World's top bankers see oil prices staying high

Crude oil is expected to remain near record highs of $60 a barrel for several years, eroding some strength from a world economy already vulnerable to upsets, the world’s most powerful central bankers said on Sunday.

Global growth is softening somewhat because of crude oil prices, which have shot up 60 percent this year, although central bankers holding their annual summit said that overall the economy remains solid and inflation contained.

But surging crude oil and volatility on energy markets is clearly worrying central bankers, who held a special session on how to tackle the risks it poses at the Bank for International Settlements’ annual meeting.

“In the short term, we expect oil prices to remain around $60 a barrel,” Iran’s central bank vice governor, M.J. Mojarrad.

“But if supply factors, demand and the geo-political environment can be dealt with, expectations for oil prices could come back to $40 a barrel,” he told Reuters.

Central bankers would like to see major oil producers and consumers meet to discuss how to remove political obstacles to lifting supply in Iran and Iraq, restraining demand in strongly growing regions such as China and the United States, he said.

But they see no quick solutions to costly oil.

“There was a general consensus that we will have high oil prices for at least the next two or three years,” said Martin Redrado, Argentina’s central bank governor.

That poses risks for sustaining robust growth in a world economy expected to expand by about 4 percent this year after it showed the best growth in over three decades in 2004.

“It is of course something that has an impact” both on growth and inflation prospects, said European Central Bank Governor Klaus Liebscher.

“We have come so far without big problems. But if you ask me whether it is a source of a big problem I say it is a relatively big problem,” said Bank of Japan Governor Toshihiko Fukui.

Oil risks overshadow other worries
Oil risks on Sunday overshadowed worries about persistent global imbalances from a world economy that is turbo-charged by the United States and China. Japan and Europe remain stubbornly weak.

Pushed into the background as well was the masses of cheap money from very low central bank rates in continental Europe and in Japan, which a year ago central bankers fretted must be gradually tightened to prevent asset bubbles and inflationary outbursts.

In fact Sweden’s Riksbank cut its interest rate to a new low of 1.50 percent last week to counter weakening growth, partly caused by oil costs.

Financial policymakers for several years have failed to achieve breakthroughs in rebalancing world growth and easing stresses to financial markets, which come from very cheap money and particularly from currencies.

“We don’t need much analysis. We need solutions,” Eddie George, former Bank of England governor and BIS board member, told a session on how to improve international cooperation, according to one participant.

“Our concerns are ... global imbalances, oil prices and what the U.S. is doing about its fiscal, its twin deficits, and what will happen to interest rates matters very much,” said Walter Cancela, Uruguay’s central bank president.

The United States and China have been center stage of world economic discussions because U.S. growth relies heavily on foreign borrowing. The U.S. current account deficit hit $670 billion or 5.7 percent of GDP in 2004, financed largely by Asia buying of U.S. dollar assets to maintain fixed or managed currency regimes.

This heavy buying caused Asian foreign exchange reserves to rise 3.4 percent on the year to $2.5 trillion as of end-May. China has led the reserve accumulation, buying U.S. dollar assets as money flooded into its fast-growing economy, in order to keep its exchange rate fixed at about 8.28 to the U.S. unit.

Central bankers and finance ministers are concerned that a sudden change in these financing flows could disrupt world growth and destabilize financial markets. They want China to revalue its currency to help relieve these stresses.

At the BIS meetings, China’s central bank governor Zhou Xiaochuan acknowledged his country’s growing role in achieving healthy world growth as the country moves towards a market-based economy but offered no hint over timing for a currency change.

“As we implement market reforms... China is becoming more important for world trade and world economy,” he told reporters.