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Oil prices hovering at a historically high level are threatening to destabilize the world economy. Domestically they could exert a cooling effect on the economy just as it appears to be emerging from a long period of deflation, thus undermining the foundation for economic recovery. The public is now feeling the effects of high oil prices in the form of higher prices for gasoline and other oil products, and other goods and services.

At their recent meeting in Washington D.C., finance ministers and central bankers from the United States, Japan, Britain, Canada, France, Germany and Italy said in a joint statement that a strong global economic expansion is continuing into the fourth year and that the outlook remains favorable.

At the same time, the Group of Seven finance ministers and central bankers warned that “risks remain from oil market developments, global imbalances and growing protectionism.” The G7 meeting took place as oil prices surpassed $75 a barrel for the first time in the New York market.

To try to assure stable oil supplies, the G7 countries “urged investment in exploration, production, energy infrastructure and refinery capacity.” They also called for “greater energy efficiency, conservation and diversification” not only in developed countries but also in newly rising industrial countries, which are largely responsible for the increasing global demand for oil.

If the effects of high oil prices seep through the Japanese economy, medium-size and smaller companies will be the first to feel them. They will find it difficult to absorb oil-price increases into their production costs and may have to raise the prices of their own products. High oil prices will also directly hit the agriculture and fishery sectors. Economic gaps will widen between different types of industries and different regions. The central and local governments need to take measures to cushion the effects of high oil prices in time.

High demand is one factor causing high oil prices. The good global economy is accompanied by an overall increase in demand for oil. Worldwide oil demand has gone up the past two to three years. China, one of the newly rising economic powers, is expected to increase its demand for oil by 6 percent this year over last. India, whose population is increasing, is also expected to demand more oil.

Speculative movement of money in the international financial market is also contributing to current record oil prices. Speculative money has increasingly found its way into oil and other commodity markets. Pension funds from the U.S. are also investing in these markets. As long as money continues to flow into speculative oil markets, oil-price ceilings are not likely.

Political factors may be more responsible for the current situation in the oil markets. The most important of these is Iran, an influential OPEC (Organization of Petroleum Exporting Countries) member whose nuclear-development ambitions may trigger sanctions by the United Nations Security Council. Iran has made clear that it will stop its oil supplies if sanctions are adopted against it. Supply halts by Iran would cause considerable economic damage to countries such as China and Japan, which rely on Iran for a considerable portion of their oil imports, and to the economies of all East Asia.

In Nigeria, another OPEC member, attacks by antigovernment forces against oil-producing facilities temporarily has caused a 20 percent drop in the African oil producer’s supply. The situation in Saudi Arabia, the largest oil-producing country, does not appear very stable either following reports of an attempted terrorist attack on an oil facility there.

Speculation about possible oil shortages due to unstable political situations involving oil-producing countries is sending speculative money into oil futures markets, thus pushing up overall oil prices.

In response to soaring crude prices, oil companies in Japan have already announced plans to raise prices of gasoline and other oil products, a move that has affected holiday travel during Golden Week. One company after another, and one industry after another, is announcing plans to raise prices on products — from industrial materials and parts to finished products and services. Utilities are no exception. Major city gas companies plan to raise gas prices starting in July.

High oil prices are occurring at a time when Japan’s long-term interest rates are on an upward path. If the economic recovery is strong enough, enterprises and consumers may be able to ride out oil-related price hikes on goods and services. But there is no assurance the recovery is that strong. Therefore, the situation in the oil market demands that the Bank of Japan exercise caution in deciding whether to end its “zero-interest” rate policy.

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