available then it

would have a lasting impact on the demand for oil and the monopoly of OPEC.

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OPEC – The Organization

The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization, currently consisting of 13 oil

producing and exporting countries, spread across three continents America, Asia and Africa. The members are Algeria, Angola, Ecuador,

Indonesia, the Islamic Republic of Iran, Iraq, Kuwait, the Socialist People’s Libyan Arab Jamahiriya, Nigeria, Qatar, Saudi Arabia, United Arab

Emirates & Venezuela.

These countries have a total population of about 585 million and for nearly all of them, oil is the main marketable commodity and foreign

exchange earner. Thus, for these countries, oil is the vital key to development – economic, social and political. Their oil revenues are used not

only to expand their economic and industrial base, but also to provide their people with jobs, education, health care and a decent standard of

living.

The organization’s principal objectives are:

1. To co-ordinate and unify the petroleum policies of the Member Countries and to determine the best means for safeguarding their individual

and collective interests;

2. To seek ways and means of ensuring the stabilization of prices in international oil markets, with a view to eliminating harmful and unnecessary

fluctuations; and

3. To provide an efficient economic and regular supply of petroleum to consuming nations and a fair return on capital to those investing in the

petroleum industry.

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OPEC can be considered a trade organization with precedents in numerous industries, but in practice it operates as a cartel. It isn’t

alone:

• De Beers is a diamond cartel composed of a number of different companies involved in mining diamonds. Collectively, they control

40% of the world’s diamond production.

• The MPAA (Motion Picture Association of America) is a ‘trade organization’ that protects and advocates the interests of major

movie studios.

• The RIAA (Recording Industry Association of America) is another ‘trade organization’ whose member businesses distribute about

90% of the recorded music sold in the US.

The latter two have faced chronic accusations of monopolizing their markets, of anti-competition and price-fixing—in short, of

collusion in an effort to control a market and eliminate their competition, all hallmarks of cartels.

In the following pages we’ll look at the OPEC history, its formation and rise to power, anti-competition accusations against it, the

curious legal status it enjoys in the US, and some of the effects it has had, both temporary and long-term.

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OPEC – HISTORY

1960 - founded by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela

1965 - Moves from Switzerland to new headquarters in Vienna, Austria

1973 - Opec embargo causes oil price shock

1990 - Iraq's anger at Kuwaiti over-production sparks Gulf War

1998 - World oil price drops to $10 a barrel

2000 - Opec introduces $22-$28 a barrel price band

2005- Price band abandoned

2008- Indonesia decides to leave Opec

The 1960s

These were OPEC’s formative years, with the Organization, which had started life as a group of five oil-producing, developing

countries, seeking to assert its Member Countries’ legitimate rights in an international oil market dominated by the ‘Seven Sisters’

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multinational companies. Activities were generally of a low-profile nature, as OPEC set out its objectives, established its Secretariat,

which moved from Geneva to Vienna in 1965, adopted resolutions and engaged in negotiations with the companies. Membership

grew to ten during the decade.

The 1970s

OPEC rose to international prominence during this decade, as its Member Countries took control of their domestic petroleum

industries and acquired a major say in the pricing of crude oil on world markets. There were two oil pricing crises, triggered by the

Arab oil embargo in 1973 and the outbreak of the Iranian Revolution in 1979, but fed by fundamental imbalances in the market;

both resulted in oil prices rising steeply. The first Summit of OPEC Sovereigns and Heads of State was held in Algiers in March 1975.

OPEC acquired its 11th Member, Nigeria, in 1971.

The 1980s

Prices peaked at the beginning of the decade, before beginning a dramatic decline, which culminated in a collapse in 1986 — the

third oil pricing crisis. Prices rallied in the final years of the decade, without approaching the high levels of the early-1980s, as

awareness grew of the need for joint action among oil producers if market stability with reasonable prices was to be achieved in the

future. Environmental issues began to appear on the international agenda.

The 1990s

A fourth pricing crisis was averted at the beginning of the decade, on the outbreak of hostilities in the Middle East, when a sudden

steep rise in prices on panic-stricken markets was moderated by output increases from OPEC Members. Prices then remained

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relatively stable until 1998, when there was a collapse, in the wake of the economic downturn in South-East Asia. Collective action

by OPEC and some leading non-OPEC producers brought about a recovery. As the decade ended, there was a spate of mega-mergers

among the major international oil companies in an industry that was experiencing major technological advances. For most of the

1990s, the ongoing international climate change negotiations threatened heavy decreases in future oil demand.

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THE WORLD CRUDE SCENARIO

World crude oil demand grew an average of 1.76% per year from 1994 to 2006, with a high of 3.4% in 2003-2004. Demand growth is highest in

the developing world. World demand for oil is projected to increase 37% over 2006 levels by 2030, according to the U.S.-based Energy

Information Administration's (EIA) annual report. Demand is projected to reach 118 million barrels per day (18.8×106 m3/d) from 2006's

86 million barrels (13.7×106 m3), driven in large part by the transportation sector.

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International Petroleum Supply and Consumption

2007 2008 2007 2008Supply Supply Demand Demand(million barrels per day) (million barrels per day) (million barrels per day) (million barrels per day)

OECDb 21.42 21.13 48.94 48.46U.S. (50 States) 8.49 8.7 20.7 20.3Canada 3.36 3.43 0.32 0.29Mexico 3.5 3.19 2.33 2.34North Seac 4.54 4.19 15.28 15.21Other OECD 1.53 1.62 4.97 4.97Non-OECD 63.14 65.35 5.34 5.36OPECd 35.42 37.1 36.6 37.94Crude Oil Portion 30.9 32.32 4.28 4.41Other Liquids 4.52 4.78 0.79 0.8Former Soviet Unione 12.61 12.78 7.58 8.02China 3.9 3.92 8.78 8.83Other Non-OECD 11.21 11.55 15.17 15.88Total World Production 84.56 86.48 85.54 86.4

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As countries develop, industry, rapid urbanization and higher living standards drive up energy use, most often of oil. Thriving

economies such as China and India are quickly becoming large oil consumers. China has seen oil consumption grow by 8% yearly

since 2002, doubling from 1996-2006, indicating a doubling rate of less than 10 years. A 2008 report from the IEA predicted that the

observed drops in demand from developed countries would continue due to high prices, but that a 3.7 percent rise in demand by

2013 in developing countries would cause a net rise in global petroleum demand.

