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Monday, Sept. 27, 2004
Oil-shock veteran Japan strong enough to weather surging prices
Members of the Organization of Petroleum Exporting Countries agreed at a conference in Vienna on Sept. 15 to increase daily crude oil production by 1 million barrels to 27 million. This is a record that exceeds even the 26.7 million barrels agreed on in fall 2000, and signals OPEC's intent to correct the recent surge in oil prices.
Since this decision was made, however, crude oil prices have fluctuated between $42 and $45 per barrel -- lower than the $50 level seen earlier this year but still high.
One of the reasons why oil prices remain high is that OPEC's decision to expand the quota was, in effect, merely an official endorsement of the excess production that already had been going on in recent months.
Another factor is that there is less and less room for OPEC to increase production. U.S. Federal Reserve Chairman Alan Greenspan has reportedly said that high oil prices are a temporary problem, but given the geopolitical risk surrounding such oil-producing countries as Iraq, Russia and Saudi Arabia, the advent of winter, and new demands from China and other developing economies, it's not likely crude will drop sharply below $40 per barrel anytime soon.
Attention should also be paid to the course of the U.S. dollar. The International Monetary Fund has warned that the current account deficit of the United States, which has ballooned to $500 billion, could bring on the dollar's depreciation. Since crude oil prices are denominated in U.S. dollars, a weaker dollar would erode the purchasing power of oil-producing countries, which could in turn prompt them to scheme on raising oil prices further.
During recent testimony before Congress, Greenspan also expressed concern that high oil prices, if left alone, could become a significant drag on the Japanese economy, which, he noted, has finally emerged from a more than decade-long slump and entered a self-sustained expansion.
True, the impact of another surge in oil prices would be serious for Japan, which relies on exports for 99 percent of its oil needs. But it should also be noted that Japan alone would not be affected by such an increase. On the contrary, Japan shows relative strength in this respect.
One of Japan's strengths is that, unlike the United States, it has a more than sufficient current account surplus to pay for all of its oil imports.
Japan's daily oil consumption stands at 5.337 million barrels, compared with 19.708 million for the U.S., 5.362 million for China, 9.709 million for the rest of Asia (excluding Japan and China), 2.709 million for Germany, and 2.469 million for Russia.
Assuming the U.S. relies on imports for at least half its oil consumption, that means the country must import nearly double what Japan does, and higher oil prices will only work to expand its current account deficit.
Another strength is that Japan's growth potential isn't at the mercy of crude oil prices.
Japan weathered the two oil crises in the 1970s by improving energy efficiency and restructuring its industry, and it is estimated that the impact of an oil price hike on Japan's GDP growth would be less than half of what it would be for China, for example.
Japan accounts for only 5 percent of the world's carbon dioxide emissions, far below the 24 percent and 13 percent, respectively, generated by the U.S. and China. This is evidence that Japan has already made its economy less dependent on oil.
Given that consumer prices in Japan remain roughly flat, the risk of inflation is also negligible. Needless to say, an appreciation of the yen would put Japan in a better position in this aspect.
As in a boxing match, nations that are relatively immune to surging oil prices will have an advantage. On an international scale, their impact on Japan is relatively small.
Of course, Japan has its own problems to solve. The nation still relies heavily on Mideast oil, and needs to improve its ability to defend the sea lanes and beef up its diplomatic power. It will also be essential for Japan to develop safer and cleaner sources of energy.
Teruhiko Mano is a professor at Seigakuin University.