G7 Convenes to Discuss High Oil Prices

Location: Washington, D.C.
Author: Ellen J. Silverman
Date: Friday, April 21, 2006

The Group of Seven ministers and central bank chiefs will meet before the World Bank and the International Monetary Fund (IMF) for their annual spring meetings over the weekend. Record-breaking oil prices and global currency rates will be the topics addressed.

The latest G7 meeting comes as the global economy is on course to expand by a robust 4.9 percent this year. "But even in this strong economic climate, we remain vigilant," Tim Adams, the US Treasury undersecretary for international affairs, said. "Disparities in global growth performance are large. Oil prices remain high and buffeted by geopolitical developments," he said. Crude oil prices soared as high as 74 dollars a barrel Wednesday, as a surprisingly sharp drop in US stockpiles added to fears for supplies from major producers such as Iran and Nigeria. The G7 ministers will be joined over dinner by representatives from Russia, Saudi Arabia and the United Arab Emirates for a discussion on what can be done to boost global oil supplies.

French Finance Minister Thierry Breton said he plans to revive G7 discussion of measures to offset the "speculative effect" of outside shocks on the oil market. China will also be represented at Friday's dinner, but there the menu may be less palatable for Beijing. "We think the Chinese have been too cautious, especially with respect to the foreign exchange changes," Adams said. The United States believes the Chinese yuan remains undervalued against the dollar, fostering deep imbalances in global trade, despite changes by Beijing to its currency regime last July. Adams said that China's "blistering" first-quarter growth pace of 10.2 percent and other data "indicate that the Chinese can move more quickly without having a deleterious effect on their economy".

The G7 nations have repeatedly called for "flexibility" in global currency policies, without singling out China. The global imbalances are growing in prominence in debate among financial powers, and are high on the agenda for the IMF's weekend meeting. Mammoth trade surpluses in China and oil exporters drove the US current account deficit to an unprecedented 7.0 percent of GDP in the last quarter of 2005. That imbalance was identified by the IMF this week as risking "sizeable negative effects" for world growth going forward.

The United States relies on foreign investors to fund its deficit. But the higher the deficit goes, the more anxious investors may become over a potential US crash. German finance ministry state secretary Thomas Mirow said last week that for the G7 powers, the imbalances in the world economy translate into a "heap of crisis scenarios". US Treasury Secretary John Snow, meanwhile, wants his G7 colleagues to intensify their efforts to choke off the finances of extremist groups. "Those who reach for their wallets to fund terrorism must be pursued with equal determination as those who reach for a bomb or a gun," he stated.