The sharp rise in oil prices to almost $110 (U.S.) a barrel is presenting a fresh challenge for global economic leaders as they struggle to bridge differences over resolving the European debt crisis.
As finance ministers and central bank governors made their way to Mexico City for a weekend meeting of the Group of 20 countries, the price of West Texas intermediate crude climbed to $109.77, the highest level since last May, when it hit $114.
Friday's spike was spurred by a report from the United Nations' nuclear watchdog saying that Iran has increased its production of high-grade uranium over the past six months. The finding will likely exacerbate political tensions in the Middle East, increasing the threat of supply disruptions.
A year ago, a series of uprisings against authoritarian regimes in North Africa and the Middle East caused a similar surge in energy costs. The revolts breathed life into the region's democracy movement, but the disruption to oil production choked global economic momentum, interrupting the recovery from the financial crisis.
That scenario appears now to be repeating. The U.S.-led effort to squeeze Iran out of international oil markets will keep upward pressure on oil prices, raising costs for American consumers just as the world's largest economy is showing signs of life. For Europe, higher oil prices will burden a market that has slipped into recession.
"A new risk on the horizon – or maybe not on the horizon, maybe right in front of us – is high oil prices," David Lipton, first deputy managing director of the International Monetary Fund, said at an invitation-only gathering ahead of the G20 meeting, according to Reuters.
"The situation in Iran is a risk that we have to be thinking about," Mr. Lipton added. "Our assessment is that the global economy is not really out of the danger zone."
The risk of an oil shock adds pressure on the G20 to stabilize the European debt markets, which are volatile because bond traders worry that too little is being done to protect debt-burdened economies such as Spain from default.
European members of the G20 will ask their allies for help in meeting the IMF's request for $500-billion (U.S.) in new resources to backstop fragile economies. Europe has pledged to put up about half that amount. But countries such as Japan and Great Britain are cool to the request, saying members of the euro zone must do more to show they have the situation under control.
The United States and Canada are going into the Mexico City steadfast against new money for the IMF, arguing that European countries are wealthy enough to build an adequate financial backstop on their own.
Financial regulation also promised to be a hot topic at the meeting. The Institute of International Finance, a Washington, D.C.-based group that represents hundreds of the world's largest banks, amplified its call for the G20 to ease up on its efforts to overhaul financial regulation. It said the rush to regulate is creating undue burdens and uncertainty that is hurting global economic growth.
Calling the situation "urgent," Richard Waugh, chief executive of Bank of Nova Scotia and a member of the IIF's executive, told reporters in Mexico City that the G20 must "decide if the role of the private sector is promoting growth."
Among its demands, the IIF wants the G20 to delay new surcharges on big banks until at least 2018 and drop its recommendation that countries strive to implement stricter rules as quickly as possible. It is unlikely such proposals will be met warmly at the G20. Earlier this month, Tiff Macklem, the No. 2 at the Bank of Canada, told an audience in Toronto that if the G20 were to be reproached for its regulatory efforts, it should be for failing to conduct its overhaul faster.
With rising energy prices, however, the bankers will struggle for the attention of the G20 politicians. U.S. Treasury Secretary Timothy Geithner said Friday the Obama administration is studying whether it should release oil from the government's emergency reserves to ease prices.
If oil prices level off, the impact on the global economy should be minimal, according to economists at Deutsche Bank and Bank of America Merrill Lynch. Angel Gurria, head of the Organization for Economic Co-operation and Development, also played down the threat from higher oil prices, as did Mr. Waugh, who said in an interview that the current surge likely will subside.
"If it moderates at this level, I think things will be fine," he said.