Rising oil prices threaten health of wide range of companies


Because high oil prices affect not only transport firms but also manufacturers that use oil to make their products, the health of Japanese companies both big and small in a wide range of sectors is likely to be affected by the continuing price rise, analysts say.

The ongoing price surge, already nearly equivalent in scale to the oil crises in the 1970s, is expected to carry the price to well over $100 per barrel as early as this month, some analysts say.

And noting the pattern of past crises, the current oil market turmoil could take nearly a decade to stabilize, they add.

“It is highly possible that oil prices will test $120 to $130 a barrel” in the near future, said Akio Shibata, deputy director at Marubeni Research Institute. The price now hovers around $95 a barrel.

Oil prices have moved steadily higher in recent months, backed by rapidly growing demand in China and India. However, the latest surge, following the U.S. subprime mortgage meltdown in August, was believed to be led largely by speculative transactions.

The widespread view that the current surge in prices is primarily due to speculative trade has slowed down investment in facilities by oil producers as well as oil refiners, Shibata said.

“If this situation does not change, oil supply could become scarce in two to three years,” further driving up prices, he said.

Rising oil prices are likely to directly hit Japan’s transportation industries that use oil for fuel — airlines, shipping companies and trucking firms.

High oil prices also hurt food processing companies that use oil. Other industries directly impacted include petrochemical firms that use naphtha to make PET bottles or food wrapping.

“Higher costs have an impact (on corporate earnings) amid bad business environments when there are concerns over future economic slowdowns,” said Hideki Matsumura, a senior economist at Japan Research Institute Ltd. “Such rises (in oil prices) would be absorbed if the strength of economic growth is solid.”

If the price of oil stays at $95 per barrel and companies are forced to absorb the higher costs, combined annual pretax profits of Japan’s 1.16 million companies capitalized at more than ¥10 million could fall by ¥5.3 trillion — equivalent to about 1.8 percent of their combined sales, according to Matsumura.

If the price of oil hits $100 per barrel, those companies’ combined profits would be estimated to fall by ¥6.2 trillion, or 2.1 percent of their total sales. At that level, earnings of not only small but major Japanese firms would be hurt, he said.

Will this trigger a panic in Japan like the 1970s oil shocks? Most analysts say no.

After the 1973 and 1979 crises, oil prices jumped to $40 per barrel — up from a mere $2 before the crises. The $40 per barrel level would be equivalent to $100 now, after taking into account the changes in overall prices since then, Shibata said.

In the 1970s, unexpected surges in oil prices caused a panic and people rushed to buy daily goods that they feared would be in short supply, including toilet paper.

But compared with the 1970s, Japanese industries are much more energy-efficient and less reliant on oil for energy, the analysts point out.

Shibata warned that the current high oil price spike, which started in 2003, will continue for as long as 15 years, although prices may stabilize after shooting above $100.

Meanwhile, rising oil prices have so far shown no sign of accelerating the rise in the prices of goods in unrelated industries — as happened during the oil crises in the 1970s — amid global price competition, Matsumura said. More worrisome, he said, is the impact on consumer sentiment, given that prices are already rising in sectors affected by the high oil prices.