The danger of rising oil prices on world economy
The Asahi Shimbun Tokyo
Soaring oil prices are threatening the world economy, which has been in good shape for some time. Oil prices reached unprecedented height above US$50 a barrel in the New York market, sending alarm bells around the globe.
All eyes will be on the meeting of finance ministers and central bankers of the Group of Seven economic powers later this week. China, where demand for oil is swelling rapidly, will also attend the G-7 meeting.
The top economic policy-makers of the G-7 and China should come up with measures to deal with the threatening situation.
Crude oil prices have been soaring for months due to a confluence of factors, from the deteriorating state of affairs in Iraq to management troubles at Russian oil giant Yukos. Exacerbating the problem were the hurricanes that ravaged southern United States and the deepening political turmoil in Nigeria, a major oil producer.
Such developments have intensified fears of a serious supply disruption. The inflow of speculative funds betting on a further rise have contributed to the inflated oil prices.
The oil market's record-setting climb inevitably conjures up unpleasant memories of the oil crises in the 1970s and 1980s. But real oil prices adjusted for inflation are still much lower than the levels in that turbulent era. There is no reason to get panicky.
Yet rising oil prices could drag down two principal engines of the world economy: robust industrial development in China and strong consumer spending in the United States. The negative effects could be more damaging now as both the Chinese and American economies are slowing down.
If these two economies were to suddenly lurch downward, exporting nations and regions, including Japan, other Asian countries and Europe, would be dealt a serious blow.
What should the G-7 do? The G-7 members and China are all large consumers of oil. They should urge oil producing countries and international oil companies to increase production to cool down the market while trying to keep inflation at bay through timely monetary tightening.
The United States should also step up its efforts to achieve political stability in the Middle East.
The leading economic powers should also take serious action to curb growth in oil demand. After suffering from the two oil crises, major industrial countries reduced their dependence on oil and promote energy conservation. But when they eased efforts to lessen their vulnerability to oil price fluctuations, oil consumption in Asia started expanding at a dizzy pace.
Industrial nations should now rev up their strategies to further promote energy conservation and shift to alternative power supplies. The United States, the largest oil importer, bears responsibility to take aggressive steps to calm the situation, such as raising the gasoline tax to dampen demand and increasing private-sector oil stockpiles.
Rich nations should also be generous in providing fast-growing countries like China and India with technologies that would help improve efficiency in oil use, such as upgrading boilers and power generators.
Low crude oil prices from the late 1980s through the 1990s dampened the appetite for large oil development projects, which require massive and risky investments. That has been one of the causes of the thin stockpiles of crude.
The meteoric rise of oil prices in recent months has shed new light on the old fact that oil is not an ordinary commodity but a "strategic" product. Driven by this realization, Russia has started tightening its control on domestic oil companies, while China is racing to develop natural gas fields in the East China Sea. Japan, for its part, is showing great enthusiasm about getting involved in oil development in Iran and the project to build oil pipelines in Siberia.
Wise and cool-headed responses, however, are essential in avoiding a costly replay of the confusion that roiled the world economy 30 years ago.