26 June 2008

Rising Prices, Weak Growth to Dominate Industrial Powers Summit

Group of Eight leaders to focus on economic challenges

A Chevron deep seas drilling ship drills for oil off the coast of Louisiana in the Gulf of Mexico.

By Andrzej Zwaniecki
Staff Writer

Washington -- Leaders of the most industrialized countries at their upcoming summit in Japan will look for solutions to a set of severe economic challenges that threaten to weaken economies already shaken by turmoil in the financial markets.

Head of states of the Group of Eight (G8) -- Canada, Germany, France, Italy, Japan, Russia, the United Kingdom and the United States -- are likely to discuss a broad range of issues from climate change to nonproliferation at their July 7-9 summit in the Japanese resort of Toyako.

But soaring prices of food, oil and other commodities are likely to be on the top of their agenda, according to John Kirton, director of the G8 Research Group at the University of Toronto.

Squeezed household incomes and businesses’ limited access to credit threaten to slow economies further. Balancing pro-growth and anti-inflationary measures in such circumstances is particularly difficult, according to economists.

With populations uneasy about economic conditions and difficult political environments in some G7 countries (the G8 minus Russia), the leaders are likely to break from tradition and “extend rather than just endorse what finance ministers have done,” Kirton told America.gov.

Those ministers have welcomed progress in implementing the recommendations of a group of international financial experts and regulators to strengthen capital markets’ oversight and transparency.

The final summit communiqué will “latch to pieces of good economic news,” according to Kirton, such as somewhat improved financial market conditions and the better odds that the end of the market turmoil is closer.

But the U.S. housing market crisis is far from over, capital markets still are uneasy, and the rise in fuel and food prices carries an increased risk of inflation.

No easy solutions exist to these problems in the short run, experts say.

Energy economist Michelle Foss believes, however, that the G8 can come up with effective mid- and long-term measures concerning energy prices as long as its commitments and recommendations are acts of political courage rather than political expediency.

MID-TERM OIL SUPPLY PROBLEMS LOOM LARGE

Some experts and lawmakers have blamed financial speculators for pushing up oil prices. But Foss, who heads the Center for Energy Economics at the University of Texas at Austin, told America.gov that even if that is the case there are other major reasons for rising oil prices, such as supply constraints and energy subsidies in oil-consuming countries. The G8 might be able to sway oil markets in the medium term if it puts those controversial issues on the table, she said.

Oil prices skyrocket not only because of high demand in China, but also because it is traded on world markets in a belief that the mid-term supply prospects do not look good, according to Foss. Output from mature fields, such as ones in the North Sea, is projected to decline. Member nations of the Organization of Petroleum Exporting Countries are unwilling (or unable) to ramp up production significantly.  And drilling for oil in U.S. coastal waters and pristine areas seems unlikely due to political and environmental opposition.

“If the United States showed resolve that we were going to consider seriously the issue of drilling in those areas, it would put downward pressure on oil prices,” Foss said. 

President Bush, presumed Republican presidential candidate Senator John McCain and the governor of Florida have called for lifting the federal moratorium on offshore oil and gas drilling, a change opposed by presumed Democratic presidential candidate Barack Obama and Democratic lawmakers.

Foss said the G7 needs to push countries with energy subsidies to get rid of or drastically reduce such supports.

The G8 finance ministers said June 13 that “reducing subsidies” was important to lowering oil prices.

“The question is whether the G7 has any leverage to encourage other countries to go ahead with reforms,” she said.

China recently reduced fuel subsidies, following similar moves by India, Taiwan, Malaysia and Indonesia, because its government had realized it could ill afford subsidizing energy, according to experts. However, countries that try to end energy supports face potential political backlash, social unrest and a rise in inflation.

Another issue concerns oil-producing nations. At a June G8 ministerial meeting, Akira Amari, Japan’s trade and industry minister, blamed meager increases in oil supply levels on lack of investment in the oil sector.

Foss said a discussion within the G8 on what constitutes a good investment framework for energy resource development would send a “tremendous” signal to the energy markets and the countries that struggle with the issue. Governments of some oil-producing countries do not realize, she said, how important a more open investment regime is to their own oil sectors and to the global oil markets.

The full text of the G8 financial ministers’ statement is available in a PDF file on the G8 Research Group Web site.