Summit on the oil price rise

The G-8, comprising the 8 most industrialised nations of the world, plus 3 (including the remaining three major oil guzzlers of the world namely China, India and South Korea), met in Aomori, Japan to deliberate on a common strategy to deal with the oil crisis that has hit the world since July 2007. Interestingly the world's largest oil consumer, the United States, and the world's second largest oil producer, Russia, were present at the summit.
Together these 11 countries consume two-thirds of the world's oil output. However none of the Middle Eastern countries, or other members of the Opec cartel, including Saudi Arabia, the largest oil producer, were represented. On Friday, oil prices surged to the highest level ever to $139 per barrel - a rise that is forecast to further dampen global economic growth, worsen inflationary pressures and raise the risk of more protests worldwide - be it by the fishermen, truck drivers and others whose livelihoods are under threat in the West or the common man in the developing world unable to bear the burden of soaring oil prices.
The question of who is at fault for the recent oil price rise has plagued many an economic fora. It maybe recalled that during President Bush's recent visit to the Middle East he requested the oil producing countries to increase output - a request which, implicitly at least, appears to lay the blame on the price surge of recent months on the oil producing nations.
Such a 'request', reminiscent of the 1970s oil crisis, was the usual practice of US governments who blamed the price rise on supply rather than on other factors. Two months after Vice President Dick Cheney went to Saudi Arabia to plead for increased oil production, President Bush was in Ryadh last month making the same pitch.
It was reported that Saudis were only slightly more accommodating, agreeing to a modest increase that will, according to New York Times, do nothing to lower prices at American gas pumps or America's dependence on imported oil.
Later, the Iranian President Ahmadinejad claimed that the oil price was artificially inflated by 'capitalists' and that crude oil remains plentiful: "while the growth of consumers is lower than that of production and the market is full of oil, prices are constantly on the rise and this situation is completely artificial and imposed.
Powerful and international capitalists (are working) mendaciously to pursue their political and economic aims." Top-exporter Saudi Arabia, however, said recently that it will increase output this summer to help meet peak demand, but oil prices have continued to rise as investors rush into commodities as a hedge against the dollar's fall and inflation.
The latest figures from US government agencies and trading data indicate that hedge fund managers and speculators have reduced bets on higher oil prices by 80 percent since July last year when prices began to rise sharply and crude futures rose to record highs.
And yet price of oil has continued to rise in recent days. Could it be the presence of massive liquidity in the financial markets? Mr Ito, senior analyst at UBS Securities Japan, agrees: "Oil prices are surging not because of a supply shortage, but because of massive liquidity," he maintained referring to the influx of financial funds into markets, helped by low interest rates.
Thus the G-8 plus three summit has moved on from the 'who to blame' to 'how to deal with the problem'. There was a growing acceptance that it is the consumer nations that must find ways to temper demand by focusing on technology, conservation and diversification.
The latter policy is being challenged on the grounds that rising ethanol production in the US in particular is reducing the grains available on the world market leading to global food shortages. In effect, there is a need for all the nations but particularly the US to ensure that its oil policy does not generate a food crisis or indeed an environmental hazard.
To deal with the rising price of oil and the resulting protests South Korea, this Sunday, became one of the first countries to succumb to public pressure, announcing a $10 billion one-year handout to help 14 million low-income earners. Sarkozy of France has floated the idea of reducing VAT on oil - a proposal that is being resisted by the European Union at this point.
Pakistan has its own economic woes, made all the more acute because of the surge in oil prices. The government's top managers hurriedly visited Saudi Arabia to get a deal on oil in an effort to better limit its negative fallout on the common man.
Additionally, the PPP Co-Chairman, Asif Ali Zardari, has stated that the government will issue Benazir Cards which will provide cash between Rs 1000 to Rs 1500 to over 5.5 million of those living below the poverty line.
These measures would no doubt raise the deficit with repercussions on the economy, however it is to be supported as those living below the poverty line would be unable to feed themselves and their families without such support.