Water's more costly than oil, so what's the fuss?

Asahi Shimbun

October 27, 2000

Higher oil prices are casting a shadow over stock prices and growth prospects worldwide. Oil markets are nervous, partly because U.S. demand for heating oil is expected to tighten as winter approaches, and partly because of flare-ups of violence in the Middle East.

However, overreaction to oil shortages is unwarranted because global supply exceeds demand. The impact this has on Japan is, and will be, much less severe than in the United States and Europe because the Japanese oil industry has large oil stocks.

Instead of worrying about the ``crisis'' that does not exist, the government needs to take long-term steps to improve the country's energy supply and consumption structure, such as using more natural energy and promoting energy conservation.

At an OPEC summit meeting held in Venezuela in September, Venezuelan President Hugo Chavez Frias emphasized that crude oil was still ``cheap,'' although its price had more than tripled since the previous year.

Comparing oil prices to beverage prices, Chavez said a unit of cola, drinking water and wine costs three times, 3.6 times and more than 45 times as much as the same amount of crude oil, respectively. His message was that high oil taxes, not high oil prices, were responsible for the high fuel cost in consuming countries.

His view that ``oil is cheap'' is not unfounded, at least in Japan's case. The current import cost of crude is about 20 yen per liter-almost the same as it was in the late 1970s and lower than in the early 1980s-mainly because the yen's exchange value against the dollar has almost tripled since then.

Gasoline prices also remain low compared with previous years. According to the Oil Information Center, Japan, the average price of regular-grade gasoline as of Oct. 16 was 105 yen per liter, much lower than the level that prevailed until 3 years ago. However, it was up 15 yen from May 1999 when the average price hit its lowest level since the price survey began in 1987.

Japan is said to be 10 years behind the United States and Europe in oil-industry deregulation. However, the relatively low prices at the pumps show that Japanese consumers are at last enjoying the benefits of free competition.

Certainly, oil and gasoline prices have shot up since early 1999, but Japan's economy is now much less vulnerable to oil price gyrations than it was during the two global oil crises of the 1970s.

A 10-percent rise in oil prices, for example, is estimated to push up consumer prices only marginally, by about one-sixth of the effect it had in 1980. There are two reasons for this. Firstly because the economy's size has increased and, secondly, because its dependence on oil has diminished.

Japan's export industries will be hit if economic growth slows down in Southeast Asia and elsewhere as a result of higher oil prices. As things stand, however, the effect is expected to be limited.

Statistics show the world's oil supply has topped the demand since April. ``There is the risk that prices will fall sharply after soaring for a certain period,'' says an analyst with the Institute for Energy Economics, Japan. The institute believes oil prices will return to stability around the time the cold season is over.

On the New York Mercantile Exchange, prices for benchmark one-month oil futures contracts are lower than those for two-month and three-month contracts. This shows the market sentiment is being affected more by short-term demand for oil products, such as heating oil, than by long-term price expectations.

The acquisition of Texaco by Chevron, a major U.S. oil company, announced in the midst of the oil price rise, suggests a strategy of raising efficiency sufficiently to withstand the impact of price falls. Over the long haul, energy demand will grow substantially, particularly in Asia where rapid economic development is expected in countries such as China and India. For Japan, the world's second-largest oil-consuming country, it is essential to secure price and supply stability while diversifying energy sources.

Japan has long pursued a policy of developing oil on an independent basis. Now, however, that policy is doomed because of huge losses incurred by National Oil Corporation, and also because the flagship Arabian Oil Co. has lost concessions in Saudi Arabia.

Independent oil development no longer holds a key position in energy policy. As an American economist points out, ``Oil development, whether by Japanese or foreign entities, has the same effect in that it increases global oil supply.''

Energy policy will be focused on two priorities. The first is to review the system of energy and environmental taxes, including the gasoline and motor vehicle taxes. Introducing environment-oriented taxes, such as the carbon tax which is levied in proportion to carbon dioxide emissions, will help to reduce dependence on oil and curb energy consumption.

Environmental taxation will encourage industries to use more eco-friendly energy, such as natural gas and renewable energy. It will also induce households to make greater efforts to save energy-by purchasing fuel-efficient cars, for example.

The second priority is to promote liberalization in the energy sector in order to bring down energy prices, such as those for electricity and gas, which remain at high levels by international standards.

Under the current price adjustment system, changes in the price of crude are passed on to electricity and gas prices every three months. If the scope of liberalization is expanded, competition for customers will intensify. As a result, power and gas suppliers will be prompted to try harder to hedge exchange-rate risks.

And if the energy market is further developed as a result of the entrance of more newcomers, it will be possible to increase gas purchases, for example, during an oil price upheaval.

The author is an Asahi Shimbun business news writer.

http://www.asahi.com/english/asahi/1027/asahi102712.html

-- Martin Thompson (mthom1927@aol.com), October 27, 2000