THE OIL price shock that has hit global growth could have been exaggerated by financial speculation, Jean-Claude Trichet, European Central Bank (ECB) president, suggested for the first time yesterday.
Going further than comments by other central bankers, Mr Trichet argued it was "reasonable conjecture" that financial investors had distorted commodity markets, leading to prices above those justified by fundamental supply and demand factors.
His remarks were significant as they indicated policy-makers believe this year's peaks in oil prices were unsustainable. Oil prices hit more than $147 a barrel in July, but have since dropped by $40. Further falls would help to boost growth and assist central banks in fighting inflation.
The ECB sees higher oil prices as a big factor in explaining the slowdown in euro zone growth, hitting consumer spending as well as demand for its exports.
Adding to the gloom, Germany yesterday reported a sharper-than-expected 1.8 per cent fall in industrial production in July. Data earlier this week had shown industrial orders fell for the eighth successive month.
Further falls in energy prices would strengthen ECB optimism that weak euro zone growth will be followed by a "progressive recovery" later this year.
Speaking at a "ECB watchers" conference in Frankfurt, Mr Trichet argued that, on one "benign" view, investors could have played a helpful role in commodity markets by expanding liquidity and making price-setting processes more efficient. The volatility created "might have been the price to pay to avoid even higher volatility in the future".
However, he also said that financial investors had encouraged sellers to accumulate inventories or delay production so as to take advantage of expected higher prices. This could have exaggerated changes in prices beyond what would have been expected by fundamental economic factors.
His comments echoed arguments by Alan Greenspan, former chairman of the US Federal Reserve, who said in the Financial Timeslast month that speculation was "importantly responsible" for the rapid move in oil prices.
- (Financial Times service)