The sector that generally sees the highest annual growth in petroleum demand is transportation, in the form of new demand for

personal-use vehicles powered by internal combustion engines. Cars and trucks will cause almost 75% of the increase in oil

consumption by India and China between 2001 and 2025. As more countries develop, the demand for oil will increase further. This

sector also has the highest consumption rates, accounting for approximately 68.9% of the oil used in the United States in 2006, and

55% of oil use worldwide as documented in the Hirsch report. In 2008, auto sales in China were expected to grow by as much as 15-

20 percent, resulting in part from economic growth rates of over 10 percent for 5 years in a row.

Another large factor on petroleum demand has been human population growth. Because world population grew faster than oil

production, production per capita peaked in 1979 (preceded by a plateau during the period of 1973-1979). [31] The world’s population

in 2030 is expected to be double that of 1980.

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The world's oil supply comes from a wide variety of sources. While the Middle East (home to the largest OPEC producers) was the

largest producing region in 2004, with 29 percent of total world production, North America accounted for 19 percent, with the

remaining 52 percent dispersed fairly evenly throughout the globe. OPEC member countries together accounted for about 40

percent of world total oil production in 2004, up from 38 percent in 2003.

Of the 14 countries that produced more than 2 million bbl/d of total liquids in 2004, seven were OPEC members. The remaining

seven were not OPEC members, including: the United States (the world's third-largest total oil producer for the year); Russia;

Mexico; China; Canada; and North Sea countries Norway and the United Kingdom. It should be noted that the United States' total

liquids production is boosted by the very large refinery gain that occurs there - over one million bbl/d in 2004.

Of the world's top net oil exporters, OPEC countries are strongly represented. Ten of the 14 countries exporting more than one

million barrels per day of total oil (net) in 2004 were OPEC members. Russia, Norway, Mexico, and Kazakhstan are the world's largest

non-OPEC net oil exporters. The United States is the world's largest net oil importer. China is also a net oil importer, while Canada

and the United Kingdom are smaller net oil exporters. (Note: EIA does not have 2004 data for worldwide gross oil exports, and

computes net oil exports from production and consumption data.)

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Top World Oil Producers and Oil Net Exporters 2004 Tables

Non-OPEC oil production is expected to rise during the next 2 years, though not enough to keep pace with total world oil demand

growth. The greatest increases are expected in the former Soviet Union (FSU), including Russia (though less growth from Russia than

in the previous two years) and the states bordering the Caspian Sea, and in other non-OECD producers, particularly Angola and

Brazil. Brazil is expected to become a net exporter sometime in the next two years. (view a table of world production data).

PRODUCTION COORDINATION WITH OPEC?

A few non-OPEC countries that share some traits of OPEC countries sometimes have indicated that they would coordinate

production policies with OPEC (though they have not always actually carried out these policies). While the stated volumes of non-

OPEC production (or export) restrictions have usually been small, the participation of these non-member countries can make

member countries more likely to maintain their own output restriction policies. Therefore, non-OPEC coordination with OPEC often

has carried a significance beyond what the output data might imply. It should be noted that the absence of low oil prices since early

2002 have meant that non-OPEC producers have seen little reason to restrain output of late - there has been no explicit cooperation

with OPEC to cut production and/or exports since 2002. Mexico, Norway, Russia, Oman, and Angola have announced intentions to

cut production or exports in the past, but it is extremely unlikely that any of them would do this in the current price environment.

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Indeed, on June 16, 2005, oil ministers of Mexico and Norway announced that they have no spare capacity and asserted that all of

the world’s spare capacity that might remain lies in OPEC countries.

Of the estimated preliminary 82.5 million bbl/d of oil the world consumed in 2004, OPEC countries together consumed about 7

million bbl/d, or 8.5 percent of total consumption. Most of the world's largest oil consumers are also net oil importers. Of the

world's top ten oil consumers in 2004, only Russia and Canada were net oil exporters. The remaining top consumers also are listed

as the world's largest oil importers, with the exception Brazil, which was the 18th largest net oil importer in 2004.

Top World Oil Consumers and Oil Net Importers 2004 Tables

PROVEN CRUDE OIL RESERVES

It is generally agreed that the location of proven world crude oil reserves is far more concentrated in OPEC countries than current

world oil production. Note that estimates of reserves vary; EIA does not assess oil reserves, but does list several independent

estimates here. According to one independent estimate (Oil and Gas Journal), of the world's 1.28 trillion barrels of proven reserves,

885 billion barrels (69 percent) are held by OPEC, as of January 2005. The non-OPEC reserves include Canadian non-conventional

reserves. Not including Canada, according to this estimate the world's proven oil reserves are about 1.1 trillion barrels, of which

OPEC holds 84 percent. In the future, the inclusion of non-conventional oil reserves for other countries may also significantly impact

OPEC member Venezuela, as well as non-OPEC countries such as Australia. Non-conventional reserves are generally more expensive

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to produce than conventional crude oil reserves and may require special facilities and technologies. Because non-OPEC countries'

smaller reserves are being depleted more rapidly than OPEC reserves, their overall reserves-to-production ratio -- an indicator of

how long proven reserves would last at current production rates -- is much lower (about 26 years for non-OPEC and 83 years for

OPEC, based on 2004 crude oil production rates). This implies increased OPEC production as a proportion of world production over

the long term.

REFINED PRODUCTS

As of January 2005, 89 percent (73.4 million bbl/d) of the

world's 82.4 million bbl/d of crude oil refinery capacity was

located in non-OPEC countries. Countries with high petroleum

demand tend to have large refinery capacities. The United

States has far more refinery capacity than any other country,

with 149 of the world's 691 refineries, and a crude oil refinery

capacity of about 16.9 million bbl/d (not including territories).

Russia's refinery capacity stands at an estimated 5.4 million

bbl/d. Japan (4.7 million bbl/d) and China (4.6 million bbl/d)

are the only remaining countries with refinery capacities

exceeding 3 million bbl/d.

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There are several countries that are important to world trade in refined petroleum products despite very low (or non-existent) levels

of crude oil production. For instance, Caribbean nations (including U.S. and European territories) have very limited oil production

(233,000 bbl/d in 2004), but refinery capacity of about 1.7 million bbl/d. Much of this refined product is exported to the United

States. Other countries that are important sources of refined petroleum products yet have very limited domestic production include

the Netherlands, South Korea, and Singapore.

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THE OPEC FACTOR

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The Middle East remains the biggest player in oil.

