Source : Business Times - 16 Jun 2008
Soaring oil prices could prolong a US economic downturn triggered by a housing market slump and credit crisis, Treasury Secretary Henry Paulson warned on Saturday.
Speaking after a meeting of Group of Eight (G- 
finance ministers, Mr Paulson repeated that he backed a strong dollar and dismissed any suggestion that the dollar’s depreciation was helping push up global energy prices. The US economy grew at an annual rate of 0.9 per cent in the first quarter. Growth should pick up this year, Mr Paulson said, although falling home prices, financial market turmoil and energy costs would all weigh on the economy.
‘While we are still working through housing and capital markets issues, and expect to be doing so for some time, we also expect to see a faster pace of US economic growth before the end of the year, while recognising that the recent increase in oil prices risks prolonging the US economic downturn,’ Mr Paulson said.
The impact of high energy and food costs on global growth were the main theme of talks between Japan, the United States, Britain, Canada, France, Germany, Italy and Russia.
While Italy and France played up the role of speculation in sending commodity costs skyward, Mr Paulson said that oil prices were being driven by the fundamentals of supply and demand.
‘At its heart, this run-up in price reflects long-term trends in global supply and demand and strong economic growth coinciding with a period of minimal investment in oil production.’
Mr Paulson said that in his talks with G-8 finance ministers, a number of them said that high commodity prices were being used as a hedge against inflation.
‘I don’t believe that is related to the dollar,’ he said in reply to a question on whether the falling US currency was a major factor behind soaring oil prices.
Mr Paulson noted that since February 2002 the dollar’s value had fallen about 25 per cent but oil prices had gone up 500 per cent in the same period.
‘In terms of financial investors, speculation and the role that that plays, we’re looking at that but all the evidence points to supply and demand,’ he said, making the point that he did not believe the dollar was a key culprit for costlier energy.
Mr Paulson said that there was a tendency to look for someone to blame for costly energy. ‘It is very easy for people who want to look for some short-term solutions and I think there’s a danger if people say that all it is is speculators.’
There has been no significant increase in global oil production capacity in the past 10 years and significant new investment to boost production was required, Mr Paulson said.
There were no short- term solutions but said oil users should ‘avoid subsidies and other market-distorting policies’ while suppliers needed to open up their economies to more oil-market investment, he said. ‘Producers need to increase output and capacity,’ he added.
Mr Paulson said that wealthy countries should offer emergency food assistance to help the hungry and developing countries should replace general food subsidies with better-targeted ones and drop export restrictions.
The G-8 finance chiefs met to set an agenda for a July meeting of political leaders from their countries, which will also take place in Japan.
Mr Paulson acknowledged that oil and food price inflation were turning people against globalisation, the term used to describe increasingly intertwined worldwide markets.
‘A shift inward would lead to economic stagnation and would cost millions of jobs, deter foreign investment, curtail growth, and increase the cost of many goods and services purchased by American households,’ he said.
There was support among the G-8 for a proposed Clean Technology Fund that would help poorer countries buy state-of- the-art anti-pollution equipment and so reduce greenhouse gases that damage the environment.
The fund, up to US$10 billion, is to be financed by both developed and developing nations. Mr Paulson said that the Bush administration was asking Congress to approve US$2 billion for it over three years. — Reuters
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