IMF Warning: Low Fuel Price Risks
A slowing US housing market and the possibility of a major oil supply disruption were two of the biggest risks to the world economy, International Monetary Fund (IMF) head Rodrigo de Rato said yesterday.
Speaking at an Organisation of Petroleum Exporting Countries (Opec) conference in Vienna of policy makers and oil executives, he underscored the importance to economic growth of stable oil flows.
Moves by some oil-producing countries to raise taxes on international oil groups or change contract terms could lead to their rebound by cutting investment.
» Source: Business Day
“With the housing market in the US cooling faster than anticipated, there is a risk of an abrupt slowdown in the US which could derail the global expansion.
“There are clear signs of increasing risks,” De Rato said, referring to global growth. “Adequate investment in the oil sector will help alleviate concern about future supply.”
He said fuel prices should be raised in countries such as the US and China, the two largest consumers, as current costs discouraged conservation and resulted in damage to the environment. The wealthy benefited disproportionately from lowered fuel costs, said De Rato.
Governments should stop subsidising fuel and engage in energy policies that went beyond the needs of their own country. They should develop “safety nets” to protect the poor from high energy prices, he said.
“Sudden or unexpected supply disruptions in the oil market — should they occur — could have more adverse effects than have occurred up to now.”
Iran’s disagreement with the United Nations Security Council on its uranium-enrichment programme has raised concern of a cut in oil supplies from the world’s fourth-biggest crude-oil exporter. The government has, however, given assurances it would not use oil as a “weapon”.
Militants have shut a quarter of oil output in Africa’s biggest oil producer, Nigeria, and Iraq’s exports remain vulnerable to sabotage.
Other disruptions could come from oil-producing states where governments have taken control of production. The trend to resource nationalism, including changing oil majors’ contract terms, is gathering pace in Russia, Venezuela, Bolivia, Chad and Algeria. Emboldened by high oil prices, governments are seeking more cash and control from multinationals that drill in their oil and gas fields, such as Chevron, Royal Dutch/Shell, ConocoPhillips, BP and Total.
“Recent moves in various producer countries to change the taxes or terms of contracts of oil companies may raise government revenues in the short term,” De Rato said. “But this could backfire as they create significant disincentives to new investment in oil production, thus ultimately affecting the governments’ long-run revenues.”
De Rato called on governments of oil-producing countries to ensure their polices encouraged investment and spread risk between themselves and the groups drilling for oil.
He said the effect of high oil prices had been moderate so far in large part because they were accompanied by strong demand for other commodities, goods and services.
Oil hit a record $78,40 on July 14, and even at today’s $66 is still three times the price at the start of 2002.
He urged policy makers in emerging economies to be ready to respond to the appearance of any strains. A major challenge in China and some emerging Asian countries was to manage a transition to more flexible exchange rates that would allow necessary currency appreciation to take place, he said.
Russia and some other oil exporters could also benefit from more flexible exchange rates, which would help to contain risks of overheating, De Rato said.
De Rato said the challenge facing Europe was to make the region’s economic recovery last. Indicators have pointed at strong growth this year with a tapering off next year.
He saw some inflationary pressure in the US. The Federal Reserve has paused in imposing a series of rates increases, to monitor inflation. De Rato said domestic fuel prices in all countries should be set to reflect economic and social costs, and to promote an appropriate demand response.
