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G20 Attempt to Increase Energy Market Transparency Falls Short

April 5, 2011

The G20 was kind of a big deal a few years ago when they were trying to fix the world post-GFC.  The forum is clearly failing to follow through on early promise, in particular in addressing global trade imbalances.  The G20 has its limits.  Now, it appears that they’re having a crack at fixing the commodities markets.

Over the last 12 months both energy and food commodities have risen dramatically.  The FAO food price index is at the highest ever, and increasing.  There has also been some fairly wild price volatility.  The possible economic and social effects are causing real concern.

The International Energy Agency (IEA) has concluded that speculation hasn’t been responsible for recent oil price gains and volatility (as we’ve previously written). 

Rather, it seems that tightening of the physical market through demand and supply dynamics, with prices stoked by easy money printed by the US Federal Reserve through QE1 and 2, are largely responsible. 

Rather than seeing price movements as a logical response to tightness and uncertainty in the energy supply and demand interplay, the G20 appears to take the position that the poor old physical market is just misunderstood by the traders, thereby exacerbating price movements.

The G20 is therefore to address what they see as a disjunct between energy market fundamentals and the financial markets, caused by information deficiencies.

The International Energy Forum (IEF) will report to the snappily-named G20 Finance Ministers and Central Bank Governors (FMCBG) meeting. 

The IEF is ‘the world’s largest grouping of Energy Ministers’ – an intergovernmental facilitator of dialogue between oil producing and oil consuming nations.  It is based in Riyadh. 

The FMCBG is meeting this week in Abu Dhabi, and one of the themes they are set to consider and tackle is commodity market volatility.

For the energy markets, the way the G20 are tackling volatility is through an initiative called Joint Organisations Data Initiative (JODI), which is a data amalgamation exercise across half a dozen international data agencies and participating energy producing and consuming nations, with the IEF as the Secretariat.  At core, the exercise is intended to improve energy market transparency – to iron out the uncertainties in the physical markets, so as to provide clarity to the financial markets.  The April G20 meeting provides the forum for the final report on improving the quality of JODI.

The stated goal of JODI is as follows:

By helping to mitigate some of the uncertainties that may be detrimental to market functionality, Jodi aims to moderate undue price volatility, thereby increasing investor confidence and contributing to greater stability in energy markets worldwide.

In the presentation provided by their Secretary-General, the IEF states that the long-term ambition of JODI is to communicate an ample availability of oil resources.

At this blog, we have our concerns about the energy markets.  Today, the oil price is at over $108 a barrel.  The gulf nations are increasing their own consumption, eating into export availability.  Meanwhile, the consumption growth trajectory implied by added demand from BRICS is staggering.  Opportunities for major new accessible oil finds are relatively limited.

We think this might be a spur to invest in alternative energy options.  However, among other things, the IEF blames energy efficiency and renewable energy for making the fossil fuel investment climate more uncertain.

We have emailed the JODI secretariat to ask if the data published is in any way subject to review, or standards of third-party audit prior to publication.  We await their response.

Until the reserves of the swing producer, Saudi Arabia, are subject to independent third party audit, no one will be convinced of anything other than the vulnerability of energy markets to shock.  This much is evident from the Wikileaks cables on the subject.  This one factor is the most critical aspect of energy markets.  Lack of transparency and certainty on this issue drives all other physical and financial aspects of the energy market.

In the absence of audited Saudi reserves, all other efforts at transparency are froth, and will mean that the stated objectives of transparency of JODI and the G20 FMCGB are not met.

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