By Kan Tsutagawa

03-09-04

Although soaring crude oil prices have cast a shadow over the world economy, many business leaders in Japan remain surprisingly optimistic. This is mainly because many are confident that the Japanese economy, having raised its energy efficiency, is now highly resilient to rising oil prices.
Is such optimism really justified?

In trading of crude futures on the New York Mercantile Exchange, West Texas Intermediate crude, the US benchmark grade, came close to $ 50 a barrel for a short time in August -- an extremely rapid rise from a little more than $ 35 in early July. After threatening to reach the $ 50 mark, crude prices levelled off, but many analysts say oil prices will probably continue rising, for three main reasons.

First, oil demand is on the rise. Economic recoveries in developed countries, including the United States and Japan, plus the rapid growth of the Chinese economy, have pushed up world energy demand.
About one-third of the global growth in demand for crude this year is said attributable to rising oil use in China. The oil-guzzling Chinese economy is thus the main factor in rising oil prices.

Second, oil supplies remain unstable. Members of OPEC are pumping oil at close to capacity, while the situation in Iraq and other Middle East countries remains volatile. In addition, political unrest continues in Venezuela and the crisis at Russian oil giant Yukos shows no sign of ending.

In short, oil markets are concerned that the stability of supplies may be in jeopardy.

Third, speculative trading of oil has surged.

Taking advantage of the fluctuations in crude prices, hedge funds and others have poured money into oil futures in the hope of quick profits.

Among other factors relevant to higher crude prices are an end to a global uptrend in stock prices and expected declines in cereal prices because of good harvests of soybeans and other crops -- something that tends to drive surplus funds into oil. Given the multitude of factors pushing oil higher, there is little hope of prices falling to past levels any time soon.

The United States and many other countries are afraid the higher crude prices may cut corporate profits and consumer spending, putting a stop to economic growth. In Japan, by contrast, many analysts are rather optimistic about the future of the national economy -- a stark contrast to the panic at the time of the 1973 oil crisis.

Behind Japan's confidence in its economic future is the fact that the energy efficiency of the national economy has risen thanks to progress in energy-saving technologies over past decades. Statistics compiled by a think tank indicate Japan uses one-third less energy than the United States to produce goods worth $ 100. Compared to the average for members of the Organization for Economic Cooperation and Development, Japan is 50 % more efficient.

Japan's energy efficiency gains since the first oil crisis have clearly enhanced its ability to absorb rises in crude prices. In addition, the yen's gains versus the dollar -- up about 50 % over the past two decades -- means yen-denominated crude import prices have fallen.

Since the nation's business climate is now fairly good, many Japanese companies seem able to neutralize the impact of higher crude prices through boosts in sales. For these reasons, few in Japan have been worried by rising crude prices. On the contrary, some business leaders in the manufacturing sector regard the advent of higher oil prices as an opportunity.

Partly because of the stringent energy-saving standards the Economy, Trade and Industry Ministry has imposed on manufactured goods, many Japanese-made goods, such as motor vehicles and home appliances, outperform foreign rivals in terms of energy efficiency. In particular, the fuel efficiency of Japanese automobiles has won them fans worldwide. In the US market, for instance, fuel-efficient Japanese cars are becoming more and more popular. Toyota Motor Corp. now plans to boost its share of the US large-sized car market by offeringenergy-efficient hybrid autos.

Japanese-made home appliances, such as refrigerators and air conditioners, can also boast of their energy efficiency, with the power consumption of such appliances cut by up to 85 % over the past 10 decade.
As a world leader in energy efficiency, Japan can now reap the rewards of its competitiveness in an age of rising energy costs. But if crude prices keep rising, they may still deal a body blow to the economy. Higher prices have already hit US consumers, since their gasoline consumption is greater than in other countries. The rises may even cut US consumer spending as a whole, with ramifications for the pace of the country's recovery. In China -- a very energy-inefficient economy -- growth may also be hit by rising crude prices.

If the US and Chinese economies run out of steam, Japan's export-oriented industries, heavily dependent on sales to the two countries, will suffer, putting in danger one of the economy's key growth drivers. Should higher oil prices lead to rising inflation and interest rates, the nation's financial markets could plunge into disarray.

The Japanese economy has experienced hardships more than once in the past because of ill-founded optimism. While we need not be excessively pessimistic over rises in crude oil prices, there is no room for complacency either.

Tsutagawa is economic news editor of The Yomiuri Shimbun.

Source: Yomiuri Shimbun