The Group of 7 leading industrialized nations is not what it used to be. That was amply demonstrated during the energy scare last year, when the most powerful economies stood impotent in the face of surging energy costs that threatened global growth. Luckily, crude oil prices cooled after reaching a record $55.67 a barrel in October.
It's not as if the G-7 could have halted the trend, which was driven partly by emerging economies beyond its control.
Signaling that some humility is in order, G-7 organizers invited a number of those economies to attend their Feb. 4 meeting in London. They include Brazil, Russia, India and China, a group known as the "BRICs" economies. In Asia's case, trends in commodity markets probably explain much of the G-7's interest.
"Given the rapid rise in demand for energy from China and India in particular, there's little chance of a coherent world energy policy without these nations sitting at the same table as the G-7 members," says Jim O'Neill, the London-based head of global economic research at Goldman Sachs Group.
All this has less to do with environmental concerns - although they should be in the G-7's sights, too - than with keeping skyrocketing energy costs from hindering global demand. While scientific advances mean that the United States, Europe and Japan are less vulnerable to energy shocks than they were in the 1970s, oil approaching $75 or even $100 a barrel could hold back growth everywhere.
The G-7 has been watching Asia's giants mostly from a currency perspective. Efforts to weaken exchange rates to help exporters are delaying a rebalancing of global burdens. The currencies of Asia's fast-growing economies should be allowed to rise, while worsening U.S. imbalances should drive the dollar lower. The G-7 wants Asia to accept these realities.
Yet it was the energy-price boom of 2004 that seemed to awaken the G-7 to new realities of its own. Thanks largely to energy trends, we are seeing recognition that the G-7 is not the optimal club for managing global growth. We also may be seeing a begrudging admission of something else: That Goldman Sachs had a point in October 2003 when it predicted that the BRICs economies could rival the G-7 over the next 50 years.
Growth in China, the world's second-biggest crude oil consumer, unexpectedly accelerated to 9.5 percent in the fourth quarter. The figure suggests that efforts to slow the economy are not working, and that China will continue to suck up a growing share of commodities from every corner of the globe.
In December alone, China imported 31 percent more fuel than a year earlier. Over the last decade, its crude oil imports have risen from zero to 41 percent of local consumption, as domestic production failed to keep pace with demand that more than doubled to in excess of six million barrels a day.
All this explains why CNOOC, China's biggest offshore oil and gas company, is pursuing a full takeover of Unocal. That would vault CNOOC above its rival PetroChina, the nation's biggest oil producer, in efforts to expand output overseas. Other Chinese companies also have been busily buying up oil-producing assets.
India, too, is becoming a force. With an economic growth rate exceeding 6 percent, its role in commodity markets is rising exponentially. Not surprisingly, Oil & Natural Gas, India's biggest oil explorer, is bidding for assets confiscated by Russia from Yukos Oil.
Such moves to buy U.S. and Russian oil and gas assets are altering the landscape in which Western energy giants operate. Moreover, unless the Organization of Petroleum Exporting Countries raises output, the growth trajectories of China and India may increase pressure on oil prices.
"For many financial markets, especially energy, commodities and foreign exchange, these developments are probably critical," says O'Neill of Goldman Sachs. "At the margin, developments in these economies are likely to remain critical for world equity performance as well as, indirectly, fixed-income markets."
G-7 members know that competition with emerging Asia for oil could get ugly. Prime Minister Manmohan Singh of India, for example, has said that "energy security" in his nation is second only to food security.
Observers, meanwhile, are watching territorial disputes between China and Japan over a group of allegedly oil-rich islands. For similar reasons, China and some Southeast Asian nations are bumping heads over the Spratly Islands in the South China Sea.
Access to plentiful energy supplies, in other words, may increasingly trump Asia's current emphasis on economic cooperation and smooth political relations. Can that really be good news for stock values or bond yields?
Seeking the participation of India and China is a smart move by the G-7. It offers a chance to follow the machinations of the world's most exciting economies - ones that may affect the G-7 nations more than they may want to admit.