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G7 chiefs mull oil prices as storm nears

Posted on: Friday, 23 September 2005, 00:27 CDT

By Glenn Somerville

WASHINGTON (Reuters) - Top finance officials from the world's richest nations were set to meet on Friday to mull the potential risks to global growth from costlier energy, with a wary eye on a storm headed for a refinery-rich U.S. region.

The so-called Group of Seven -- the United States, Britain, Canada, France, Germany, Italy and Japan -- was scheduled to meet formally for about four hours Friday afternoon to put the best face on prospects in an era of soaring oil costs.

On Wednesday, the International Monetary Fund said it expected the global economy to expand a healthy 4.3 percent in each of 2005 and 2006 but warned energy presented a growing risk to the outlook.

U.S. nerves were on edge going into the meeting as Hurricane Rita churned toward areas of Texas where as much as a quarter of the nation's oil-refining capacity is centered.

Oil markets are still reeling from last month's onslaught from Hurricane Katrina, which claimed more than 1,000 lives and wreaked havoc on infrastructure.

"We have seen a strong increase in oil prices and up to this year we see that the world has been able to absorb that," IMF Managing Director Rodrigo Rato told Reuters on Thursday.

"2005 is starting to show a different picture and a not-so-good picture because some of the increases in prices this year are not due to increases in consumption but to supply constraints," he added.

Oil price gains fueled by constricted supply rather than growing demand are harder and more expensive to fix.

Energy will likely be foremost in the minds of the finance ministers and central bankers who do attend the G7 meeting -- although domestic political turmoil in two member countries means not all the top officials will be present, making it all the less likely many deals will emerge.

Germany's finance minister, Hans Eichel, opted out of the gathering after an inconclusive election last Sunday that left unclear which party will rule the country.

And Italy's economy minister, Domenico Siniscalco, abruptly quit after a dispute over defiant Bank of Italy Governor Antonio Fazio. Tremonti was headed for Washington even though he also is at odds with Fazio, who planned to attend.

CURRENCY TO LOOM LARGE

As always, foreign exchange was bound to be on the agenda.

The wrinkle this time was whether the G7 would officially recognize China's modest 2.1 percent revaluation of its yuan currency, a move the United States and other G7 members pressed for as a swelling flood of cheap exports from China ran up its trade advantage over the industrial giants.

Ahead of the meeting, several G7 officials said China's action in July was a good first step, but pressed for more -- leaving unclear whether officials will use the closing G7 communiqué on Friday night to apply subtle pressure on China to keep moving toward increased flexibility.

In what is widely seen as a gradual move to bring China and other key emerging economies into their club, participating G7 members will meet officials from China, Brazil, Russia, India and South Africa -- known as the BRICs -- over lunch on Friday ahead of formal G7 talks.

"I believe that we ought to put some of these countries on a glide path to being full participants in the G7," Tim Adams, the U.S. Treasury's top foreign affairs official, said this week. "We need an institution, the G7, that reflects a changing world economy."

The new economic reality is one where cheaper-labor nations such as China and India account for a growing portion of world economic output.

The finance ministers' gathering takes place on the sidelines of semiannual meetings of the IMF and World Bank that continue through the weekend.

The ministers hope to make further strides on a deal -- agreed by political chiefs in Scotland in July -- to forgive about $40 billion of debt for about 18 poor countries.

Some divisions remain, however.

France has suggested measures like a tax on airline travel to help finance such a plan, something the United States strongly opposes. U.S. authorities have stressed that debt forgiveness should be complete and not carry any conditions.

"There are still some countries out there that have yet to lend their full support," Adams said without naming names. He added that he hoped an agreement could be completed soon and said he expected it to be a focal point of the IMF meetings.

The United States will also likely press for the fund to forge a loan pact with Iraq while the IMF's Rato said the violence-scarred country was making progress in the main areas that need to be addressed for a fresh dose of aid by year-end.

"We would hope that later this week the next milestone would be reached with the IMF, and the IMF -- with Iraq -- would be able to announce that they're moving into the negotiations phase of the standby agreement," Snow said on Thursday, just before meeting with Iraq's Finance Minister Ali Allawi and Central Bank Governor Sinan al-Shabibi.

Source: REUTERS

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