Rising oil prices, the recession and a new world order

A discussion between economist Kazuo Mizuno and Tsuda College associate professor Toshihito Kayano, which was carried in a book, is based on a bold hypothesis and is inspiring.

In the book, titled “Cho-Makuro Tenbo, Sekai Keizai no Shinjitsu” (“Ultra-macro Outlook — The Reality of the World Economy”), Mizuno and Kayano discuss the global economy from an ultra-macro economic viewpoint. They assert that the current recession is not just a problem involving the cycle of business conditions but is a result of a drastic change in the current of capitalism.

They pay close attention to the fact that the trade bargaining position of developed countries has declined because they have become unable to beat down the prices of natural resources, particularly oil, with the rise of emerging economies. Furthermore, developed countries have lost their superior positions as economic nationalism has heightened.

In plain words, developed countries are no longer able to make profits if they maintain their policies that had long been regarded as orthodox. This is clearly shown by the fact that they cannot put the brakes on the decline in workers’ wages even if their economies improve. This is a big headache for both the United States and Japan.

The United States attempted to retain its economic supremacy by transforming itself into a financial empire. At one time this move appeared successful, but the financial crisis triggered by the collapse of Lehman Brothers has demonstrated that such a measure has its limits.

The trade bargaining position of developed countries is expected to continue to worsen with the rise in prices of natural resources, so developed countries’ economic growth will remain slow.

The discussion between Mizuno and Kayano resembles what Jeff Rubin, an economist with a Canadian investment bank, wrote in his book, “Why Your World is About to Get a Whole Lot Smaller.”

Like Mizuno and Kayano, Rubin attributes the ongoing global recession primarily to the rise in oil prices. He urges those skeptical about such an assertion to analyze all the recessions in the post-war period. He says the fingerprints of oil clearly remain in all post-war recessions, and the current one is no exception. A rise in interest rates, which is responsible for the bursting of the real-estate bubble in the United States, was triggered by skyrocketing oil prices.

China is a major factor behind the rise in oil prices. Additionally, however, oil producing countries’ self-consumption of oil has sharply increased, and their capacity to export oil has declined. The amount of gasoline that an average U.S. driver consumes in a month is equal to that required to operate a man-made ski ground in a scorching desert in Dubai for only a day.

There is a large amount of oil reserves in oil sands in Canada as well as in other countries that are not traditional oil-producing states. However, such oil is expensive.

Since the production of less expensive oil by traditional oil-producing countries has already peaked, globalization can no longer be maintained. Rubin concludes that the world has no choice but to contract.

However, the rise in oil prices is not necessarily a bad thing. As the price of crude oil has risen to over 100 dollars per barrel, the amount of steel and perishable food China exports to the United States has sharply declined. As a result, domestic steelmakers in the United States are now being required to sharply increase their output, while farmers have begun growing vegetables again in their farmlands that they had once abandoned. This suggests that the United States can survive without China.

Oil will never be exhausted but its price is rising. Globalization was a mere dream that quickly vanished. These two books are useful in learning the new reality of the world. (By Michio Ushioda, Expert Senior Writer)

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