The region dwarfs the rest of the world, when it comes to reserves, ensuring its prominence on the global political stage. Saudi

Arabia alone possesses 21.9% of the world's proved reserves.

The North Sea and Canada still have substantial reserves.

No-one knows how long the world's oil reserves will last, but even the oil industry suspects the world "peak" is now approaching.

It says it has 40 years of proven reserves at the moment - but it also said that 30 years ago.

In fact, the estimate has actually increased in recent years as production has fallen. Cutting consumption would prolong oil's life.

OPEC Strategies

The Organisation of Petroleum Exporting Countries (Opec) is an association of oil-producing nations set up in 1960 with the express

purpose of influencing oil prices by controlling supply. Things have changed a great deal for the cartel in recent years.

In 2000, it adopted a price band of between $22 and $28 a barrel, levels a world away from current prices. If the price went below

$22 a barrel, production quotas would be cut. If it went above $28 a barrel, production would be raised.

Opec abandoned the price band in 2005 and now has no official price target. When its members meet, they try to co-ordinate future

production with their predictions for demand.

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Financial sector

While there have been increases in production recently, the price of oil has continued to soar. Opec's official position is that there is

plenty of supply in the market. It says rising prices are the fault of investors in the financial sector, who are buying oil contracts in

order to sell them on without ever planning to take delivery. Clearly there are limits to the amount production can be raised, and

Opec also sees dangers in increasing supply further.

They feel that producers fear that the financial sector will decide that there is over-supply in the market and move into other

investments. If there is a sudden change in sentiment like that, then the price could collapse.

That problem is exacerbated by the time delays in the system.

If producers in the Gulf, for example, decide to increase production, it will be about three months before any extra oil reaches the

market.

If the announcement of extra production caused a big fall in prices, then the extra oil actually hitting the market three months later

would exacerbate the problem and the members of Opec have a great deal at stake.

Uniquely vulnerable

Many of the oil-rich states are rich in very little else. Crude oil is their only export, making them uniquely vulnerable to world oil

prices. When prices fell to $10 a barrel in 1998, their economies were hit hard.

The one thing the Opec countries all have in common is their absolute reliance on one product - oil.

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The Opec countries cannot afford to treat oil "as just another commodity".

On the other hand, when Opec members decided to stop supplying oil to countries they said were supporting Israel in the Yom

Kippur War of 1973, a great deal of damage was done to the economies of the targeted countries.

Besides supply concerns, many other issues have also had some effect on oil prices. Labour strikes, hurricane threats to oil platforms,

fires and terrorist threats at refineries, and other short-lived problems are not solely responsible for the higher prices. Such

problems do push prices higher temporarily, but have not historically been fundamental to long-term price increases

2003

The U.S.-led 2003 invasion of Iraq was a significant event for oil markets because of Iraq's large oil reserves. The price of oil rose in

the months running up to the invasion in March. Prices dropped in mid-2003, and several observers attributed this to the perception

that the armed conflict would come to a quick resolution. The conflict coincided with an increase in global demand for petroleum,

but it also reduced Iraq's current oil production, and has commonly been blamed in part for oil price increases since. However,

peakniks such as Matthew Simmons tend to emphasize the simultaneous peaking and decline of many present or former oil-

exporting countries[ around the world, such as Mexico, Indonesia, and the U.K. for the overall upward price trend of oil, contending

that the combination of relentlessly rising global demand and peaking or eventually declining supply means the price must

eventually go up. According to Simmons, isolated events such as the Iraq war affect short-term prices but by themselves do not

determine the long-term trend. Simmons cites the use of enhanced oil recovery techniques in large fields such as Mexico's Cantarell,

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which maintained production for a few years, but only made the eventual decline all the more drastic. Pumping oil out of Iraq faster

may reduce petroleum prices in the short term, but cannot keep the price low forever. From Simmons' point of view, then, the

invasion of Iraq happened to be a major event that we can associate with the start of the long-term oil price rise, but at most this

merely shifted the schedule ahead a few years, and may actually mitigate the inevitable decline in oil production by keeping some of

Iraq's oil in reserve.

2004

As a direct consequence of the Iraq War that followed the 2003 Invasion of Iraq, the oil production capacity of Iraq was cut from

more than three to two million barrels per day.

Overnight gasoline price hike shown at a United States Chicago area BP station (background) on August 12, 2005. The Shell station

(foreground) had not yet posted the 12 U.S. cent price increase.

After retreating for several months in late 2004 and early 2005, crude oil prices rose to new highs in March 2005. The price on

NYMEX has been above USD 50 per barrel since March 5, 2005. On March 16, 2005, the price surpassed the October 2004 high of

USD 55.17 to close at USD 56.46. In April 2005 the price began to fall, reaching USD 53.32 on April 9. It then reversed course and

headed to an all time high of USD 58.28, driven mainly by lingering concerns of a prolonged weak dollar. In June 2005 crude oil

prices broke the psychological barrier of USD 60.

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2005–2006 increases

In the United States gasoline prices reached a record high during the first week of September 2005 in the aftermath of Hurricane

Katrina. The average retail price was nearly USD 3.04 per U.S. gallon. The previous high was USD 1.42 per gallon in March 1981,

which would be USD 3.20 per U.S. gallon after adjustment for inflation. In comparison, the average retail price of a litre of petrol in

the United Kingdom was 86.4p on 19 October 2006. This equates to USD 6.13 per U.S. gallon.

On January 17, 2006 crude oil for February delivery rose by USD 2.38 (3.7%) to USD 66.30 a barrel. This was the highest increase

since early October 2005. Observers believe that violence in Nigeria, and the increasing tension between USA and Iran are

responsible for this price increase. Continued tension between Iran and USA raised the price to USD 68.38 on January 31. However,

due to rising stockpiles of crude oil and an abnormally warm northern winter, on February 14 the price of crude hit a 2006 low of

USD 59.60.

Oil production in Iraq continued to decline as result of the ongoing conflict, decreasing to an output of just 1 million barrels per day

(160,000 m³/d).

Mid-2006 increase

July 2006, San Francisco, California

Regular gasoline prices were averaging USD 3.036 per U.S. gallon across the U.S. in August, 2006, slightly below the post-Katrina

peak of USD 3.057. Adjusted for inflation, these U.S. prices were the highest in 25 years. The all-time U.S. inflation-adjusted record is

approximately USD 3.20 per U.S. gallon, set in March 1981.

