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G7 urges OPEC to follow Saudi output hike

The Group of Seven top economic powers will on Sunday urge oil-producing nations to safeguard the world economy from soaring energy costs by pumping more crude.
/ Source: Reuters

The Group of Seven top economic powers will on Sunday urge oil-producing nations to safeguard the world economy from soaring energy costs by pumping more crude.

After a quest for words that welcome unilateral production increase commitments from Saudi Arabia without widening divisions within the OPEC cartel, G7 finance officials are due to release a final statement by mid-afternoon local time.

But they said the essence of the communique was clear.

"We call on all producers to take action to ensure world oil prices return to levels which are consistent with lasting economic prosperity and stability -- especially for the poorest nations," Britain's Chancellor of the Exchequer Gordon Brown told reporters.

He said the G7 agreed "a lower oil price would be of benefit to the whole world economy."

G7 officials said the statement would seek to indirectly praise Saudi proposals for an output increase of up to 2.5 million barrels a day and urge other producers to follow suit.

The Saudi proposal "will add pressure on the other OPEC countries to do the right thing," Brown said earlier.

OPEC seeks unity
Members of the Organization of Petroleum Exporting Countries met in Amsterdam on Saturday to discuss record high oil prices that recently topped $40 per barrel. But they deferred a decision on raising output to a more formal gathering in Beirut June 3.

"Right now we encourage the member countries to do as much as they can to stabilize the oil market," OPEC President Purnomo Yusgiantoro of Indonesia said in Amsterdam on Sunday.

However, G7 hopes the Saudi proposals would be accepted easily by OPEC were dampened as several of the cartel's members objected to the Saudis going it alone.

"They can't. It's a mistake. Saudi Arabia can't decide alone to increase production," Libya's oil minister Fethi bin Chetwane told reporters in Amsterdam.

Venezuela's energy minister also opposed the move and said prices would stay high even if there is a June output hike.

G7 finance officials, meeting in New York, are worried sky-high oil prices will dent the most robust economic outlook in at least four years by hitting businesses and consumers and stoking inflation.

"It will be welcomed that some OPEC countries have expressed their willingness to increase their production," Germany's Deputy Finance Minister Caio Koch Weser said.

Echoes of 2000
The G7 last called on producers to act when oil prices surged in 2000 -- the last time the world economy was growing this fast. Back then, the United States released some of its Strategic Petroleum Reserve to help calm prices but U.S. officials have ruled out that response this time around.

G7 delegates said Sunday's communique would highlight economic forecasts for global growth of about 4.5 percent this year and next. Italy's finance minister Guilio Tremonti said the world economy was now growing at its fastest clip in 15 years, even though euro area was lagging.

Unlike the statements after the G7 meetings earlier this year, this one may not specifically urge currency flexibility or warn against excess foreign exchange volatility.

The G7 wants OPEC to honor a long-standing commitment to stabilize oil prices between $22 and $28 per barrel but some OPEC members on Sunday seemed to distance themselves from that goal -- suggesting the range for future oil prices will rise.

"$28-$30 for the OPEC basket is a very reasonable price for producers and consumers," Qatari Oil Minister Abdullah al-Attiyah said in Amsterdam. Nigeria agreed and said $28 per barrel should now be seen as a floor.

Some OPEC members and many economists argue high oil prices are more a product of refining bottlenecks, demand from a roaring world economy and security concerns in the Middle East than collars on crude output.

The thirst for oil was illustrated on Sunday when a senior Chinese official said the booming economy's oil import needs would rise 10 percent to 100 million tons this year.

Economists reckon the overall impact of higher energy costs on the world economy at present should be relatively contained. Rules of thumb suggest it will shave less than half a percentage point off global gross domestic product, now expanding at about 4.5 percent a year.

Also, although crude prices are at record highs, inflation-adjusted prices are nowhere near the economy-crippling levels of the 1970s.

But the G7 is worried sustained price rises will sap demand and output in its slowest economies, exaggerating an uneven world expansion and global current account imbalances.

Conversely, the impact of pricier oil on the faster growing economies like the United States and Britain could exacerbate inflation pressures, forcing up interest rates.

The uncertain security situation in the Middle East is also a major concern for the long-term outlook.

Finance ministers from five of the G7 -- the United States, Japan, Germany, Britain, France, Italy, and Canada -- plus representatives from the European Commission and Euro Group finance ministers met at the Waldorf-Astoria, a landmark art deco hotel on New York's fabled Park Avenue.

The officials' main purpose this weekend is to prepare the economic agenda for a June 8-10 summit on Sea Island, Georgia.

Germany's Hans Eichel and Canada's Ralph Goodale were absentees but both sent high-level representatives. Russia also sent a delegation as part of preparations for the G8 summit, where it too has a seat at the top table.

Apart from oil, the ministers discussed an array of other issues -- including the upbeat outlook for global growth, structural economic reforms, stalled world trade talks, Iraqi debt workouts and a review of Bretton Woods institutions.