Oil Market Developments and Issues
March 1, 2005
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IMF Executive Board Holds Seminar on Oil Market Developments and Issues
On March 11, 2005, the Executive Board held a seminar on recent oil market developments and issues.1 The seminar provided an opportunity to discuss the likely impact of recent oil price movements, prospects for the future, and related policy challenges.
Oil prices rose more than 30 percent in 2004 compared to 2003, and by March 11, 2005 they had risen almost 35 percent further, to more than US$50 per barrel. Prices are at record levels in nominal terms, though they remain significantly below their peaks of the 1970s in real terms. In light of the large impact that oil prices can have on the global economy and on individual member countries, the IMF has responded on many fronts, including assessments of the likely causes of the price increases, their impact on the global economy and on oil exporters and importers, and prospects for investment in the oil sector. Fund staff has also prepared guidance on how importing and exporting countries should respond to higher oil prices, and the Fund has assessed the quality of oil market data and identified ways it can support international efforts to improve those data. The paper "Oil Market Developments and Issues" synthesizes much of this work undertaken by the Fund staff.
In addition to this work, the April 2005 World Economic Outlook provides further analysis of oil market developments, including assessments of demand trends, future investment requirements, and volatility. Also, the April 2005 Global Financial Stability Report reviews major energy markets and discusses volatility.
Executive Board Discussion
Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, made the following remarks at the conclusion of the seminar:
"Directors had a fruitful and wide-ranging discussion of recent oil market developments and related policy issues. They commented on the timeliness of the discussion in light of the recent resurgence of oil prices and commended the staff for its analysis in the numerous different areas covered in the paper, including likely causes of recent price increases, impact on oil exporters and importers, prospects for investment in the oil sector, Fund policy advice, and data issues. They also looked forward to further discussions of oil market prospects in the context of the April 2005 World Economic Outlook and the April 2005 Global Financial Stability Report.
"Directors recognized that the outlook for prices contains a large margin of uncertainty, which has to be taken into account in decision making by both producers and consumers. However, the prevalent view was that, notwithstanding the uncertainties inherent to the oil market, some of the recent price increase is likely to be permanent. There was also broad agreement that current low levels of spare capacity, in the context of strong demand growth and potential supply disruptions, increase the risk of greater volatility in prices.
"Directors considered the issue of investment in new oil production capacity. Many Directors felt that the current low levels of spare production capacity and strong demand growth call for increased investment in new productive capacity. Some other Directors pointed to past experiences of over-investment and very low prices, and also noted that other factors besides capacity limitations were contributing to high prices. While Directors considered that a durable increase in prices will stimulate investment, they also noted a number of other factors that affect investment. These include high initial costs of investment, the long time horizon for payoffs, uncertainties associated with forecasting long-term prices, and geopolitical risks. Some Directors suggested that limited openness to foreign investment in this sector might be another disincentive for additional investment. Directors agreed that members should strive to remove undue obstacles to investment. They also noted the importance of adequate investment in refining and other downstream activities, where structural rigidities persist.
"Directors broadly agreed that the impact of the recent high oil prices on the global economy has not been too large, and that growth prospects continue to be favorable. Moreover, they noted that oil prices remain well below historical peaks in real terms. Directors attributed this relatively limited impact in part to the ongoing reduction in oil intensity of consumption and production, especially for advanced economies, as well as to the greater credibility of macroeconomic policy frameworks. Directors were reassured that many oil importing developing countries have been able to respond to price increases so far without undue hardship through a combination of adjustment, use of reserves, and external financing. However, the impact on some developing country oil importers has been rather significant. Against this background, Directors stressed the need to remain watchful, especially if prices rise further.
"Directors supported the general principles underlying Fund advice to countries on policy responses to higher oil prices, as noted in the staff report, as well as the need to take into account the variety of specific circumstances in different countries and the uncertainties about the durability of price increases. Directors recommended that policy responses by oil exporters should take into account their current macroeconomic situation, the size of the oil windfall relative to the economy, the size of oil reserves, the existing liquidity cushion, the external and public debt situation, and the capacity to identify and implement good spending programs. They encouraged oil exporters to react prudently, given the uncertain outlook for oil prices. Directors also considered that careful budget management in exporting countries to ensure the quality of any higher spending will be essential. In addition, Directors attached importance to transparency and accountability in the management of oil revenues.
"Directors agreed that the response by importing countries to higher oil prices will continue to require some combination of increased foreign borrowing, reserve drawdown, and adjustment, including allowing real exchange rate depreciation. They noted that some net petroleum importers will be better placed to adjust gradually to the higher costs of petroleum imports, particularly countries with access to capital markets, comfortable reserve positions, sound debt dynamics, and modest inflationary pressures. Some countries that have limited access to foreign financing, low reserve cushions, or high debt burdens will need to adjust more rapidly. In this regard, Directors observed that additional concessional donor financing will help ease the burden of adjustment for these countries. Directors agreed that the Fund should continue to stand ready to provide temporary balance of payments financing where that will be a useful complement to countries' own policy adjustments.
"Directors noted the desirability of stability in oil markets for global prosperity, and underscored the importance of closer dialogue between consumers and producers. In that context, they agreed that the timeliness, accuracy, and comprehensiveness of data on both oil supply and demand should be improved, including data on inventories. They considered that such improvements can help reduce uncertainty and price volatility as well as improve decision making by producers and consumers, although recognizing that uncertainties related to long-term supply and demand will remain. Directors agreed that the Fund should continue to support the efforts of the international bodies responsible for collecting data on the oil market and encouraged Fund representation at meetings of those bodies. In this regard, several Directors welcomed the efforts of the Joint Oil Data Initiative and the Extractive Industries Transparency Initiative. Fund support will continue to include technical assistance to members to improve their institutional frameworks, such as statistical legislation and organization. Directors agreed that the Fund should continue to encourage members to accelerate their participation in the Fund's data-related initiatives. It was also suggested that there is scope for the Fund to focus more on resource-data transparency in surveillance activities.
"Many Directors also remarked on the important contribution that countries can make to oil market stability through policies to restrain demand for oil products. These actions include policies to improve energy efficiency, promote energy conservation and use of alternative fuels, and facilitate pass-through of international price changes to retail prices. In this context, they noted that the prices of petroleum products, including taxes and excises, should reflect not only their market costs but also the social costs that can result from their use. Directors considered that, where necessary, these measures should be accompanied by appropriate social safety nets, and that Poverty and Social Impact Analyses can be useful in assessing the potential effects on vulnerable groups."
1 This PIN summarizes the views of the Executive Board, as expressed during the March 11, 2005 seminar, based on the paper "Oil Market Developments and Issues."
IMF EXTERNAL RELATIONS DEPARTMENT