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In July 2006, crude oil for August delivery traded over USD 79 per barrel (bbl), an all-time record. The mid-2006 runup is attributable

to increasing gasoline consumption, up 1.9% year over year in the U.S., and geopolitical tensions as North Korea launched missiles,

the tension between Iran and USA drags on, and Israel and Lebanon went to war. The early 2006 runup in prices has been attributed

to a number of factors, including continuing supply disruptions from the 2005 Atlantic hurricane season (18% of Gulf Coast supplies

were still off-line in early 2006), supply disruptions from the changeover from MTBE to ethanol, lingering concerns over Iran and

Nigeria, and anticipation of higher summer demand in the Northern Hemisphere. Hostilities in Nigeria alone have caused a supply

disruption of 675,000 bbl per day. On August 7, BP shut down its Prudhoe Bay, Alaska field due to pipeline corrosion, bringing supply

down by up to 400,000 bbl/day or about 8% of total U.S. production.

The higher price of oil substantially cut growth of world oil demand in 2006, including an outright reduction in the oil demand of the

OECD.

September 2006 decreases

Oil prices began to decrease during September 2006, closing below US$66/barrel on September 11. The U.S. national average gas

price dropped to US$2.70/gallon in early September, down US$0.11 from the previous week. Some cities were seeing average prices

below US$2.40/gallon.

In September, prices continued to fall, and the average cost of gasoline per gallon (U.S. nationwide) was below US$2.50. On

September 19, crude oil fell US$2.14 to a 6-month low of US$61.66. The recent significant fall in the price of crude oil has led some

to speculate that price of gasoline may fall to as low as $1.15/gallon. By October 3, the price closed at US$58.68, its lowest close

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since mid-February. Reasons for the recent price decreases have included easing tensions with Iran, ample supply and the lack of

hurricane activity in oil-producing regions of the Gulf of Mexico After news of North Korea's successful nuclear test on October 9,

2006, oil prices rose past $60 a barrel, but fell back the next day. Also, for several days in early October, oil prices bounced around

the $60 mark on possible news that some OPEC countries would cut oil production by 1 million barrels per day (160,000 m³/d). OPEC

had not cut its production since December 2004. However, the oil market has lately seemed to shrug that news off, especially

considering that Saudi Arabia said that no such agreement exists (to cut production).

On October 11, oil prices fell below US$58 for the first time since February. Days later, on October 20, a barrel of crude oil closed at

US$56.82 per barrel. The same day, OPEC declared that they would cut production by 1.2 million barrels per day (190,000 m³/d) in

order to arrest the sliding price, the first drop since December 2004.

GSCI reweighting

In early August, the weighting of gasoline futures in the Goldman Sachs Commodity Index was significantly reduced, causing

investors who were long oil to sell. The extent to which the price deceases of late 2006 can be attributed to the reweighting is

disputed.

Mid-2007 increases

The U.S. national average on May 16, 2007 was $3.09, and some parts of the West Coast were selling regular unleaded at

$3.33/gallon (e.g. San Francisco and Los Angeles). On NYMEX, a barrel was trading at $73.93, based on civil unrest in Nigeria. A

pipeline disruption in the North Sea has also bumped the price of Brent Crude up to $79.64 (an all time high).

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Legislation from the U.S. Congress, from approving the No Oil Production and Exporting Cartels Act of 2007 (in which the Sherman

Act is amended towards foreign companies acting as cartels), and hearings in May 2007 from the House Energy and Commerce

Committee's Oversight and Investigations Subcommittee will address the following: price gouging (especially from oil companies) as

a federal crime, and the intervention of the Joint Economic Committee led by Senator Charles Schumer to which lawmakers should

intervene where the current corporate mergers (Exxonmobil, ConocoPhillips, Chevron, Shell) should break up, as a way to protect

American consumers.

The "NOPEC" bill passed the U.S. House of Representatives with a 345-72 vote on May 22, 2007.

On September 12, 2007 oil prices rose to an all-time high of $80 per barrel, which surpassed even the highs of the early 1980s. High

prices and restricted supplies have increased the concerns of those who believe that peak oil is either imminent, or may have

already passed, because of the implication that oil supplies will not increase significantly beyond that point, and in the longer term a

decline will occur. It should be remembered that some of this trend in prices is partly due to the slide of the dollar against other

currencies. Measured in Euro for example, as the dollar has been falling steadily, the price of oil appears much less volatile. This

results in worldwide price gains being relatively mild, but as the dollar loses its value against the euro, oil prices in the United States

rise because they are priced in dollars.

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Late 2007 increases

On October 19, 2007, U.S. light crude rose to a new height of $90.02 per barrel due to a combination of ongoing tensions in eastern

Turkey and the reducing strength of the U.S. dollar. Prices fell briefly on the expectation of increased U.S. crude oil stocks, however

they rose again rapidly to a peak of $92.22 on October 26, 2007 when stocks were revealed to have instead fallen.

Prices increased throughout late October and early November. On November 7, 2007 light crude oil reached another record, closing

at $98.10 per barrel. On November 21, 2007, oil prices rose to a new high of $99.29 per barrel, leading to fears of the price breaking

the $100 per barrel mark due to a Wall Street Journal report which stated that peak oil had arrived.

Early 2008 increases

March 15, 2008, Redwood City, California

On January 2, 2008, U.S. light crude surpassed the psychological barrier of $100 before falling to $99.69, due to tensions on New

Years Day in Nigeria and on suspicion that U.S. stocks of crude will have dropped for the seventh consecutive week. A BBC report

from the following day stated that a single trader bid up the price. Stephen Schork, a former floor trader on the New York Mercantile

Exchange and the editor of an oil market newsletter, said one floor trader bought 1,000 barrels (160 m³), the smallest amount

permitted, and sold it immediately for $99.40 at a $600 loss. However, on January 3, oil rose to $100.05 a barrel in intraday trading.

Oil fell back later in the week to $97.91 at the close of trading on Friday, January 4, in part due to a weak jobs report that showed

unemployment had risen.

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Despite news on weakened demand, the price of oil once again rose to $100.10 a barrel on February 19th after a Texas refinery fire,

rumors about OPEC production cuts, and evidence that the supply of oil is decreasing faster than demand of oil. Oil prices rose

above $101 a barrel February 27, 2008.[87] Oil prices surpassed $103 a barrel February 29, 2008 as continued weakness in the U.S.

dollar and the prospect of lower Federal funds rates attracted fresh capital to the oil market.

