Published November 14, 2007 in the Financial Times

From Mr Adrian Binks.

Sir, Warren Mosler (Letters, November 12), reveals the level of hysteria that affects even intelligent western economists when it comes to oil prices.

First, economists need to understand the facts. Saudi Arabian crude oil is sold at prices directly linked to market values. Sales to Asia are linked to the price of Oman and Dubai crude, with exports to Europe based on ICE Brent futures prices, and sales to the US ultimately linked to West Texas Intermediate crude price levels. The Saudis set monthly differentials to these benchmark market prices that reflect the different quality of their crude, taking into account their customers’ refinery configurations.

Mr Mosler is equally confused when he writes that President Vladimir Putin “seems to have gained control over pricing of Russian oil”. Most Russian crude oil is sold at market-related prices. In the case of the second largest private-sector Russian producer, TNK-BP, next year’s sales will be based on the average of market assessments by Argus and Platts, two international specialist reporting agencies.

The trend within Russia is to greater market-related pricing, not less. The Kremlin proposed that an oil exchange be established at St Petersburg to set the price of Russian oil, although this has not yet come into being.

Rather than producer price setting, the cause of the upsurge in oil prices is new demand in China and India, coupled with the inability of western oil companies to invest in new low-cost reserves because of state control of crude oil extraction in key exporters. This is nothing new. Saudi oil production has been closed to western oil companies since the 1970s.

What is new is the drive for cleaner-burning transport fuels that require massive investment by the oil industry in more sophisticated refining. At the same time, there is a huge increase in product demand in markets to which western companies have little access.

These are the facts that economists in western countries should be focused on, and not conspiracy theories about price-setting cartels.

Adrian Binks,
Chief Executive,
Argus Media,
London EC1V 4LW

Copyright The Financial Times Limited 2007