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Rising Food, Oil Prices Pose Challenges for Developing World By TOM BARKLEY July 2, 2008; Page A8 The jump in oil and food prices has put leaders of some developing countries in the difficult position of balancing the interests of the poor and economic growth, the managing director of the International Monetary Fund said Tuesday. "If food prices rise further and oil prices just stay the same, then some governments will be unable to feed people and at the same time to maintain the stability of their economy," Dominique Strauss-Kahn said at a news conference to discuss a new IMF report on the impact on developing countries of a doubling in commodity prices since 2006. While advanced countries are also dealing with Getty Images the rising price pressures, the challenges are International Monetary Fund Managing Director much greater for developing countries, which Dominique Strauss-Kahn spoke on worldwide increases in food and fuel prices in Washington. had been making strides in recent years in improving economic stability and reducing poverty, he said. "The picture is a picture of a world in crisis," said Mr. Strauss-Kahn, noting that global financial markets are still enmeshed in the turmoil that began in the U.S. subprime mortgage market. Policy responses are needed from governments as well as the international community, he said. Leaders from the Group of Eight leading nations have put the commodity-price crisis on the agenda for next week's meeting in Japan. Mark Plant, deputy director of the IMF's policy development and review department, said at the news conference that the G8 should work toward concluding the Doha round of global trade talks, ensuring adequate investment in agriculture in developing countries and addressing the diversion of crops toward biofuels. In its first broad-based analysis of how rising commodity prices are affecting developing countries, the IMF found an increasing deterioration in inflation conditions and the balance of payments. And with oil and food prices expected to ease only gradually, the situation could worsen if governments don't take appropriate action, it said. "The food and fuel price surges have greatly raised the policy challenges associated with reducing poverty, ensuring food security, and maintaining macroeconomic stability," the IMF said in the report, covering about 150 countries. The world is "in the midst of the broadest and most buoyant commodity price boom since the early 1970s," it said. The IMF cited the rapid growth of emerging and developing countries as the "main source" of demand for commodities. The fund said rising demand and a "sluggish" supply response has been the main driver behind the run-up in oil prices. Financial conditions, such as the weak dollar and low real interest rates, have also likely contributed, it said. The IMF found "no compelling evidence" that commodity trading has affected price trends. The rise in oil prices has fed into food costs, including the increase in biofuel production, the fund said, noting that corn-based ethanol output accounted for about three-quarters of the increase in global corn consumption in 2006-07. More recently, a growing number of countries have imposed limits on food exports, exacerbating the global problem, it said. The fund found that inflation pressures have built up more than expected since the beginning of the year in developing countries, whose fiscal and balance-of-payment conditions have also worsened. It estimated that a further 20% increase in the price of commodities from its April projections -- which has already occurred in the case of oil -- could "severely weaken the external position" of 72 countries. The IMF said developed countries should re-examine support programs for biofuel production and lift limits on agriculture exports. For developing countries, the IMF recommends allowing price increases to pass through to the economy to avoid disrupting macroeconomic stability, while offering programs to help the most vulnerable of their populations. Energy Watchdog Expects Oil Markets to Stay Tight Supply Constraints Likely to Persist As Demand Rises By GUY CHAZAN in Madrid and NATALIE OBIKO PEARSON in London July 2, 2008; Page A8 Global oil markets will remain tight over the next five years, the International Energy Agency warned Tuesday, in a gloomy assessment that offered little respite for consumers battered by record-high oil prices. The view of the Paris-based energy watchdog, which is funded by the world's biggest oil- consuming nations, helped push oil prices to near-record levels. Benchmark crude oil rose 97 cents a barrel, or 0.7%, to settle at $140.97 Tuesday in New York, a Nymex closing record. U.S. oil futures set a new intraday high of $143.67 a barrel early Monday. The IEA forecast global oil supply capacity will rise to just 96.2 million barrels a day in 2013 from 90.4 million barrels a day this year, including crude production from the Organization of Petroleum Exporting Countries, OPEC natural gas liquids and non-OPEC production. Most of that growth will come early before sharply tapering off. Between 2011 and 2013, capacity will grow by less than one million barrels a day annually, the IEA said. The IEA's outlook jibed with the views of oil company executives at an industry conference in Madrid, who said the red-hot oil market reflects deep-seated pessimism about the industry's ability to open the spigot to satisfy rising demand. Christophe de Margerie, head of French energy giant Total SA, said there was enough oil available, but confidence was lacking that "the system will deliver oil in the future -- knowing that to deliver new oil and gas will take 8 to 10 years." The IEA's report provided scant comfort for a world desperate for relief from the escalating cost of fuel. The oil shock is already badly denting the global economy, with consumers restricting their travel, truck drivers and fishermen striking in Europe and airlines reducing routes or closing down altogether. Saudi Arabia tried to cool the markets by adding 200,000 barrels a day of production last month, but prices continued to climb. The IEA said it expected crude producers to boost supply in response to an oil price that has doubled since the last medium-term oil market report, issued a year ago. But that hasn't happened. Demand for fuel was still strong in developing countries, and that, combined with supply constraints, "continue[s] to paint a tight market picture," the agency said. "What we're seeing here is an absence of obvious reactions to price signals," said Lawrence Eagles, editor of the IEA report. He noted that it takes time for the impact of prices to filter through, especially on the supply side, where "things move much, much more slowly." Perhaps one of the most disappointing figures to emerge from the IEA report was its assessment of oil production by nations outside the OPEC cartel. Non-OPEC supply was "paltry to say the least," said Mr. Eagles, the IEA's head of market analysis, and had been revised down since last year's market report. He said crude supply from non-OPEC countries would remain at or below 39 million barrels per day over the next five years, though it would rise after 2013. That is sobering news for a world that has come to rely heavily on non-OPEC oil in recent years. A massive boost in Russian crude output earlier this decade helped slake the big surge in demand from China and India as their turbocharged economies took off. But the Russian engine has stalled, with some fearing production could even decline this year. Meanwhile, output has long been falling at traditional non-OPEC sources like the North Sea and Mexico. OPEC spare capacity, though rising over the next couple of years, will fall "to negligible levels" in 2013, the report said. That is bad news because low spare capacity reduces the market's ability to respond to sudden increases in demand. Chakib Khelil, the Algerian minister of energy and mines and the president of OPEC, tried to counter the view that OPEC wasn't doing enough to slake the world's thirst for oil. He told the Madrid gathering that OPEC was collectively investing $150 billion in new projects that would boost production capacity by four million barrels a day by 2012. Mr. de Margerie said oil output would reach a plateau of 95 million barrels per day by 2015. Even that, he said, would be a "beautiful success," because of the need to offset declines at mature fields as well. "It will not go smoothly...to 95," he said. The IEA also said that a 4.7% increase in China's electricity prices for business and industrial users, effective Tuesday, isn't enough to prevent power shortages that are adding to the country's oil demand. China's power generators aren't likely to be profitable as a result of the price increase -- the first in two years -- as they can't pass on rising coal costs to the consumer in full. Coal prices in China have risen more than 60% this year, forcing the government to reintroduce price controls on spot coal sales. Many generators have opted to temporarily close capacity rather than sustain losses on output, exacerbating power shortages at a time when transport bottlenecks and the closure of small mines are restricting coal supplies. Such policy decisions will keep having significant implications for oil demand, the IEA said, with blackouts in southeastern China and elsewhere triggering a spike in demand for diesel to fuel backup generators.
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