ENI's plan for a more stable pricing world

Scaroni used the word "provocative" more than once to describe his company's proposal, and there is little doubt what is the most provocative part: the creation of a "spare capacity market" to help ensure that some unused capacity is always available.

Although Scaroni did not discuss the plan in great deal, an accompanying document shows a graphic with a clearinghouse in the middle of producing and consuming nations. The idea would be that the clearinghouse would "certify" spare capacity. Consuming countries would "book" spare capacity through the clearinghouse, and producing countries, looking for incentives to invest in spare capacity, would be able to use those producer "bookings" to guarantee a market for their investments.

The goal would be spare capacity of between 5% and 10% of global consumption, according to the ENI plan. At present, if we assume an 84 million b/d level of consumption, it would assume spare capacity of 4.2 million b/d to 8.4 million b/d. Current global spare capacity is probably somewhere in the middle, probably closer to the bottom of that range.

A second key part of the plan would be a "global stabilisation fund," funded by consuming countries, that would supply funds to producing nations when oil prices fall under a designated floor price, not specified in the document.

The plan also envisions an expansion of global oil stocks managed by the Global Energy Agency -- the name given to ENI's proposed governing body -- but with a larger roster of members than the current countries of the International Energy Agency. Members of the IEA hold stocks for emergencies, and the IEA coordinates their release, as it did after Hurricane Katrina.

It is not difficult to mock this and poke holes in it, but it is an earnest attempt to placate both sides of the producer/consumer divide. The sharp drop in upstream investment in the past year is bringing about warnings, some dire, of a return to three-digit prices as supply tightens in the future.

The spare capacity market is designed to solve that. But it's easy to imagine the stabilisation fund becoming a political football in consuming countries. One could envision a scenario, for example, that would have a country like the US paying money into a fund that might funnel cash to Hugo Chavez or the leaders of Sudan.

In fact, almost all of the spending being done here would be done by consuming countries. They would fund the stabilasation pool; they would be providing the guaranteed markets for the developments spurred by the spare capacity bank; and an expanded number of consuming countries would be required to hold emergency stocks. But since it's consumers that do the spending anyway in the producer-consumer relationship, this does make sense.

What is the cost to producers? Mostly foregone opportunities to cash in on $140 oil (for example), and a presumption that funds sent to them by the Global Energy Agency would be used for the proper purposes. Given the politics of some of the producing countries in this world, that could be a very big assumption.

Scaroni told the gathering that there isn't really a "next step" in making this plan areality; it's clearly in the early thought process stages. (Or as a character said in the movie Annie Hall: "Right now it's only a notion, but I think I can get money to make it into a concept ... and later turn it into an idea.")

"We will elaborate," Scaroni said. "We will continue to answer questions. Governments have been contacting us. Before the next step we would like more reactions." He said ENI had received positive feedback from a variety of officials at the G8 meeting, including US Secretary of Energy Stephen Chu.