Oil prices continued to rise to $104 on March 3, 2008 continued by the weakness in the United States dollar ] The OPEC on March 5,

2008 accused the United States of economic "mismanagement" that it said is pushing oil prices to record highs, rebuffing calls to

boost output and laying blame at the feet of the George W. Bush administration. Oil prices surged above $110 to a new inflation-

adjusted record on March 12, 2008 before settling at $109.92.[90] Oil continued its soar skywards, hit $111 a barrel, on March 13,

2008, before sliding back to below $110 amid fears of economic recession in the United States. The record was again broken on

March 17, 2008, with U.S. light sweet crude reaching $111.80. On April 15, 2008 the price of oil broke the $114 mark for the first

time. The price increased to $115.07/barrel on April 16, 2008 due to the increasing weakness of the U.S. dollar, and increased again

to $117 per barrel on April 18, 2008 after a militant group in Nigeria said it had attacked an oil pipeline. Oil prices rose to a new high

of $119.90 a barrel on April 22, 2008, before dipping and then rising $3 on April 25, 2008 to $119.10 on the New York Mercantile

Exchange after a news report that a ship contracted by the U.S Military Sealift Command fired at an Iranian boat.

Mid-2008 increases

Gas prices on May 26, 2008 (Memorial Day in the United States) outside Bakersfield, California

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On May 9, 2008, the oil price exceeded $125 per barrel for the first time, while on May 21, 2008 the oil price exceeded already $130

per barrel of Brent Crude. In approximately 24 hours from May 21 to May 22nd, 2008, the price per barrel of oil passed $135.

On June 6, prices rose $11 in 24 hours, the largest gain in history. The possibility of an attack on Iran by Israel was considered to have

contributed to the rise. The combination of two major oil suppliers reducing supply has generated fears of a repeat of the 1973

energy crisis. The mid-July decision of the Saudi kingdom to increase oil output has caused no significant influence on prices, but the

caused the Iranian government misgivings. According to the oil minister of the Islamic Republic of Iran Gholam-Hossein Nozari the

world markets are saturated and that a Saudi promise of increased production would not lower prices. Several Asian refineries were

refusing Saudi petroleum in late June as over priced and of the wrong grade.

Oil prices on June 28, hit record of $142.99 at 1:58 p.m., the highest since 1983 and to $142.97, the highest intraday price since

1988, owing to a weak dollar, geopolitical unrest and global equities slump. [103][104][105] Oil rose on July 1 to a NYME record $143.67

and a London's ICE Futures Europe exchange record $143.91.

On July 3, "the Brent North Sea crude contract for August delivery rose to $US145.01 a barrel" in Asian trade. London Brent crude

reached a record of $145.75 a barrel, and Brent crude for August delivery peaked to a record $145.11 a barrel on London's ICE

Futures Europe exchange, and to $144.44 a barrel on the NYMExchange. By midday in Europe, light, sweet crude for August rose to a

record $ 145.85 a barrel on the NYME while Brent crude futures rose to a trading record of $ 146.69 a barrel on the ICE Futures

exchange. On July 11, Oil hit another record of $US147.00 a barrel, after a $10.00 decline in oil before.

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On July 15, a selloff began after remarks by Chairman of the Federal Reserve Ben Bernanke which indicated significant demand

destruction within the US because of the high prices. Within hours of his statements, an $8 drop had occurred, the biggest since the

first US-Iraq war. By the end of the week, crude oil had fallen by 11% to US$128, also affected by an apparent easing of tensions

between the US and Iran.

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WHY PRICES ARE RISING

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Forecasted prices and trends

Fatih Birol, chief economist of the International Energy Agency expressed his opinion in October, 2007 that oil prices will remain high

for the foreseeable future due to rapid increases in demand from the huge developing economies of China and India. Although India

has raised prices, China has "no plans" to do so. According to informed observers, OPEC, meeting in early December, 2007, seemed

to desire a high but stable price that would deliver substantial needed income to the oil producing states, but avoid prices so high

that they would negatively impact the economies of the oil consuming nations. A range of 70–80 dollars a barrel was suggested by

some analysts to be OPEC's goal.

Some analysts point out that major oil exporting countries are rapidly developing; and because they are using more oil domestically,

less oil may be available on the international market. This effect, outlined in the export land economic model, could significantly

reduce the oil available for trade and cause prices to continue to rise. Particularly significant are Indonesia (which is now a net

importer of oil), Mexico and Iran (where demand is projected to exceed production in about 5 years), and Russia (whose domestic

petroleum demand is growing rapidly).

In May 2008, Barclays Capital raised its forecast for average crude oil price in 2008 from its previous prediction of $100.80/bbl to

$116.90/bbl, citing the only modest decreases in oil consumption among OECD countries, strong demand growth among non-OECD

countries, the slow development of alternative fuels, and weak non-OPEC supply which "continues to under-perform dramatically

relative to consensus expectations.

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Also in May 2008, Arjun N. Murti and other Goldman Sachs analysts issued a research report predicting oil prices are likely to rise to

between $150 to $200/bbl in the next six to 24 months. This was a marked increase from Goldman Sachs' earlier (September, 2007)

forecast of oil prices averaging $85/bbl through 2008, rising to $95/bbl at year end, which was in turn an increase from still-earlier

predictions.

Also in May 2008, T. Boone Pickens, Jr., the influential oil investor who believes the world’s oil output is about to peak, warned oil

prices would hit $150 a barrel by the end of the year. “Eighty-five million barrels of oil a day is all the world can produce, and the

demand is 87m,” Mr Pickens said in an interview with CNBC. “It’s just that simple.”

In June 2008, Alexei Miller, head of Russian energy giant Gazprom, warned that the price of oil is likely to hit $250 a barrel sometime

in 2009. Miller said that while speculation had played a role in oil prices, "this influence was not decisive." Bloomberg reported that,

as of mid-June, "At least 3,008 options contracts have been purchased giving holders the right to buy oil at $250 a barrel in

December".

Also in June 2008, Shukri Ghanem, head of Libya's National Oil Corporation, said: "I think it [the oil price] will go higher. That is a

trend that will continue for some time. The easy, cheap oil is over, peak oil is looming."

On 26 June 2008, OPEC President Chakib Khelil said in an interview: "I forecast prices probably between $150-170 during this

summer. That will perhaps ease towards the end of the year." Iran's OPEC governor Mohammad-Ali Khatibi predicts that the price of

oil would reach $150 a barrel by the end of this summer.

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Near-term peak oil proponent Matthew Simmons predicts a rise to $300 a barrel or higher by 2013 as sweet crude petroleum

becomes more scarce and major producers begin failing to meet demand.

