EDITORIAL: Super high oil prices

The price of crude oil continues to soar. The New York market recently hit a series of new highs with the price temporarily climbing above $126 (about 13,000 yen) per barrel. Since breaking the $100 line soon after the new year, the pace of this price advance has accelerated.

Until about five years ago, up to the U.S.-led invasion of Iraq in March 2003, crude sold in the $20 to $30 range. With that war drawing attention to geopolitical risks, crude broke through $50 per barrel the following year. While this was said to be super high, the current price is 2.5 times that level. This is worthy, in short, of being labeled a "super oil shock."

Strangely, though, there is no real panic occurring among either companies or consumers. While concerns exist about the rising prices of daily necessities, the atmosphere is dramatically different from the oil crises of the 1970s.

One major factor is that the strong yen/weak dollar trend serves as a guard that shields Japan's economy. Though suffering a torrent of body blows in the form of more expensive crude, this guard continues to prevent a knockout punch.

Since last summer, it has been feared that the subprime loan crisis would lead to recession in the U.S. economy, with the dollar steadily losing ground. About a year ago the yen traded at around 124 yen to the dollar. This March the rate temporarily hit the 95-yen level. As a result, the yen-converted price of imported crude has not matched the jump in the global market.

In the past, export companies would have cried out in distress if the yen traded in double-digit territory against the greenback. The shift in this dynamic is clear from the results of an emergency survey of 82 major domestic manufacturers that the Ministry of Economy, Trade and Industry conducted in late March. Although 91 percent of the firms that responded reported that the higher cost of crude was pressuring corporate earnings, only 44 percent said the same about the higher yen.

The advance of overseas production has markedly bolstered corporate endurance toward a stronger yen. What's more, the view appears to be that the yen's appreciation provides a buffer against the shock from the abnormally high price of crude. Perhaps this degree of yen strength is actually an economic plus.

As long as global demand for crude continues to force up the market price, the only truly viable choice is to create an economic structure capable of dealing with the new price level. On the energy front, frantic efforts to conserve and develop new sources of energy should be a natural matter of course.

The recent rise in crude also entails one other factor--the deluge of surplus funds into that sector. Because the market scales of crude oil, grains and other commodities are relatively small, compared with the global financial market, this cash influx is triggering sharp price increases. Though finance, crude oil, foods and housing are totally separate markets, they have become strongly linked via the progress in financial engineering and the advance of globalization.

The only way to correct this structure is for the major economies to promptly normalize the easy money policies that have dragged on for so long, bringing the global cash glut under control. At present, priority is being placed on calming financial market turbulence by easing the global credit situation. At the same time, however, steps must also be taken to deal with excess liquidity.

Though a stiff challenge, we look forward to seeing progress during the meeting of world leaders at the Group of Eight summit at Lake Toyako in July.

--The Asahi Shimbun, May 16(IHT/Asahi: May 17,2008)