In the last three years, the G20 group of nations has taken up tough
geoeconomic issues bedevilling both developed and developing countries.
These include matters such as bringing transparency in global energy and
commodities markets.
Addressing them is vital as the world faces turmoil in both energy
and food markets. The new discoveries of shale oil, turbulence in
traditional West Asian energy markets and massive food subsidies being
doled out by developing country governments like India have had a
disruptive effect globally.
Even though the recently concluded 2013 St. Petersburg G20 summit was
dominated by the immediate issue of Syria and the impact of the U.S.
Federal Reserve’s quantitative easing programme on emerging markets, it
is the right institution that can, and must, address these issues. In
fact, the G20 should be the new Bretton Woods that can incorporate the
complexities of a diversified global 21st century financial
architecture. It is vital that Australia, which will host the next G20
Summit in 2014, restore focus on these longer term issues and act on the
recommendations already made by other international institutions and
approved by the G20.
Foremost on the agenda is the regulation of global institutions
responsible for price discovery and speculation in commodity markets—all
suspected of being increasingly de-linked from physical markets and
fuelling unqualified price hikes. Oil and gold, the two commodities that
have major consequences on India’s (and other emerging markets)
external liabilities, inflation and growth continue to suffer from
antiquated price reporting mechanisms.
Oil, for example, moved from $45 per barrel in mid-2006 to about $145
in two years, corrected to $40 in a few months and thereafter, again
surged to $130 in less than three years. It has been consistently
trading at over $100 since. Through this period, oil production and
demand fluctuations have hovered in the 10% range, far less than those
of its price.
This volatility has affected a number of economies negatively. For
example, in India, any large variation in global oil prices has a direct
bearing not only on the cost of energy but food and other goods as
well. As pricing becomes market-linked, any increase in prices or
volatility adversely affects a large number of end consumers.
This can be rectified: the archaic practice of price gathering from
price reporting agencies (PRA) needs to make way for a more transparent
price discovery process. International agencies such as the
International Energy Agency (IEA), International Energy Forum (IEF),
Organisation of the Petroleum Exporting Countries (OPEC) and the
International Organisation of Securities Commissions (IOSCO) have made
practical recommendations to this end which will modify principles
followed by PRAs and align them more closely with the international
standards on governance and transparency.
The work done by Organisation for Economic Cooperation and
Development (OECD), IEA, IOSCO and IEF for promoting price discovery in
energy markets is seminal. It was motivated by the evidence that spot
market prices had stopped reflecting the physical markets and instead
had become tangled with derivative markets, muddling the process of
price discovery. These organisations discovered that many price
reporting agencies, which assess the price of crude oil, were open to
manipulation as their customers—oil producers and traders—could
selectively report transactions to suit their interest and because the
price assessment process is proprietary and opaque.
The markets did not pay much attention to the G20 report until the
European Union’s anti-trust commission began investigating large oil
companies earlier this year for manipulating Brent crude oil prices.
The same situation prevailed in food markets. Ten international
organisations—chief among them the Food and Agriculture Organisation,
the International Monetary Fund, the World Food Programme, the World
Bank and the World Trade Organisation—have conducted studies on the
volatility of food prices globally. Because investors in the energy
markets have also moved into speculation in food markets, these prices
and their behaviour are now correlated with oil markets.
A similar practice of data gathering from a small group of banks was
followed for setting the London Interbank Offered Rate or Libor. That,
too, became a victim of price manipulation. In this case, the IOSCO
recommended the separation of the benchmark assessment process from the
users, such as banks, to prevent manipulation of the benchmark purely
for profit.
The latest fears stem from the surge in gold prices. In April, when
the Fed refused to return Germany’s bullion that it had kept under
custody, it fuelled speculation that all the gold with the Fed may have
been lent out as collateral by the U.S. government for its own
borrowings. If this is true, it will prove that there is not enough gold
in the world to support the high market prices it is being traded at—a
situation already apparent in speculation prevailing in the energy and
food markets where the volume of trade has surpassed the physical
availability justifying prices.
There is a clear message from the G20 findings: Unless the system can
be reformed, these issues, operating within the globally-linked
financial architecture, will have systemic impact that no country can
address alone. And so far, there is only scattered anecdotal evidence
that any country is implementing these recommendations.
A common starting point is the push to share information through a
concerted multilateral effort, especially for over-the-counter contracts
and voluntary-submission led processes. For the energy markets, it is
the JODI (Joint Oil Data Initiative) database. For the agriculture
markets, it is AMIS (Agricultural Market Information System).
This can be done for other commodities as well.