Demand is at an all-time high, fuelled by the continued economic expansion of the economies of China and India.

China overtook Japan as the world's second-largest consumer of oil in 2003 and is closing in on the US, with demand for oil growing

at about 15% a year.

Western Europe and Japan are heavily dependent on oil imports as production cannot meet massive domestic demand.

The gas-guzzling US is the world's largest per-capita oil consumer but produces much of its requirements itself.

Producers in the Middle East, where oil costs so little, are also heavy users. Poorer countries consume much less per head.

The Middle East is the biggest oil producer, currently providing nearly one-third of the world's total.

Europe and Eurasia (mainly Russia and the UK) and North America are also big producers. The difference is, nearly all the Middle East

oil is for export while Europe and the US do not produce enough to meet their own needs.

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The weaker dollar has been driving up oil prices as investors have been using the commodity as an alternative to holding dollars.

Oil prices nearly doubled in value during 2007, but prices have still not reached a record high if inflation is taken into account.

Adjusting for inflation, US light crude's record peak of $101.70 came in 1980 against a backdrop of war between Iraq and Iran.

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Differing strategies

Since the 1970s, Opec's power has waned, with its control over oil prices being questioned.

There have been continuing disputes about whether member countries are actually sticking to their agreed quotas. Also, strategies

favoured by countries such as Kuwait and Saudi Arabia, which have enormous oil reserves and relatively small populations, are often

at odds with those of countries such as Iran and Nigeria, that have bigger populations and few other exports.

Indonesia has announced that it may leave Opec when its membership expires.

The official reason is that it is no longer a net exporter of oil. But the cartel's only South East Asian member is also understood to

have been upset that there have not been greater increases of production to try to bring prices down from their record levels.

Another factor weakening the cartel is that as oil prices have risen, reserves that were not previously worth tapping in non-Opec

countries have now become viable and Russia has become a particularly significant supplier.

World heading for much worse oil crisis

With demonstrations and strikes against rising oil prices hitting not only India, but also the rest of the world, the crisis is set to get

worse in the days ahead. It won’t be too long before the Indian Government is forced to think afresh on the strategy to deal with the

imminent disaster in the making.

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Oil producing nations have hardly done anything so far through OPEC to increase production. Saudi Arabia has claimed that it had

increased production and the rise in oil prices is not justified. Many think that oil market speculation has in part been responsible for

keeping the prices at a high level.

Many experts feel that oil could be headed for $250 a barrel. They hold market speculators as being partly responsible for the

continuing rise in oil prices. But they also holds the market situation of supply and demand being responsible for the current crisis

and the impending disaster.

The International Energy Agency in its latest monthly report has stated that the huge rise in oil prices is due to the mismatch

between demand and supply of the oil, the failure of governments to harness other sources like nuclear energy.

In many countries, especially developed countries like United Kingdom, the demand for petrol by the motorists has fallen by nearly

20 per cent as many have started using public transport. However most developing countries, including India, lack an efficient public

transport system.

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If oil prices do touch even $200 per barrel, and not $250 as warned by the experts, the world could be headed for a crisis in which

food prices could soar to new heights as the costs of running tractors, tubewells and production of fertilisers are pushed upwards.

Civil aviation would be hit hard as would also be tourism and travel industry. Household electricity and cooking gas bills could rise to

all-time high making them beyond the reach of an average Indian family.

For India, the crisis could be a devastating. Having failed to deal with the subsidies on oil, the country will be headed for an

unmanageable rise in inflation.The oil crisis is already causing serious problems in developed countries. In Europe transporters went

on strike asking governments to slash the tax on fuel. The rising cost of food is hurting the family budgets. In the United Kingdom

nearly half a million children are said to be malnourished as families struggle to control their household budgets within their means.

For India there is no escape from taking urgent steps to create alternative sources of power generation to ensure that industry,

farms and homes are freed from their dependence on oil. Cars and two wheelers perhaps are not the culprits of this crisis as car

makers have continued to produce fuel-efficient vehicles. The simple fact is that country like India cannot manage with the price of

oil rising to $200.

But still it can be said that with the kind of intelligent and hard working manpower that India has, the country is capable of meeting

the challenge of the energy crisis.

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INDIAN SCENARIO AND ITS STRATEGY TO DEAL WITH OPEC

The Indian scenario

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INDIAN STRATEGY TO DEAL WITH OPEC

Asking OPEC to act against speculators

India has asked oil-producing countries to move against what it called speculation pushing up prices of crude. Indian finance minister

has asked recently the energy ministers of the Opec countries in Jeddah in Saudi Arabia that there is need for the oil industry

toaffirm its leadership in price formation and not remain a passive spectator of speculation and paper trading in oil.

India has proposed that adopting a price band mechanism would stabilize prices in the global market. Under the mechanism,

consuming countries will guarantee that oil prices will not fall below an agreed level while producing countries will ensure that oil

prices do not rise above a guaranteed level.

This can be one of the solutions to save the world from volatility and unpredictability in oil prices. In case the global economy slowed

or slipped into recession due to high oil prices the oil producer countries would also suffer.

The current level of prices was in the interest of neither the producer nor the consuming countries.

International oil prices in the last 10 months have doubled from $70 a barrel in August 2007. There are evidences that large financial

institutions, pension funds, hedge funds, etc have channelised trillion of dollars into commodity investments and commodity

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derivatives. These financial transactions are unregulated and highly opaque and the demand for oil generated by these funds is

purely speculative.

Asking OPEC for uniform pricing policy

India has asked OPEC to adopt a uniform pricing policy for all buyers and not charge a premium from developing countries in Asia

while offering a discount to the developed West.

Petroleum Minister Mani Shankar Aiyar told the 132nd OPEC ministerial conference in Vienna.

India is the only importer among Asian countries to have been invited for the meet to present views on petroleum and sustainable

development.

All Asian countries, barring Japan, were developing nations and accounted for two-thirds of the crude imports from West Asia.

During 2003, Asian consumers paid about half a dollar per barrel more than US buyers and nearly two dollars per barrel more than

European consumers.

In the April-July quarter this year, Asian countries paid 36 cents per barrel more than the US and close to three dollars per barrel

more than European customers.

The Asian premium costs between $5-10 billion a year to Asian countries, according to the Japan's Institute of Energy Economics.

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Import dependent India estimates the premium accounts for $750 million to $1 billion of its over $18 billion oil import bill, as per

petroleum ministry official reports.

