India demanded ending of the Asian premium charged by OPEC countries from Asian countries on crude prices. Petroleum Minister Dharmendra Pradhan asked the OPEC to adopt a responsible price for providing energy to common people. He cautioned that higher prices encourage to go for alternative energies thereby reducing the demand for crude.
India is hosting the 16th International Energy Forum (IEF) Ministerial meeting on April 10-12 in New Delhi with China and South Korea as the co-hosts. Ninety-two countries from Asia will participate in the meeting.
Mr Pradhan urged an ‘Asian Dividend not Asian Premium’ so that Asian countries can benefit from energy pricing.
Backgrounder: What is Asian Premium?
Asian premium is the effective high price that the countries of the Asian continent pay for the import of crude from OPEC. Such a high price for Asia happened because of the marker based price system adopted by Saudi Arabia along with the absence of an own strong crude derivative market in Asia. The system penalized Asian countries while subsidizing the rich Western countries – the US and European nations.
The history of Asian Premium
The Asian premium has its root in the establishment of market oriented crude pricing in 1986. Before that, the prices were set by contract between the exporting country and the importing country. When the market-oriented price system emerged, OPEC’s political power to engage in price setting eroded. At the beginning of the market system in 1986, crude prices crashed.
Saudi Arabia, to counter the price fall, introduced sale of crude oil on a formula method in early 1987. The idea was to create `markers’ for three regions – the US, Europe and Asia. Markers are price referrals based on historical and economic contexts of the respective market.
For Europe and the US, there emerged domestic crude markets and spot prices. These market prices were emerged as markers under the new Saudi Arabia proposed system to price crude export to these countries. For the US, the marker was the West Texas Intermediate (WTI) and for Europe, it was Brent. These two markets reflected the cost of crude produced in the respective geographies.
But for Asia, there was no such indigenous market/production location for importers except the export-oriented Gulf markets. Hence, the Dubai/Oman market price was taken as the marker. But it has failed to indicate the cost of production.
In this formula pricing, the US and Europe had an advantage because their markets and prices were based on future trading and reflected every trend in the crude market. On the other hand, since Asia represented by Dubai/Oman do not have any derivative trading, doesn’t have that edge.
Hence, price charged from Asian countries remained $1-$2 dollar higher than that from Europe and the US. This price differential is termed as ‘Asian Premium’. It is not de facto charged by Saudi Arabia rather it is prevailing there because of the behavior of the Dubai/Oman market price. The term was coined by research institutions who made detailed study about crude markets and price movements.