Joining forces can help China, India gain pricing power in global crude...

Joining forces can help China, India gain pricing power in global crude oil market

Hu Weijia,

China and India need to enhance strategic communication and mutual trust, and take advantage of a “honeymoon” atmosphere, to move their initial oil alliance forward.

On the sidelines of the 16th International Energy Forum ministerial meeting that concluded last week in New Delhi, Indian Oil Minister Dharmendra Pradhan and Chinese representatives showed an intention to leverage the two countries’ buying power for a better bargain from West Asian crude producers, the Times of India reported.

Rapid economic growth has led to dramatic increases in both countries’ energy needs. Their thirst for oil imports is heating up the competition between their companies, which are engaged in a worldwide search for oil reserves. The competition also pushed up oil import prices. As a result of this cut-throat competition, pricing power is usually in the hands of supplier countries.

China and India are currently the major victims of oil price volatility due to their lack of pricing power.

By 2023, oil demand will hit 104.7 million barrels per day, up 6.9 million barrels per day from 2017, according to the International Energy Agency. “As has been the case for some years, China and India together will contribute nearly 50 percent of global oil demand,” the agency said in a report.

As two countries with substantial oil imports, China and India have broad common interests and space for cooperation. If they can enhance coordination and collaboration on oil imports, China and India can wrest some pricing power away from their suppliers, as they use their market dominance to influence prices across Asia.

Over the past decade, oil and gas companies in China and India have made much headway through investing abroad. The two countries can also make joint investments to avoid intense competition.

In addition, China’s new yuan-denominated crude oil futures contract, which began trading in March, offers a chance for China and India to beef up their cooperation in the finance sector.

The memory of an oil alliance proposed in 2005 is still fresh for some Chinese people. At that time, Mani Shankar Aiyar, who was then India’s oil minister, proposed forging a common front with China on oil issues.

The cooperation resulted in a memorandum of understanding signed in 2006 that was lost in the complexities of bilateral ties. The two countries must deepen mutual political trust to avoid a repeat of this situation.

Sino-Indian relations have been warming up since last year, when a military standoff soured bilateral ties. China may be willing to work with India on oil issues because together, they can gain pricing power in the global energy market.