In the absence of energy efficient technology it takes India nearly three times as much oil to produce one unit of economic output as

in the OECD (Organisation for Economic Co-operation and Development) countries.

Asking OPEC to raise oil production

India has joined the global chorus asking members of oil exporting cartel OPEC to increase volumes to calm global crude prices.

Indian oil minister has complimented his Saudi counterpart for unilateral decision to increase production by 300,000 bpd (barrels per

day).

This action would help supply side management and would thus stabilise the current oil market

Major oil producing countries should raise their output to calm the market further and revitalize the global economic growth.

Saudi Arabia is the world's largest oil exporter and has unilaterally decided to raise production by 300,000 bpd, mainly for exporting

to Asian markets which are witnessing record growth in demand and are pushing up global prices.

This is an effort at weakining the adverse impact of high oil prices on developing economies.

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The Indian government has already raised prices of motor fuels and cooking gas this year to save state-owned oil marketing

companies from bankruptcy.

The current high oil prices coupled with the turmoil in the financial markets would seriously impact the economic growth of most

countries and in the longer term affect both producers and consumers," Deora wrote.

However, experts feel that India does not have much influence in the global oil market and Saudi Arabia had been resisting much

stronger US demands for pumping more oil for almost a year before deciding to raise its output.

India in 2007-08 spent $68 billion for its crude imports, up from $48.38 billion in 2006-07. Even after the June 4, 2008 decision

raising prices of diesel by Rs 5 a litre, petrol by Rs 3 and cooking gas cylinders by Rs 50, besides reducing customs and excise duties,

the state-run firms continue to incur losses of Rs 13.79 a litre on petrol, Rs 23.22 on diesel, Rs 35.98 on kerosene and Rs 302.99 on

each cooking gas cylinder refill.

Building relationship with OPEC: Indian finance minister and petroleum minister will also attend OPEC meet

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The decision to send Indian finance minister to the meeting, called by King Abdullah of Saudi Arabia to discuss measures to stabilize

the international oil market, have been taken at the highest level in view of the rising inflationary trends and the volatility in oil

market threatening to derail economic growth. All eyes are on this high-level meeting between producers and consumer-nations.

Saudi Arabia has already announced that it will step up its daily oil output by 2,00,000 barrels to help cool record-high crude futures.

Saudi Arabia, the world’s biggest oil exporter, is believed to be the only producer with spare output capacity. However, there are

chances that production increases may still not keep up with future demand.

Indian finance minister would interact with leading OPEC (Organisation of the Petroleum Exporting Countries) members and seek

their intervention in cooling crude prices.

The idea is to get a proper feedback from the oil producers in order to chart a strategy for dealing with a situation that could emerge

in future. India is a petroleum import-dependent nation and any volatility in the crude oil market would only make things difficult for

the Indian government in an election year

OPEC rejects call for oil price band and sees crude hitting $170

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Oil cartel OPEC on June 30, 2008 rejected India's call for regulating crude prices through a price band, saying the market was the best

judge and forecast prices climbing to USD 170 a barrel on summer demand in the US.

They have said that the producing and consuming nations never agree on any price and that they never agreed with (OPEC) price

band (that operated between 2000 and 2005). Hence they did away with the price band.

Stung by high oil prices driving inflation to 13 year high of 11.42 per cent, the Indian Finance Minister had asked earlier the

Organisation of Petroleum Exporting Countries (OPEC) to operationalize a price band mechanism so that crude prices move within a

specified range.

India feels that the speculative premium is USD 60 a barrel and blame speculators for the rise in crude prices that have touched an

all time high of USD 142.99 a barrel, but Western oil firms pinned it on demand-supply mismatch.

India should prosecute OPEC in WTO

We live in the WTO era of rule-based trade aimed at increasing competition and removing distortions. Yet there is an absolutely

huge exception to this rule called OPEC (Organization of Oil Exporting Countries). This cartel shamelessly aims to manipulate

production to deceive consumers.

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Why does the world community not impose sanctions on the cartel and ensure its break-up? Clearly the very existence of OPEC is

anti-competitive. India is now a huge importer of energy, and its dependence on imported energy will rise further in coming years.

But India by itself cannot take on OPEC. Rather, it must raise the issue within WTO, and seek multilateral action to stop the fleecing

of oil consumers.

US should also help India in the process considering the improving relations between the two countries. US anti-trust legislation

makes it illegal for producers to collude to raise prices. This is why the US government fined multinational vitamin producers and

even Microsoft. Logically, it should prosecute government-owned oil companies in OPEC countries, sequester OPEC assets in the US,

and arrest any OPEC oil minister who steps into the USA.

But it will not do that because it is reluctant to move against cartelizes who happen to be governments rather than corporations. The

State Department and Pentagon view many OPEC countries as valuable allies.

The second reason for US reluctance to act is its own oil producers, notably those based in Texas, who are major beneficiaries of

cartelization. Many of them are engaged in oil exploration in OPEC countries, and fear that anti-trust action against OPEC could

jeopardize their foreign operations. So this combination of big oil, the Pentagon and State Department has put paid to any US anti-

trust initiative against OPEC. Instead the US has used diplomatic pressure on OPEC, viewing cartelization as a diplomatic rather than

anti-trust issue.

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But even governments are answerable in forums like WTO, which seeks to lower global trade barriers. Cartelization is a far more

objectionable barrier to trade than quotas or tariffs.

India needs to raise the cartelization of oil as a WTO issue, and canvass support from other oil-importing countries. If India moves

positively, the US and other western nations will find it difficult to adopt the position that protecting Indian small scale industries is

bad but looting consumers of oil is acceptable.

India, Iran should sign gas pipeline deal

India has said in last week of June, 2008 that it will sign very soon an agreement with Iran and Pakistan in connection with the

transnational pipeline project involving the three countries.

the Iran-Pakistan-India (IPI) pipeline project is of $7.5 billion

There are some issues with Pakistan that has been taken care of since the Pakistan oil minister has changed and so India will have to

deal with the new minister who will be dealing with it. Very soon India hopes to sign the agreement with Iran and Pakistan.

The project was first mooted in 1994 but has been stalled by a series of disputes over prices and transit fees.

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India's domestic gas supply meets barely half its fast growing demand, and with projected 7-8 percent annual growth, the country

has to ensure reliable supply of affordable energy. As long as natural gas is used to move India's power turbines, Iran, geographically

closest to India, will be the lowest cost supplier.

