Would an international agency cool volatile prices--or just guarantee oil company profits?

 

Would an international agency cool volatile prices--or just guarantee oil company profits?

The proposal is delivered in a voice that is forceful, melodic and utterly Italian: "The fact that the oil price has made a yo-yo from $50 to $150, and from $150 back to $50 is certainly not healthy for anybody," says Paolo Scaroni, chief executive of the Italian oil company Eni, at a news conference in New York.

And Scaroni has a solution, albeit one that might strike bureaucracy-leery Americans as crazy. He's proposed a global energy agency, exact form to be determined, that would regulate oil prices by charging consumers more when prices are too low and reversing the flow when prices are too high. Kind of like what the Organization of Petroleum Exporting Countries has tried to do for the past 48 years, with the twist of including consumers in the game.

The details are overwhelming. What price of oil is too high? Too low? How could any agency compel Saudi Arabia to disclose its reserves and pumping capacity, figures the monarchy considers state secrets?

But Scaroni's logic is compelling nonetheless. Volatile crude prices make it hard for companies like Eni to invest in long-term oil projects. And by yanking around the price of other forms of energy, they make it nearly impossible to invest the tens of billions of dollars needed to build competing renewable-energy projects. Volatility "is the worst enemy of renewables," Scaroni says.

The solution is more information, he says. During the steady march of oil prices from $9 a barrel in 1999 to $140 last summer, even oil-company forecasters consistently got consumption wrong. First they underestimated demand from China and India, then more recently they pegged global demand growth at 2% when it turned out to be 1.4%. Result: A round trip in oil prices that disrupted the world economy and choked off investment in the projects that would supply additional oil at the margin.

Eni's engineers and economists calculate the sweet spot for oil producers and consumers to be between $60 and $70 a barrel, adjusted for inflation. When prices go higher, consumers find other sources of energy or cut consumption other ways. Below $60, consumers burn more but producers stop investing in new fields and the supply gradually shrinks.

www.forbes.com