Oil does not have to be that volatile

Sir, in your leader of April 17 you mentioned important ways for achieving fuel security, but failed to include the use of long term contracts between consumers and producers. If for instance nations entered into 40 years binding purchase and supply agreements, at a price of 40 dollars per barrel plus or minus 50% of the difference to the market spot price, this would provide the producers with a floor of 30 if the spot price hits 10, and conversely “only” charge consumers 70 dollars if the spot rises to 100 dollars. Such arrangements would stimulate new investments in oil since let us not forget that there are no real reassurances that oil prices, because of an oversupply created by too much investments, or economic recessions, could not dive again below those ten dollars per barrel that so many pundits predicted in early 1998.

Unfortunately it would seem that there are many economic interests in maintaining the volatility of oil for these stabilizing long term contracts to come into fruition.

Sent to FT, April 18, 2006