Dependence on Middle East oil threatens yen, stock market

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Dependence on Middle East oil threatens yen, stock market A crash in oil prices would reverse the money flow and roil financial and securities markets around the world. Asia's currency crisis of three years ago was caused and worsened by rampant speculation across the world.

Asahi Shimbun

September 23, 2000

World oil prices continue to climb. The benchmark price of crude oil has shot up about three times in just 1 years, hitting the highest level since the 1991 Persian Gulf War.

Robust growth in the United States and Europe and economic recovery in Asia are pushing up energy demand. But that is not the only reason for the increase in oil prices.

The larger reason is that vast sums of international funds used in speculation, such as money invested by hedge funds, are flowing into oil futures markets. It is as if an elephant were sloshing around in a pond.

Such speculative money is driving up oil prices as investors play up discord among members of the Organization of Petroleum Exporting Countries (OPEC) or drops in U.S. oil stocks resulting from hurricanes.

The danger is that soaring prices for petroleum and refinery products could throw the world economy into confusion. They could also derail Japan's nascent economic recovery.

It is hoped that the Group of Seven finance ministers and central bank governors, due to meet in Prague this weekend, will figure out ways to control the flow of speculative money.

The U.S. economy is now in a delicate stage, with its future course riding on its ability to make a soft landing on a plateau of slower growth. The overall price trend remains strong, although consumer prices dipped in August from the month before.

The spike in oil prices could fuel inflationary expectations and push interest rates higher than called for by the real economy. If that happens, U.S. growth could grind to a halt.

In Europe, where truckers have blockaded highways to protest higher fuel prices, the rising cost of oil has become a political issue. It has also set off a vicious cycle of a weaker euro driving up the cost of importing oil, in turn further weakening the euro.

Japan cannot remain complacent. For now, the yen is steady, thanks largely to the improved prospects for a self-sustained economic recovery. Also, cutthroat competition among the refiners make it difficult to pass higher import costs on to the price of gasoline and other oil products.

But if the price of crude oil continues to climb, then the economy's Achilles' heel-its heavy dependence on foreign oil, particularly Mideast oil-could lower the value of the yen as well as of Japanese stocks.

The share of petroleum in the nation's primary energy supply has shrunk since the 1970s, when the economy was twice hit by a global oil crisis. But the share still exceeds 50 percent. Japan must continue to promote new-energy and energy-saving programs.

Experts say part of the money earned by oil-producing countries as a result of the price rise is pouring into U.S. securities markets and thus keeping the stock market bubble afloat. They also say some of the oil revenue invested in the stock market is helping drive up oil futures prices at the hands of hedge funds and other investors.

The Institute of Energy Economics, Japan says world oil supply exceeds global consumption. If so, oil prices could go into a free fall once the veneer of speculation peels off.

A crash in oil prices would reverse the money flow and roil financial and securities markets around the world. It must not be forgotten that Asia's currency crisis of three years ago-and the subsequent turmoil in Russia and Latin America-was caused and worsened by rampant speculation across the world.

The coming G-7 meeting should not end with a superficial statement expressing ``common concern'' for such speculative money flows. Instead, it should study specific ways to control them, such as ensuring that hedge funds fully comply with their obligation to report transactions.

http://www.asahi.com/english/asahi/0923/asahi092315.html



-- Martin Thompson (mthom1927@aol.com), September 23, 2000


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