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Impact of oil prices on world economy

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BRAINSTORMING: Saudi officials gather at the hotel where Jeddah’s energy meeting will take place. The world’s top oil producers and consumers convene on June 22 to grapple with record high oil prices.
BRAINSTORMING: Saudi officials gather at the hotel where Jeddah’s energy meeting will take place. The world’s top oil producers and consumers convene on June 22 to grapple with record high oil prices.

Special Correspondent

Three international agencies send note to Petroleum Ministry

Interaction between oil and financial markets

Measures for efficient operation mooted

NEW DELHI: Saudi Arabia, International Energy Agency (IEA), International Energy Forum (IEF) and Organisation of Petroleum Exporting Countries (OPEC) have warned that oil price rises and underlying volatility will have an impact on the economies of the consuming and producing countries alike as well as on the long term stability of the international oil market and world economy.

The background note sent to the Petroleum and Natural Gas Ministry in India states that apart from the demand and supply issues for the volatility in the oil markets, there have been other causes not necessarily related to the underlying demand and supply trends.

The note identifies the increasing interaction between the oil market and the financial markets, making oil more of a financial asset than before. The increase in the investment inflows from financial institutions, pension and hedge funds, and private equities, into the oil futures and over the counter markets, due to the relative weakness in the value of dollar and lower returns on other assets. Uncertainties about the monetary, fiscal, energy, investment, trade and environmental policies of consuming and producing countries and unrealistic assessments of the oil market situation and price projections by some entities have also added to the woes.

Spelling out the consequences of the oil price developments, the joint note states that oil price rises and underlying volatility, if they continue without concerted action from all parties, will have an impact on the economies of the consuming and producing countries alike, as well as on the long-term stability of the international oil market and world economy.

This could include adverse impact on economic growth, especially in the least developed countries, through the energy/economy linkages; higher oil prices will affect heavily energy intensive industries and the cost of transportation.

They also submitted a plan identifying consequences of recent price behaviour and suggestions for improvement for efficient operation of the oil market. This includes enhancing the transparency and regulation of financial markets through measures to capture more data on index fund activity and to examine cross exchange interactions in the crude market and enhance cooperation among international, national and service companies from all producing and consuming countries in investment, technology and human resource development.

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