Business Analysis: Oil prices surge past $50 a barrel as finance ministers meet at IMF

Brown more downbeat than counterparts over prospects for world economic growth
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The Independent Online

As fleets of gas-guzzling multi-person vehicles begin ferrying world financial leaders into the secure compound protecting the offices of the International Monetary Fund in Washington, there will be one topic on their minds - the soaring price of oil.

As fleets of gas-guzzling multi-person vehicles begin ferrying world financial leaders into the secure compound protecting the offices of the International Monetary Fund in Washington, there will be one topic on their minds - the soaring price of oil.

Crude prices struck new all-time records yesterday, vaulting the $50-a-barrel barrier in after-hours trade in New York and passing $46 a barrel in London. While in real terms the price is nowhere near the peaks of the 1970s, when oil hit the equivalent of $80 a barrel in today's money, analysts fear it could be enough to slam the brakes on the world economic recovery.

Gordon Brown, the Chancellor of the Exchequer and a senior figure at the IMF, added to the gloom at yesterday's Labour party conference saying the global recovery was "uneven and still fragile. Where oil prices have doubled and imbalances worsened, I will tell the G7 and IMF when I travel to Washington later this week that we will take no risks," he said.

The IMF itself will cast its verdict tomorrow when it publishes its key World Economic Outlook document, detailing its forecasts for the world's leading economies. According to early leaks it will raise its forecast for world growth this year to 4.9 from 4.6 per cent, making it the best year for some three decades.

But the big question is what growth in 2005 will look like. The IMF is expected to shave a point off its forecasts to 4.3 from 4.4 per cent, reflecting its upbeat view of the world economy's ability to cope with soaring oil costs.

Last week Rodrigo Rato, the IMF's managing director, played down fears of an oil-induced recession. "There is no additional capacity," he acknowledged in a newspaper interview. "But the oil price of recent weeks is being perfectly absorbed by the global economy. We are not seeing a new surge in inflation in a significant way and emerging countries are not having problems facing up to the rise."

Oil prices have breached $50 a barrel thanks to a combination of strong demand, low stock levels, uncertainty over the Russian oil giant Yukos, hurricane damage to Gulf of Mexico supplies, violence near Shell's Nigerian sites and tensions in the Middle East.

Julian Lee, an analyst with the Centre for Global Energy Studies, said there was nothing to keep a lid on oil prices. Once $50 is reached, analysts see resistance at $51, and then at $53 - and perhaps higher.

Mr Lee said: "The market is now out of the control of [the oil cartel] Opec. The only end I can see to this is that oil prices reach a level sufficiently high and stay there sufficiently long that they limit the level of demand - in other words the global economy is set for a slowdown."

Morgan Stanley has told clients it believes surging crude oil prices could top $60. "We now think that crude oil could reach $61 before a meaningful sell-off occurs," a report by the investment bank's private client group said.

The Bush administration, however, will be determined to ensure the communiqué from the Group of Eight (G8) nations that meets this weekend sticks to an upbeat line.

With the US presidential elections five weeks from today John Snow, the Treasury Secretary, will insist the US recovery is sustainable. Last week his under secretary, John Taylor, said: "The world economy is in a remarkably good situation right now. Growth is strong all over the world. There's no economy that's in recession. There's no major financial crisis."

The US is likely to urge other economies - especially the eurozone - to boost their economic growth to take the pressure off America to act as the consumer of last resort.

The IMF is expected to echo that, warning that this imbalance has forced the US to build up record trade and current account deficits that could trigger a slump in the dollar if they unwound suddenly.

At the heart of this debate is China. For the first time the finance ministers and central bank governors of the G7 (the G8 minus Russia) will meet with their counterparts from China at their session on Friday.

For the fifth meeting on the trot the issue of China's currency regime, which has kept the yuan pegged to the dollar, will be high on the financial markets' agenda. With China, the world's most populous country, enjoying a major boom, its undervalued exchange rate allows it to pump out cheap exports to the West - great for the Chinese but a problem for the US balance sheet.

So far the G7 has stuck to coded language that it wants "more flexibility in exchange rates ... for major countries or economic areas that lack such flexibility".

Julian Jessop, an international economist at Capital Economics, said there was still speculation China could agree to a revaluation in exchange for G7 membership although he said this would be a surprise. "The necessary reforms to the domestic financial system and the framework of capital controls would have to be spread over several years so the markets would be none the wiser about what actually happens to the value of the currency," he said.

In contrast to the US, Mr Brown's more downbeat noises have been interpreted as a hint he will downgrade his optimistic growth forecast of 3.0 to 3.5 per cent next year - something denied by the Treasury. The IMF expects just 2.5 per cent.

Although he has been distracted by the preparation for the Labour conference, Mr Brown will still use the IMF meetings to push his personal agenda of Third World poverty relief. The Chancellor announced at the weekend the UK planned to spend an extra £100m a year on debt relief for more than 30 of the world's poorest countries to help them repay debts to the World Bank and African Development Bank.

Mr Brown will call on the world's biggest donors to do the same at upcoming World Bank and IMF meetings and ask for IMF gold reserves to be revalued to release cash for debt relief. Under a 1971 agreement, most IMF gold is valued at just $40 an ounce, one-tenth of the market price.

This meeting will also receive a joint IMF/World Bank report into Mr Brown's proposed international finance facility that seeks to double the global aid budget to £100bn a year by encouraging private banks to lend against future government aid payments.

Mr Brown says this is vital to get access to cash now to ensure the United Nations' millennium development goals are met by the 2015 deadline.

This will become an even more important issue for the Chancellor next year when the UK assumes the presidency of both the G8 and the European Union. As he told yesterday's conference: "I am proud that I can travel as a Labour Chancellor, your representative, to go to Washington, and at the annual IMF, G7 and World Bank meetings make the case for our unique Labour proposals, as we work together to make poverty history."