G7 Says High Oil Price Threatens Economy | Business| Economy and finance news from a German perspective | DW | 02.10.2004
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G7 Says High Oil Price Threatens Economy

With a view to rising costs, the Group of Seven finance chiefs called on oil producers to help keep energy prices manageable. Meeting in Washington, the world's richest nations warned economic growth was at risk.


Demand for oil means an ever-shrinking world supply

Although they gave general upbeat assessments for global economic prospects next year, finance ministers and central bankers from Britain, Canada, France, Germany, Italy, Japan and the United States, expressed concern that an unchecked increase in oil prices could jeopardize growth.

"Oil prices remain high and are a risk. We call on oil producers to provide adequate supplies to ensure that prices moderate," they said in a statement issued after Friday's G7 meeting in Washington, and added that "consumer nations had to increase their energy efficiency."

On Friday, New York crude oil futures closed at over $50, the highest level ever and a 20 percent increase since the finance ministers made a similar call for higher production at a meeting in New York in May.

"We're urging the countries with reserves to do everything they can to make sure that the supplies are adequate to meet market requirements," US Treasury Secretary John Snow told reporters. "That commitment on their side to make adequate reserves available will help deal with some market uncertainty, which I think is feeding some speculation and which is taking the stock price well above the fundamentals of the market," he said.

While Snow said he didn't fear a recession in the US as a result of the oil price, he did caution about a slowing of growth in the world economy.

European Central Bank President Jean-Claude Trichet echoed those concerns, saying "all we are observing today is not encouraging." The euro zone's chief banker said that if oil prices continued to climb it "could certainly hamper the global economy."

More market information

In an attempt to determine why oil costs have soared to levels that now threaten growth prospects, the world's top economic leaders called for better market data. The G7 pressed the International Energy Agency, founded during the 1974 oil crisis, to improve "oil data transparency," and to help sort out whether scarce oil supplies, speculations or rocketing demand is behind the steady rise in prices.

Germany and Britain are reputedly involved in negotiations for a detailed oil transparency initiative. Ahead of the G7 meeting, Chancellor Gerhard Schröder said he believed speculation was one of the main reasons for soaring prices and that a better overview of the market through increased information could improve the situation.

Die Förderanlagen fuer Rohöl der stattlichen Ölgesellschaft Petroleos de Venezuela S.A. (PDVSA) in Cabimas, Venezuela

Supplies cannot meet up with the growing demand for oil

Little power to change price

Better information and calls for increased production will most likely do very little in bringing down the oil price. Analysts say the G7 has little influence over the oil market. The problem is one of simple economics, they point out: demand is outpacing supply, said Nariman Behravesh, chief economist at the economic research firm Global Insight.

"It's not as if OPEC is manipulating the market. There's really not much anybody can do until the investments now being made bring some fruit," he added.

The G7 may be effective in currency markets, but they have no real history in the oil markets. In all reality, the price of oil will only come down when the supply improves and global growth begins to slow.

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