The oil company executives have also dropped their hangdog expression. Last week the IOC chairman estimated that his company had saved Rs 600 crores during the month and that ‘underrecoveries’ had reduced from Rs 100 crs a day to Rs 50 crores. And Reliance, which had effectively closed its pumps, was reportedly contemplating the resumption of sales. All this in a month.

What has brought about this dramatic shift? Why have prices suddenly reversed direction? Certainly demand has not slowed down. And there has been no material spurt in supplies. The physical fundamentals have not altered. The answer lies not in Economics 101 but in the ephemeral term ‘perception’. What has changed is the perception of the clever, young, computer bound and quantitatively inclined hedge fund trader.

A month back he saw a world riven by resource nationalism; threatened by turmoil in the Middle East and under risk from Atlantic hurricanes. And a tight oil market in jeopardy of volatile and unexpected disruption. He (and his ilk) bet $150 billion of their investor’s capital on the perception that prices would not only remain high but rise further. A month later his world view has shifted. He is now more optimistic. The Lebanon ceasefire is holding; the ‘godowns’ of the oil companies are flush with stocks to take care of any exigency other than the deepest of winters, and the anti-American rhetoric of the Presidents of Venezuela and Iran has not (at least yet) provoked anything but a verbal retort from Bush. The bears have replaced the bulls and the ‘hot money’ in oil funds is now flowing elsewhere. The decline in prices reflects this shift in perception.

Historically the oil markets have driven politics. Governments have adjusted their politics to access affordable and secure oil supplies. Today it is politics that is driving the oil market. The situation in the Middle East, the civil conditions in Nigeria or Iraq, the ideology of other major resource holders like Russia... these are now the lodestars of the hydrocarbon market. The result is that no one really knows where oil prices are headed. People will of course speculate... some are paid to do so — but the reality is ignorance.

In such circumstances of uncertainty what should the decision-maker do? Clearly he cannot abdicate taking a view on oil prices. That is essential. Otherwise it would be difficult to build the contours of energy policy.

I presume, for instance, that the management of ONGC has a bullish view on prices. They expect it to trend upwards. I make this presumption because otherwise I would wonder about the logic underpinning their investments in overseas assets. If these investments are driven only out of concern for security of supplies then I would ask whether the money is being well spent. After all oil is a fungible commodity and can be bought and sold on the international market at the prevailing price by anyone with money. India has the money and so theoretically at least we should have no difficulty securing our physical requirements except of course when on account of prolonged political and social unrest, production is disrupted and/or the shipping lanes get clogged.

But in such dire circumstances all consumers, whether or not they ‘owned’ oil, would find it difficult to secure the commodity. Only those with access to strategic stocks would be able to meet their requirements. The point is that ownership does not guarantee supply security. This does not mean that ‘energy security’ is a weak argument for acquisition. It simply means that it should not be the only argument. It must be supported by economics. Hence my presumption that ONGC expects the price of oil to rise.

Anyway to answer the question, I believe our decision makers must now look beyond quantitative forecasting models. They should develop tools that will help them project price paths under differing socio-economic, political and technical contexts. Scenario planning offers such a tool.

Scenarios are not forecasts but descriptions of alternative worlds. They are developed through a methodology that uses underlying global trends to create and describe possible alternative futures. For example, we see today three broad and somewhat divergent global trends. There is the force of globalization, liberalization and technology. The world is connected; IT has wrought a revolution in communication; barriers to trade and capital flows have been lowered.

We are also witnessing the resurgence of state authority. This is partly to counter the sense of insecurity engendered by terrorism and partly to regulate markets. Enron — the byword for corporate impropriety — triggered the latter. There is also evidence that individuals, social organizations and indeed governments are bonding along ascriptive and narrowly defined national, linguistic, ethnic and/or religious lines. Examples are the concept of ‘Asian values’; the idea of Latin American solidarity and the bond of Islam.

These three trends interweave and, depending on the extent one bears on the other, they provide the methodological basis for developing alternative futures. For example, a world in which the forces of globalization and liberalization predominate over the compulsions of nationalism would see the further lowering of trade barriers; a more rapid transfer of technology across national frontiers and rapid economic growth on the back of the comparative advantage of countries. Oil prices would in such a world exhibit short-term volatility but in view of the (definitional) willingness of the international community to strike ‘win-win’ deals, these prices would range within a broad band agreed mutually between the producer and consumer nations.

In contrast a world in which markets are abridged and regulatory nationalism and ascriptive identity predominate would not be conducive for international energy cooperation. Here the producer countries would most likely want to maximize their short-term revenues by constraining production and restricting fresh investments. And consumer countries would seek energy security by trading ‘security of demand’ (ie long term purchase agreements) for ‘security of supply’ (i.e. overseas acquisition at any price). Prices would be volatile but susceptible to sharper and extreme movements.

Scenario planning is now a widely used planning tool amongst the international players. I would recommend that it be adopted by our oil companies. We need to sophisticate our planning process. And if nothing else better prepare ourselves to understand and respond to the mood shifts of the paper trader. Scenarios would facilitate such understanding.

The writer is chairman, Shell Group in India. The views expressed here are personal