International Effort To Open Up Oil Trade

Sydney Morning Herald

Monday November 13, 2006

John Garnaut and Matt Wade

THE world's most powerful central bankers will meet in Melbourne this weekend to plot to pry open the global oil cartel, with the aim of bringing down petrol prices at the pump.

As the oil price edges back up towards $US60 a barrel, they want to loosen the world's sclerotic oil and gas markets and avert a destructive scramble for energy resources.

At best, the failure of the long-term plan would lead to petrol prices far higher than early August's $1.44-a-litre average in Sydney for unleaded fuel.

At worst, it could lead to war.

The Treasurer, Peter Costello, who will co-chair the meeting of the Group of 20, has circulated the ambitious agenda to the central bank chiefs and finance ministers of the world's 20 most influential economies, including the US Federal Reserve chairman, Ben Bernanke, and the governor of the People's Bank of China, Zhou Xiaochuan.

"We would like there to be some agreement that cartels should not operate in open global and competitive energy markets," Mr Costello said.

The world's largest oil producers will be at the table, including the most important member of the Organisation of the Petroleum Exporting Countries, Saudi Arabia.

"We're going to have Saudi Arabia and Russia there - the big oil producers - and the big consumers there - the United States and China - and this is our concrete global action on an issue which is totally connected to the hip pocket of every Australian family," Mr Costello said.

Australian officials have circulated early drafts of a final communique, which they hope will include an agreement about principles that should govern global energy markets.

"Countries that have got huge needs need to be given assurances on security, and if we can get agreement on principles that will be very important," Mr Costello said.

Agreement will not come easily.

As well as addressing the problem of producers who have failed to invest enough in production, Mr Costello wants to discuss a proliferation of bilateral energy investment and supply deals.

"I don't want to name any particular countries ... but we don't want the huge importers to respond by trying to lock up resources, which could lead to instability and races to control resources we've seen in other periods of world history [that] have been quite destructive."

One concern is that China has signed energy investment agreements with unstable sources such as Nigeria and Sudan that may be unable to meet their long-term obligations.

Some analysts feel contract shortfalls could be energy security flashpoints.

Most of the world's oil production is controlled by state-owned companies in the Middle East, Russia, South America and Africa. A priority for the G20 will be to help those companies invest in future production rather than have their profits stripped for other uses.

American nationalism is also up for discussion. The US Government has blocked China's CNOOC from buying the oil company Unocal and has stopped Dubai Ports taking over the management of several American ports.

The forum wants to develop a database of energy reserves and production to promote a more transparent energy market. It also wants better spot, derivative and long-term contract markets. Thousands of demonstrators are expected to protest against the summit, but organisers said it would be a peaceful rally from midday on Saturday, under a "Stop G20" banner.

AUSTRALIA AND THE G20

The G20 is run by a rotating troika which includes the central bankers and finance ministers of Australia, China and South Africa. A country must be "systemically significant" which is why Saudi Arabia receives an invitation (for its oil) despite not

being one of the world's 20 large economies, as does Argentina, Turkey and South Africa (seen as representing important regions).

Australia has a place at the table because of our wealth, not our population. Australia ranks 53rd in the world in population but 13th in terms of economic size in US dollars at current market exchange rates. The Aussie dollar is the fourth most traded currency against the greenback, behind the euro, yen and pound sterling.

THE G20's PROSPECTS

There is no guarantee the G20 will take over as the management committee for

global economy. The G7, recently renamed the G8, is currently in the cockpit. The

risk is that the US and European drivers of the G8 simply expand their rich country group to maintain their influence, as they recently did with Russia. They may eventually invite other important countries such as China, India and possibly Brazil. It could become the G10 or G11, leaving Australia out in the cold.

The future of the G20 may hinge on whether China and India accept an invitation to an expanded G8, or continue to throw their weight behind the broader more representative G20.

© 2006 Sydney Morning Herald

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