The danger of rising oil prices on world economy
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.