Oil prices have been turning upward, slowly but steadily, throughout the world. So far, the blow to the economy seems to have been limited. However, oil supplies are becoming increasingly unstable. With oil exports from Iraq partially suspended, prices have climbed to the $50-per-barrel level. This situation does not allow for unqualified optimism.

The problem appears to be more serious in the United States, which is more dependent on oil in its living and energy sectors than Japan, and in China, where oil demand is tight because of rapid economic growth. If these two countries, which have served as the locomotives of the world economy, suffer a sudden downturn, the impact will reach Japan as well.

In addition to the Middle East situation, centering on Iraq, oil-producing countries outside of that region, including Russia and Venezuela, are facing destabilizing factors in their oil-supply regimes because of oil company bankruptcies and political uncertainty. This has led to speculative scheming on the oil futures market, which in turn has accelerated the rise in prices. The environment that permits this rampant speculation does not look set to improve in the near future. In Iraq, for example, public order shows no signs of stabilizing.

In the U.S., the price of gasoline is a kind of barometer that influences consumer behavior overall. At present, the price is around $2 per gallon (3.8 liters). This is said to be the level where consumers become strongly aware of the rise in prices and begin to hold back on consumption. Recent surveys reveal that this tendency is working today, too.

The rise of energy prices has an influence on prices in general. In the first half of this year, consumer prices increased by the upper 1 percent range to about 3 percent from the same period the previous year. U.S. policymakers consider the time right for a change from deflationary to inflationary concern when prices increase at a rate of 2 percent.

The U.S. Federal Reserve Board (FRB) has already raised the federal funds rate on two occasions. FRB Chairman Alan Greenspan has explained that the aim of these two hikes is to correct for super-low interest rates. With the fear of deflation all but eliminated, concern about inflation no doubt will now come to the fore.

Consumer spending, which accounts for 70 percent of the gross domestic product in the U.S., has been expanding thanks to the large-scale tax cuts and super-low interest rates of the administration of President George W. Bush. Rising prices and, especially, higher interest rates would most likely put a brake on consumption.

Americans have a tendency toward excessive consumption, regardless of their debts. At present, the ratio of debts to disposable income is a high 13 percent. A rise in interest rates will increase the debt burden, leading probably to a jump in the number of individual bankruptcies. In particular, the rise in prices and interest rates will dampen the housing boom that has been spurred by low interest rates.

Since the employment situation has not improved markedly despite the economic expansion, it is difficult to expect that the increased debt burden will be offset by a rise in disposable income due to the availability of more jobs. Recently U.S. economists appear to have become increasingly cautious about the future, and attention now is focusing on whether this economic situation might lead to a change of administration in the upcoming presidential election.

Even if an economic slowdown should occur, its extent will depend a great deal on how the FRB manages interest-rate policy. For Mr. Greenspan, who has demonstrated shrewd policy management in supporting the U.S. economy up to now, the coming months are going to be a crucial period.

A slowdown in the U.S. economy will have an impact on China, because its exports to the U.S. are one of the driving forces behind its growth. China does not have stockpiles of oil and, compared with developed countries, will have a more difficult time absorbing higher costs caused by increased oil prices. A slowdown in China’s growth will impact Japan as exports to China and investments there decline. This shows once again that Japan, the U.S. and China are becoming increasingly interdependent.

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