Don't let oil harm global prosperity
Don't let oil harm global prosperity - Editorials & Commentary - International Herald Tribune
Don't let oil harm global prosperity
Rodrigo de Rato International Herald Tribune
MONDAY, OCTOBER 24, 2005
WASHINGTON Oil prices have nearly doubled since 2003, and are likely to remain at historically high levels for the foreseeable future. Fortunately, although some countries are seeing signs of lower growth and rising inflation, the global economic expansion has continued.
To sustain global prosperity, however, oil producers, consumers and policy makers need to cooperate to reduce the risks to growth and inflation, and to ensure that oil price movements are not as disruptive as they were in the 1970s.
Two major factors have contributed to the rise in oil prices. One is a large and unexpected increase in the global demand for crude oil, the outcome of robust growth in global economic activity. The other is the markets' expectation of continuing tightness in the supply chain - ranging from extraction through refining. Globally, there has been only limited investment in the oil sector for the past two decades.
In such market conditions, unexpected geopolitical developments, fears of potential supply disruptions and speculative activity can easily put pressure on prices. Hurricane Katrina provided a graphic illustration of just how sensitive the market has become. Disruptive price increases were only avoided by releases from strategic reserves, and by OPEC's offer to bolster crude production if needed.
So far, the impact of higher energy prices in industrial countries has been surprisingly benign. Price pressure is coming primarily from unexpectedly high demand for oil, rather than from a sudden constriction in supply, as happened in the 1970s. Hence higher oil prices have merely moderated strong global output growth, rather than having been a serious drag.
But such benign conditions may not persist, as is becoming evident in some countries already. Appropriate adjustments to monetary policy could be needed if higher oil prices start to have "second round" effects on inflation.
Emerging-market and developing economies have already felt the effects of higher oil prices on output, trade balances and inflation. For the poorest countries, this is a further blow to the prospects for achieving the high rates of income growth that are needed to reduce poverty.
To reduce the risks from high and volatile oil prices, we must improve the functioning of the oil market. Oil-exporting countries, international oil corporations and oil consumers need to work together cooperatively to find solutions.
The growth of oil consumption can be moderated by allowing the market to work. This means seeking ways to ensure that oil product prices reflect the full economic cost.
Many countries must face the reality that large and indiscriminate subsidies on oil products create social inequalities and economic distortions. In a few countries the issue will be to look at taxation policies - gasoline taxes remain particularly low in the United States, the largest consumer of crude oil.
Slowing oil demand growth also hinges on further action to encourage alternative sources of energy and to promote energy conservation by adopting appropriate efficiency standards and energy taxes.
Fears of future supply shortages must be eased by increasing investment in production and refining capacity. This will involve reducing regulatory obstacles to investment and reversing trends toward greater state control in the oil sector.
Mundane as it may sound, better quality and more timely data relating to oil production, consumption, investment and inventories will help reduce excessive volatility. This will help producers and consumers adjust to shifts in supply and demand conditions and improve investment and consumption decisions.
The poorest countries need more help from the international community to withstand the impact of higher oil prices. The International Monetary Fund's proposed new "shocks facility" will provide temporary financial support to low-income countries in adjusting to commodity price shocks, including higher oil prices.
Oil-exporting countries can also help the world weather the current tight market conditions and ensure that the benefits of higher oil revenues are well used in their own countries. For some, this is an opportunity to reduce their debt burdens. Many others, with sound and stable economies, could place themselves on a higher growth path through well-designed public spending.
Oil producers, consumers and policy makers share the responsibility to ensure that markets operate efficiently in allocating our most crucial natural resource, that volatility in the markets is minimized, and that the global economy is sufficiently resilient to absorb increases in oil prices - even if these turn out to be permanent.
(Rodrigo de Rato is the managing director of the International Monetary Fund.)
Don't let oil harm global prosperity
Rodrigo de Rato International Herald Tribune
MONDAY, OCTOBER 24, 2005
WASHINGTON Oil prices have nearly doubled since 2003, and are likely to remain at historically high levels for the foreseeable future. Fortunately, although some countries are seeing signs of lower growth and rising inflation, the global economic expansion has continued.
To sustain global prosperity, however, oil producers, consumers and policy makers need to cooperate to reduce the risks to growth and inflation, and to ensure that oil price movements are not as disruptive as they were in the 1970s.
Two major factors have contributed to the rise in oil prices. One is a large and unexpected increase in the global demand for crude oil, the outcome of robust growth in global economic activity. The other is the markets' expectation of continuing tightness in the supply chain - ranging from extraction through refining. Globally, there has been only limited investment in the oil sector for the past two decades.
In such market conditions, unexpected geopolitical developments, fears of potential supply disruptions and speculative activity can easily put pressure on prices. Hurricane Katrina provided a graphic illustration of just how sensitive the market has become. Disruptive price increases were only avoided by releases from strategic reserves, and by OPEC's offer to bolster crude production if needed.
So far, the impact of higher energy prices in industrial countries has been surprisingly benign. Price pressure is coming primarily from unexpectedly high demand for oil, rather than from a sudden constriction in supply, as happened in the 1970s. Hence higher oil prices have merely moderated strong global output growth, rather than having been a serious drag.
But such benign conditions may not persist, as is becoming evident in some countries already. Appropriate adjustments to monetary policy could be needed if higher oil prices start to have "second round" effects on inflation.
Emerging-market and developing economies have already felt the effects of higher oil prices on output, trade balances and inflation. For the poorest countries, this is a further blow to the prospects for achieving the high rates of income growth that are needed to reduce poverty.
To reduce the risks from high and volatile oil prices, we must improve the functioning of the oil market. Oil-exporting countries, international oil corporations and oil consumers need to work together cooperatively to find solutions.
The growth of oil consumption can be moderated by allowing the market to work. This means seeking ways to ensure that oil product prices reflect the full economic cost.
Many countries must face the reality that large and indiscriminate subsidies on oil products create social inequalities and economic distortions. In a few countries the issue will be to look at taxation policies - gasoline taxes remain particularly low in the United States, the largest consumer of crude oil.
Slowing oil demand growth also hinges on further action to encourage alternative sources of energy and to promote energy conservation by adopting appropriate efficiency standards and energy taxes.
Fears of future supply shortages must be eased by increasing investment in production and refining capacity. This will involve reducing regulatory obstacles to investment and reversing trends toward greater state control in the oil sector.
Mundane as it may sound, better quality and more timely data relating to oil production, consumption, investment and inventories will help reduce excessive volatility. This will help producers and consumers adjust to shifts in supply and demand conditions and improve investment and consumption decisions.
The poorest countries need more help from the international community to withstand the impact of higher oil prices. The International Monetary Fund's proposed new "shocks facility" will provide temporary financial support to low-income countries in adjusting to commodity price shocks, including higher oil prices.
Oil-exporting countries can also help the world weather the current tight market conditions and ensure that the benefits of higher oil revenues are well used in their own countries. For some, this is an opportunity to reduce their debt burdens. Many others, with sound and stable economies, could place themselves on a higher growth path through well-designed public spending.
Oil producers, consumers and policy makers share the responsibility to ensure that markets operate efficiently in allocating our most crucial natural resource, that volatility in the markets is minimized, and that the global economy is sufficiently resilient to absorb increases in oil prices - even if these turn out to be permanent.
(Rodrigo de Rato is the managing director of the International Monetary Fund.)
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