Background and Impact of Recent High Crude Oil Prices

Author Name HASEGAWA Eiichi  (Senior Fellow, RIETI)
Creation Date/NO. September 2008 08-P-008
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Crude oil prices on the New York Mercantile Exchange (NYMEX) temporarily fell to $10 a barrel, reflecting the Asian financial crisis that took place in 1997 and 1998, but global oil prices subsequently began to climb from around 2004, given rising demand from China, the disruption caused by hurricanes in the United States, and supply problems in Russia. In early 2008, crude oil prices topped $100 a barrel. As the sub-prime loan problems of the United States began to impact the global economy, crude oil prices surged once again from April that year, reflecting the large inflow of funds that became available around the world and other speculative money moving into the commodity futures market. Crude oil prices hit almost $150 a barrel mid-July.

The impact of high crude oil prices on Japan is significant. For example, if crude oil prices remain at $140 a barrel through the rest of the year, income of approximately $230 billion (or approximately ¥24 trillion), equivalent to between 5% and 6% of GDP, will be transferred from Japan to oil producing countries. In addition, if the rise in crude oil prices in 2008 from 2007 is $30 or $50 a barrel, the burden to Japan will amount to between ¥4.7 or ¥7.9 trillion, equivalent to consumption taxes of 2% or 3.4% (assuming $1 = ¥105). The surge in prices of other mineral resources, such as natural gas, coal, and uranium adds to the burden on Japan.

Meanwhile, oil producing countries, including Russia, used the additional income they receive from higher crude oil prices to bolster domestic welfare and their economies, as well as for overseas investments, stabilizing their domestic political foundations and raising their international presence. In contrast, to meet its growing domestic demand for energy, China has been expanding its rights to resources around the world, leveraging its financial strength, the consumption power of its market, and its political clout.

The United States is regarded as core to global energy supply and demand, given that it is the largest energy consumer in the world, it is home to many of the major oil companies that have been playing central roles in developing oil fields worldwide, it provides security guarantees to Middle East and Gulf countries, and it is the central player in the currency and settlement systems. However, concerns about declining U.S. world influence have been growing, given international factors involving Russia, China, Iran, and Iraq, as well as domestic U.S. factors, such as higher energy prices and a weak dollar.

The current explosive surge in crude oil prices, which has significant repercussions for Japan, can be traced to developments in China, the Middle East, the United States, and Russia in 2004. Since then, the environment that determines crude oil prices has become increasingly complex, with the growing involvement of governments among oil producing countries in controlling oil fields, and a complex network of players each with their own behavioral principles that can be at odds with the economic principle making up the oil market. As crude oil prices rise, oil producers such as Saudi Arabia and Russia, and consumers such as the United States and China have begun to take action based on their own national interests.

By systematically examining and analyzing both information collected through field investigations, including interviews conducted in major countries with key figures in the oil-related industries, and a wide range of information that is in the public domain, this paper foresees trends in future oil consumption and prices, and presents actions that Japan should initiate.