Climbing crude oil prices

The Asahi Shimbun Tokyo

For the first time in a long while the Organization of the Petroleum Exporting Countries (OPEC) grabbed headlines when it announced that it intended to increase oil production in a two- stage process.

Global markets appear to be puzzled about how to react to the decision. While increasing output is expected to curb climbing crude oil prices, many analysts think the decision amounted to a rubber-stamping of current, unapproved OPEC output, and thus will have little effect on controlling prices.

A combination of economic and political factors, such as rising Chinese demand and a deteriorating situation in Iraq, are at the root of the recent price surge. Terrorist attacks are happening even in Saudi Arabia, so prices will probably be volatile for a while in a higher range.

Crude oil prices soared at the beginning of the 1980s. According to the International Energy Agency (IEA), in today's dollars, a barrel of oil would have been around US$60 (6,600 yen), a level much more shocking than the recent $40-a-barrel range.

Oil importing countries have developed low-energy technologies and alternative energy sources, which have contributed to limiting rises in crude oil prices. The IEA is analyzing the possible effects on countries and regions if crude oil prices were to rise $10 a barrel. The agency says the situation would suppress growth rates by 0.4 percentage point in Japan, 0.3 in the U.S. and 0.5 for the EU.

These figures do not appear very serious, yet we cannot ignore them. As seen in Japan already, rises in various commodity prices may drag on consumer spending and corporate revenues. If that were to happen, the economy and people's lives would be widely affected as businesses became reluctant to invest and stock prices took a beating from rising interest rates.

The Japanese economy has finally gotten back on the path to recovery, and the recent high oil prices may dampen that trend. In a worst-case scenario, rising commodity prices and a return to a sluggish economy may arrive together. The government will have to be even more cautious about monetary and exchange policies.

Meanwhile, when it comes to oil suppliers, despite the attention now focused on the cartel, it is too soon to say we are witnessing a revival of OPEC's power. Disunity among its members has partly fueled the recent price increases. De facto OPEC leader Saudi Arabia is experiencing an unstable political situation, and Venezuela has resisted production increases.

Since the Sept. 11 terrorist attacks, the administration of U.S. President George W. Bush has pursued a strategy intended to make the U.S. less dependent on Saudi oil. This plan has included strengthening ties with Russia, which produces as much crude oil as Saudi Arabia, and putting Iraqi oil under U.S. control.

However, that strategy appears to be failing on two counts: Increasing concerns about the occupation of Iraq and unrest in Saudi Arabia. This is a troubling situation that cannot be resolved simply by OPEC production increases.