G7 officials say world can adapt to higher oil prices

WASHINGTON - Finance officials from rich nations gathering in Washington for weekend talks said today the economies of the world need to devise ways to adjust to higher energy costs.

Expectations were modest for the meeting of Group of Seven finance ministers and central bankers in the face of a stubbornly hard-to-advance agenda from Chinese currency reform to a debt relief package.

Regardless of the progress on other issues, energy costs will loom large in the talks.

"Oil will dominate tomorrow's discussions. It is one of the biggest risks to the economic outlook," A British Treasury official told Reuters ahead of the meeting.

Still, there were efforts afoot to fend off any impression the global expansion was at risk.

US Treasury Secretary John Snow, on Bloomberg television, acknowledged that costlier oil hurt. But he also indicated the G7 was preparing for an era in which energy prices are likely to stay at levels not foreseen as recently as a year ago.

"These prices are out of line and I'm confident there will be adaptations to these prices, both in terms of the supply side and the demand side," Snow said.

Ahead of sessions that begin with a working dinner on Friday night and end late Saturday morning, European sources agreed that ministers would talk about readying the world to live with permanently costlier energy.

There was palpable unease in financial markets on the eve of the G7 gathering. Worry about economic slowing sent the Dow Jones industrial average skidding 198.41 points, or 1.93 per cent, to end at 10,080.34 - a 5-1/2-month low.

The concern spilled into debt markets, with the bellwether 10-year US Treasury note climbing 21/32s of a point in price while its yield tumbled to 4.23 per cent. Investors sought haven in bonds on a belief that if the economy stumbles, interest rates might not rise as quickly.

Bank of Japan Governor Toshihiko Fukui said on Friday economies need to acclimate themselves to costlier oil.

"We may be at a turning point where policies in industrialised economies must focus on boosting productivity while emerging economies must use resources more efficiently," he told reporters.

The G7 is made up of the United States, Britain, Canada, France, Germany, Italy and Japan.

Not present but on everyone's minds was China - by some measures already the second-largest economy in the world - since the G7 badly wants Beijing to modify its currency regime to curb the huge trade deficit in the United States.

The Bush administration, after two years of trying to persuade China to loosen the tie between its yuan and the declining dollar, has stepped up its rhetoric in the face of rising Congressional ire over the issue.

US manufacturers claim China's currency may be as much as 40 per cent undervalued, lending a huge trade advantage.

Snow said the Bush administration feels China has had ample time to beef up its banking to withstand the volatility of a floating currency.

"They're there now," Snow said. "They've made enormous strides in fixing the financial infrastructure ... it's time for the Chinese to move to flexible currency. "

Snow won support from Canadian's finance minister, Ralph Goodale, who told reporters: "In the case of China, the sooner they are able to move with respect to more flexibility in their exchange rate situation, the better it will be. "

G7 sources say the closing communique Saturday morning will have the usual call for currency flexibility, aimed chiefly at China. Ministers also will likely urge oil producers to raise output and push anew for more transparency, or information about supplies and prices, in energy markets.

The G7 sessions lead into spring meetings of the 184-nation International Monetary Fund and its sister lending institution, the World Bank, on Saturday and Sunday.

The issue of debt relief for the world's poorest nations, a thorny patch at the last G7 gathering in February when Britain and the United States clashed about how to proceed, is expected to again generate heat but little light.

British officials said they want to see progress in hopes of scoring a final deal by June, when leaders of the G7 and Russia meet in Gleneagles, Scotland. Britain, which holds the G7 presidency this year, has declared 2005 a make-or-break year for Africa.

Protesters also began gathering on Friday for demonstrations expected to intensify over the weekend. About 75 held a noon rally under sunny skies in front of the US Treasury, chanting slogans in support of cancellation of Third World debt.

- REUTERS