Concerned over the adverse economic consequences of high oil prices on the still fragile recovery in global growth, the governing body of International Energy Agency has urged oil producing countries to demonstrate commitment and action to increase oil supplies.
There has been a near-10 per cent correction in oil prices since early May; yet prices continue to stay at elevated levels driven by the combined effect of market fundamentals (supply constraints and robust demand), geopolitical uncertainties and future expectations.
The IEA governing board has expressed concern over the growing signs that the rise in oil prices since September 2010 is affecting the economic recovery by widening global imbalances, reducing household and business income, and placing upward pressure on inflation and interest rates.
As the global demand for oil increases seasonally from May to August, there is an urgent need for additional supplies on a more competitive basis to be made available to refiners to prevent a further tightening of the market, IEA said in a statement.
Arguing that additional price increases at this stage of economic cycle risk derailing the global economic recovery, the agency said they (high prices) are neither in the interest of producing nor consuming countries. Developing countries dependent on imported oil are more vulnerable, it pointed out.
Emerging countries such as China and India with significant dependence on imported crude oil have been facing inflationary condition for several months now. Governments find themselves largely helpless in fighting inflation. Their central banks have been regularly tightening credit.
For instance, China tightened bank credit eight times since October 2010.
The Reserve Bank of India too has not lagged behind. Yet, the result is far from satisfactory.
Given high crude oil prices of last several months and high import dependence, these countries actually end up facing imported inflation. Some countries have begun to lower their GDP growth target in the wake of this.
With demand holding up strongly and supply constraints persisting, the oil market balances are tightening. Such a situation is attractive for speculative funds to move into the market. Whether policymakers will take steps to control flow of speculative capital in this sensitive commodity is unclear.
The next meeting of OPEC is scheduled for June 8. How the producers respond to the situation remains to be seen.