While for India the pipeline is almost a must, Pakistan can afford to kill the project and reap many diplomatic and economic benefits

without compromising its energy security. Should it decide to do so it could opt for an alternative energy route such as the proposed

US$2 billion Turkmenistan-Afghanistan-Pakistan (TAP) gas pipeline which would carry gas from Daulatabad in Turkmenistan via

Herat Afghanistan to Multan. For an additional US$500 million TAP can be extended to Fazilka on the Pakistan-India border and

hence provide gas to India as well. At a later stage TAP could be expanded further to connect other fields in Central Asia to Gwadar,

turning the new port into one of the world's most important energy hubs.

From an energy security standpoint TAP could provide Pakistan with 3,350 million meters cubic feet per day (mm cfpd) of gas, more

than the 2,230 mm cfpd the IPI is planned to carry. Economically, shifting from IPI to TAP should be of no consequence. The potential

revenue of the IPI, US$700 million in transit fees alone, would be collected too were TAP extended to India. TAP will also save

Pakistan the need to depend on Iran which has never been a good neighbour due to its role in spreading Shia militancy in the

predominantly Sunni Pakistan. Furthermore, Iran is not a reliable supplier. Last winter it failed to meet its contractual agreements to

Turkey resulting in the disruption of gas supplies to Turkey during the winter. Running through the restive province of Balochistan,

the IPI will face constant threats its reliability due to sabotage by Baloch insurgents.

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Iran-Pakistan-India Pipeline in view of US

In normal times, a pipeline connecting India and Pakistan would have been welcome news in the US. There is nothing like a

multibillion dollar joint economic project to create interdependence and hence reduce tension between India and Pakistan, two

traditionally adversarial nuclear powers. But these are not normal times and with the risk of war in South Asia greatly diminished,

America's top foreign policy priority is preventing the proliferation of terrorism, radical Islam and nuclear weapons.

The prime challenge for US is Iran, which defies the international community by developing nuclear capabilities, supplies militias in

Iraq with weapons used to kill American troops, trains and funds groups like Hizballah and Hamas and calls for Israel to be "wiped off

the map". This is why the planned US$7.5 billion Iran-Pakistan-India (IPI) natural gas pipeline, which would provide the Islamic

Republic an economic lifeline at a time when the US and its European allies are trying to weaken it economically, is not to

Washington's liking.

The proposed 2,600-kilometer pipeline which is currently moving into high gear puts both Pakistan and India in the front line of an

economic war currently taking place between Washington and Tehran. America's strategy to weaken the Iranian regime can only

succeed through a multinational effort to cut investment in Iran's energy sector.

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Despite its vast oil and gas reserves Iran is suffering a staggering decline in oil exports caused by lack of investment by foreign energy

companies. Sanctions originally imposed in 1995 by President Bill Clinton and renewed by President Bush prohibit US companies and

their foreign subsidiaries from conducting business with Iran, while banning the financing of the development of the country's

energy resources. In addition, the US Iran-Libya Sanctions Act (ILSA) of 1996 imposes sanctions on non-US companies investing more

than US$20 million annually in the Iranian oil and natural gas sectors. The 2006 Iran Freedom Act (IFSA) extended ILSA until

December 2011. As a result of these sanctions, investment in Iran's energy sector has plummeted, and Iran exports 2.34 million

barrels of oil per day, about 300,000 barrels below its OPEC quota.

According to Iranian officials, if the decline in investment continues, income from oil and gas sales could virtually disappear within a

decade. With oil and gas exports accounting for half the government's budget and around 80-90 percent of total export earnings,

this spells trouble for Iran which already faces the worst economic crisis since the 1970s. The feeling among many in Washington is

that Iran is in its worst economic condition and by putting the economic pressure the West can eventually bring about a regime

change. That is why any attempt by Iran's neighbors and clients to give its energy industry an opportunity to recover is viewed by US

as a quasi-hostile move.

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US giving India access to the global market for nuclear fuel and technologies for India's civil nuclear power industry

In a clear departure from America's long standing non-proliferation regime the US Congress also approved last year a landmark deal

giving India access to the global market for nuclear fuel and technologies to enhance India's civil nuclear power industry, as an

alternative to natural gas based power. If India insists on building the pipeline there are likely to be many calls on Capitol Hill to

reconsider this dispensation. Yet India seems to be bent on moving forward unfazed by the impact such policy might have on its

bilateral relations with the US.

The US will no doubt try to persuade Pakistan to opt for a project that does not compromise its strategic objectives in the region and

is likely to offer Islamabad handsome financial incentives above and beyond the US$1-billion-plus yearly aid that it has been

advancing to Pakistan since 2002. No doubt Pakistan and India, both projected to face major gas shortfalls, have a great deal to gain

from pursuing the IPI pipeline.

Trading With Non-OPEC Countries

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Non-OPEC countries contain less than one-fourth of the world's proven oil reserves but produce nearly 60 percent of the world's oil.

They also possess most of the world's capacity for refining crude oil into petroleum products such as gasoline and heating oil.

Because non-OPEC countries have smaller reserves which are being depleted more rapidly than in OPEC, their overall reserves-to-

production ratio, which is an indicator of how long proven reserves would last at current production rates, is much lower (about 14

years for non-OPEC and 73 years for OPEC).

The oil industries in non-OPEC countries differ from those of OPEC countries in several fundamental ways:

Markets. Whereas most OPEC oil is produced for export, many non-OPEC countries, such as the United States, produce oil primarily

to meet their domestic demand for petroleum. Nevertheless, non-OPEC countries as a group account for about 45 percent of crude

oil trade worldwide.

Industry Ownership. OPEC countries generally have state-owned and state-operated oil industries. Although some non-OPEC

countries (e.g., China, Mexico) also have state industries, most either already have a private sector oil industry or are promoting

increased private investment in their oil industries

Finding Costs. Non-OPEC oil reserves generally cost more to develop and produce than OPEC reserves. Finding costs in the Middle

East (where OPEC countries control most of the region's oil reserves) averages just over $2/barrel compared with about $4.50/barrel

in the United States and western Europe, and $5.75/barrel in Canada

Excess Capacity. Non-OPEC producers typically operate close to capacity, thus they have a relatively limited ability to boost

production without significant additional investments. Nearly all of the world's excess production capacity is in OPEC countries.

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REFERENCES

www.doe.gov

www.eia.doe.gov/cabs/india.htm

www.wikipedia.org

www.opec.org

Reliance Review of Energy Markets – Energy Research Group, RIL

news.bbc.co.uk

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