But what about when the world's oil output is already past its peak?

G7 leaders say world economy vulnerable

By David Pilling and Jonathan Soble in Tokyo

The world economy remains vulnerable to downside risks stemming from tighter credit, a deterioration of the US housing market, higher oil prices and rising inflation, according to G7 finance ministers gathering in Tokyo on Saturday.

Although “long-term fundamentals remain sound” and recession in the US and elsewhere could be avoided, according to the final communiqué, the world’s richest nations said they stood ready to “take appropriate actions, individually and collectively, in order to secure stability and growth”.

Finance ministers also called on OPEC and other oil-producing nations to “raise production”, saying that the “recent surge” in prices, which briefly broke through $100 a barrel, was stoking inflation and complicating the response of economies already reeling from problems related to sub-prime loans.

Henry Paulson, US treasury secretary, said that “current financial turmoil is serious and persisting”, adding that discussion focused on how problems in the capital markets were spreading to the real economy. He expected the US would continue to grow and avoid recession, though he conceded there were risks to that scenario. Finance ministers predicted continued robust growth in emerging economies, but said it would be slower.

Mr Paulson said discussion had focused on “how we minimise the spillover that is going on the in capital markets into the broader economy.” He said he was not disappointed that Japan and European countries had rejected the idea, floated by Dominique Strauss-Kahn, head of the International Monetary Fund, for joint efforts to stimulate their economies through emergency fiscal packages. “That had never even occurred to me,” he said. “Every economy is different.”

Japan, the host country, was keen to scotch any idea that it should reverse its policy of fiscal consolidation. Toshihiko Fukui, Bank of Japan governor, said: “If everyone does the same thing it won’t be any more effective. Each country needs to do what is best for its own particular situation.”

However, in terms of regulation, Mario Draghi, governor of the Bank of Italy and chairman of the Financial Stability Forum, said there should be a coordinated response. “If it is not done together it will undermine the level playing field.”

The Financial Stability Forum presented an interim report on recent market turmoil in which it recommended strengthening management of liquidity risks, addressing conflicts of interest at ratings agencies and improving investors’ awareness about the risks of structured products. The IMF was asked to work closer with the Stability Forum on developing early warning systems.

Mr Draghi suggested that financial market deregulation was partly to blame for the crisis. He cited a 1998 rule change in the US that allowed so-called monoline insurers to expand beyond their specialty business of insuring municipal bonds to take on complex structured products. “That is the sort of thing we need to look at,” he said.

Finance ministers called for “prompt and full disclosure by financial institutions of their losses and of valuation of structured products.”

Mr Paulson urged banks to recapitalise as soon as they could and avoid the risk that, by shrinking their balance sheets, they would deprive economies of credit. As banks look to the sovereign wealth funds of oil-rich nations for capital, he said the US remained open to foreign investment.

He called for a reasoned response to sovereign wealth funds, adding that countries should remain vigilant against protectionist sentiment.

The communiqué played down the issue of currencies, while officials said there was minimal discussion of the falling dollar.

G7 ministers reiterated their call for China to revalue faster, saying: “We welcome China’s decision to increase the flexibility of its currency, but in view of its rising current account surplus and domestic inflation, we encourage accelerated appreciation of its effective exchange rate.”

Original article posted here.