FOR two years the price of oil has been dangerously volatile, seemingly defying the accepted rules of economics. First it rose by more than $80 a barrel, then fell rapidly by more than $100 before doubling to its current level of around $70. In that time, however, there has been no serious interruption of supply.
The oil market is complex, but such erratic price movement is cause for alarm. The surge in prices last year gravely damaged the global economy and contributed to the downturn. The risk now is that a new period of instability could undermine confidence just as we are pushing for recovery.
Governments can no longer stand idle. Volatility damages both consumers and producers. Importing countries, especially in the developing world, find themselves committed to big subsidies to shield domestic consumers from potentially devastating price shifts.
In Britain and France we know how the price of crude dictates the price of petrol at filling stations – and the effect it has on families and businesses. And for countries heavily reliant on income from oil exports, the windfalls from brief price surges are offset by the consequent difficulties of planning national budgets and investment strategies.
Extreme fluctuations in price are encouraging energy users to reconsider their reliance on oil. The International Energy Agency, for instance, has cut its long-term forecast of oil consumption by almost a quarter. Producers are in danger of finding out that oil is losing its market and its long-term value.
More immediately, we as consumers must recognise that abnormally low oil prices, while providing short-term benefits, do long-term damage. They diminish our incentives to invest not only in oil production but in energy savings and carbon-free alternatives.
Upstream investment world-wide is already down by 20% over the past year. And with some sources of supply in decline, such as Alaska and the North Sea, the resource we will all need as the economy recovers is being developed in neither an adequate nor a timely way.
There are no easy solutions, and any progress must be made with the full cooperation of the world community and the oil industry. On Monday, we used the U.K.-France summit in Evian to explore a way forward. We hope our ideas inform meetings today at the G-8 summit in Italy, and in future talks between world leaders.
We are committed to the ongoing dialogue between producers and consumers through the International Energy Forum. Saudi Arabia and the Organization of Petroleum Exporting Countries (OPEC) have expressed interest in this as well. Producers and consumers are closer now than at any time in the past 30 years to recognizing the huge common interest in giving clear and stable signals to long-term investment.
At the London Energy Meeting last December, all participants agreed that closer coordination between the International Energy Agency, the International Energy Forum, and OPEC was necessary to develop a shared analysis of future demand and supply trends. The Expert Group of the International Energy Forum should take the lead in establishing a common long-term view on what price range would be consistent with the fundamentals.
These experts should also consider any measures that could be put in place to reduce volatility. And they should look again at whether trading activity is amplifying erratic price movements.
We therefore call upon the International Organization of Securities Regulators to consider improving transparency and supervision of the oil futures markets in order to reduce damaging speculation. This would serve the interests of orderly and adequate investment in future supplies, since volatility and opacity are the enemies of growth. Climate change is also altering government attitudes to energy.
The world’s economy is still reliant on secure supplies of oil at prices that are not so high as to destroy the prospects of economic growth, but not so low as to lead to a slump in investment, as happened in the 1990s.
It is a thorny issue, but complex markets need not be volatile or damaging to the wider global economy. We are convinced that producers and consumers alike would benefit from greater transparency, greater stability and greater consensus on the market fundamentals. After two years of destructive price volatility, the time has come for both sides to work together to build on our common interest.
Mr. Brown is prime minister of the United Kingdom. Mr. Sarkozy is president of France.