It’s as if a new oil shock had arrived. Prices of crude oil futures, which once hit $70 a barrel, have not come down enough, still hovering above $60 a barrel — more than three times the prevailing level of three years ago.
The high oil prices are likely to cast a cloud over the Japanese economy. They are already affecting the prices of petroleum-based products as seen, for example, in the steep rise of gasoline prices. But their influence on producer and consumer price indexes appears limited so far. Businesses must reckon with factors other than rising energy costs.
Since overall deflationary pressure is still strong, it is difficult for enterprises to pass production-cost increases through to retail prices in a competitive environment without squeezing profits and exerting pressure on business operations.
In Japan, the amount of oil used to produce a given unit of gross domestic product is relatively low. In short, Japan relies less on oil for generation of electric power and other economic activities than many other countries.
For example, electricity produced by oil-burning thermal power plants accounts for only about 10 percent of the nation’s total electric power production. It may be said that, among the developed economies, Japan’s is in the lower part of the spectrum with regard to vulnerability to high oil prices.
Yet past data on business cycles and oil-price fluctuations show many instances in which reductions in economic activity coincide with higher oil prices. This relationship must be kept in mind.
Hurricane Katrina, which wreaked havoc in the southern United States, damaged oil refineries in and around the region, contributing to rises in the oil price. The decision by member countries of the International Energy Agency to jointly release oil from strategic stockpiles — the first such action since the Persian Gulf War 14 years ago — has helped calm the oil market temporarily. But this action alone is not expected to pull down oil prices significantly from their high plateau at present.
Factors involving both supply and demand in the oil market are responsible for the current situation. In addition to the U.S., which consumes about a quarter of the world’s oil production, the emergence of China and India as oil-thirsty economic powers is putting pressure on the demand side. China, which is the second-largest energy consumer following the U.S., relies on imports for 40 percent of its oil needs.
Meanwhile, on the supply side, member countries of the Organization of Petroleum Exporting Countries and Russia, another big oil supplier, do not have additional capacity to pump oil. To these limitations, add political instability in Iraq, which is plagued by terrorism and insurgencies, and supply concerns about Iran, which has been in conflict with Europe and the U.S. over its nuclear program.
A prolonged period of higher oil prices will pose a great risk to each nation’s economy, as exemplified by the recent filing for bankruptcy protection by two U.S. airline companies, Delta Air Lines and Northwest Airlines, and may slow down the global economy overall.
Another factor that bears considerable responsibility for the continuation of the high oil-price regime is the influx of speculative money into the oil market, as investors look for chances to profit on crude futures transactions. Unfortunately, events leading to expectations of high oil prices in the future are abundant worldwide.
Speculation on oil-market prices will continue unless a decrease in demand appears very likely. If, for example, inflationary pressures created by high oil prices were to push up long-term interest rates to the extent that a slowdown in the economy followed, a drop in oil demand would occur.
High prices could also lead to increased oil production or new exploration for oil reserves, thus increasing oil supply. But what is now happening in the global oil market demands an approach with a long-range perspective.
To help improve energy efficiency, and thereby decrease reliance on oil in China and India, transfers of technology tuned to such a purpose would be of great service. The U.S. could also cut back on its oil consumption by introducing tougher fuel-mileage standards on vehicles.
The current situation should present a chance to invest more money and research into the development of alternative-energy sources such as natural gas and even nonfossil energy sources, including ethanol, plus renewable energy sources such as wind power and solar energy.
In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.