World Summit on Oil

In a Financial Times editorial of 15 May 2008, as oil prices continued rising to around US$ 125 a barrel and many commentators predicted oil prices could reach US$ 200 a barrel, the editorial's advice to world leaders was clear.

With the title "Time to Convene a Summit on Oil", it said that G8 or G20 leaderships should put oil on the agenda of all future summits, and perhaps convene a special oil summit. The editorial suggested the summit must include industrialised countries, big emerging market oil consumers and large oil exporter countries. It went on to recommend a mix of strategies and policies, including energy saving, and also more international effort to prevent oil prices being exposed to "boom-bust" cycles, of radical and rapid speculative price rises and price slumps.

This and other similar comments on high oil prices were however soon forgotten. From around June 2008 oil prices collapsed with economic growth, and most G8 and other OECD countries faced what the IMF calls the worst global financial and economic crisis since 1929, which lasted up to 18 months. In some countries and regions this shows signs, right now in July 2010, of returning as a "double dip" especially in Europe and perhaps also the USA.

From early 2008 and extending through 2009, finance and monetary authorities quickly bailed out banks, insurance companies, market operators and the hardest hit sectors of the economy, especially the public works sector, housing and car industries, and airlines. Total borrowing, new debt and government guarantees made by OECD governments in this period, 2008-2009 probably exceeded US$ 3500 billion. National budget deficits grew very fast, in the US case attaining about US$ 1600 billion for the single financial year of 2010.

The amounts borrowed to finance bail out and aid to most affected economic sectors can be compared with net oil import costs for all the 27 OECD importer countries. Using data from the US EIA the net volume (after re-exports) is around 24.5 million barrels a day. At US$ 100 a barrel as the average oil price, this would cost about US$ 2.45 billion a day, or US$ 894 billion a year.

For at least six months, since the start of 2010 it is clear that whenever the global economy picks up, measured by indicators like world trade value, iron and steel production, car sales and airline activity world oil demand also picks up. To be sure, arguments can be made about the exact "coefficient" of oil demand growth per unit percent increase of global GDP, due to energy efficiency raising and oil substitution efforts, but any serious return of economic growth will raise world oil demand. By July-August-September 2009, if there is no "double dip", continued growth in oil demand can easily push oil prices back above US$ 100 a barrel.

Calling a world summit on oil, and oil prices is rational for many reasons. This is firstly because oil at US$ 100 a barrel opens the door wide open for the same speculators who drive down prices to very low levels - around US$ 35 a barrel at the end of 2008 - when demand is falling, but drive up prices to very high levels when demand is strong. Price volatility is in fact only good for traders and speculators, not for oil producers and consumers.

A world oil summit would have several objectives, as the Financial Times editorial suggested, but among these, the rational utilisation of "petrodollar" oil revenues should be given close scrutiny and made more transparent.

So-called "recycling of petrodollars" is in fact similar to encouraging capital flows from countries with a capital surplus of any origin. This concerns several key players in the global economy, especially China with its huge trade surplus on manufactured products. In the current context of uncontrolled trading of national debt and currencies, these capital surpluses generate speculative pressure on exchange rates, sharp rises in interest rates for "bad borrowers" with weak moneys, and large budget deficits further increasing national debt. This creates a strong risk of inflation, following attempts at deflation and austerity. Without international co-operation and the understanding of shared interests no deal would be possible at a special summit on oil.

There are many perverse and non-productive results from oil price volatility, hurting both consumers and exporters. Through 2007-2008, but declining fast in 2009, investment in green or renewable energy - especially the biofuels - was given big support and huge subsidies by many OECD leaders. Much of this investment was not rational and many projects were unrealistic or only feasible if oil prices increased to US$ 150 a barrel and stayed there. Today, many of these subsidies are being scaled back simply because they are so costly and the renewable projects concerned are so low feasibility. This creates a boom-and-bust in renewable energy.

Investment by the oil major corporations (the IOCs) in marginal and high cost oil sources, such as extreme deep water offshore oil and tarsand oil, is also not rational unless oil prices are high and stable. By investing in these "last frontier" oil resources and production methods, as the BP disaster in Gulf of Mexico shows, the IOCs are taking big risks and can only produce high-cost oil.

Conversely, rational energy strategies and policies set up by dialogue between oil exporter countries and the big importer countries can avoid these unproductive, low yield, high risk energy strategies - all of which only seek the reduction of OECD oil import demand addressed to the exporter countries.

We can be sure that when oil prices rise to US$ 100 a barrel, which can be quite soon if there is no double dip, more calls will be made by media like 'Financial Times' for a world oil summit. Before then, it is important to set the agenda, including all the major concerns and interests of all parties.

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