IEEJ：August ©IEEJ 2023
Special Bulletin
A Japanese Perspective on the International Energy Landscape (648)

August 4, 2023

Comment on Gasoline Prices Having Risen for 11th Straight Week in JapanKen Koyama, PhD
Chief Economist, Senior Managing Director
The Institute of Energy Economics, Japan
In Japan, gasoline prices continue to rise. According to a survey by the Oil Information
Center of the Institute of Energy Economics, Japan, the average retail price of regular gasoline in Japanwas 176.6 yen per liter as of July 31, an increase of 1.9 yen from a week earlier. This is the highest inabout 15 years since September 2008. Gasoline prices rose for the 11th straight week, continuing agradual increase.
Usually, crude oil prices exert the greatest impact on gasoline prices. This is because
gasoline is a product that is refined from crude oil. Changes in the prices of crude oil as the material
for gasoline drive the prices of the product. However, a great special factor has been behind the recent
gasoline price hikes. That is the reduction of subsidies for gasoline.
In developed countries, including Japan, gasoline and other energy prices are usually
determined by market forces before being accepted by consumers. In developing countries with lowerincome levels, however, subsidies are often provided for energy as an essential commodity. This is not
the usual case in developed countries. In the face of soaring energy prices from the second half of2021, however, the European Union began to introduce energy subsidies for lower-income people after
around October 2021. In response to this development, Japan introduced subsidies for gasoline andother petroleum products for their wholesalers as a drastic change mitigation measure in response tothe soaring crude oil prices, covering a limited excess over certain price levels.
Later, gasoline subsidies gradually increased, with the subsidy coverage expanding toinclude electricity and gas. This indicates that even developed countries cannot leave price spikes
untouched for energy as an essential commodity from political, social, and economic perspectives,
even if such spikes are determined by market forces. It became clear that developed countries, as well
as developing ones, are vulnerable to energy price spikes.
As indicated by the term "drastic change mitigation measure," Japan’s basic policy has been
to phase out subsidies introduced to mitigate the negative impacts of extremely rapid and substantial
price spikes as a drastic change, although prices determined by market forces should be respected. Infact, Japan has planned to gradually lower the limit price excess for gasoline subsidies from January2023, gradually cut the subsidization rate from June, and terminate the subsidy system at the end of
September. As the plan has been implemented, subsidies have been reduced to lead retail gasoline
prices to increase. It is pointed out that gasoline prices may rise further toward the termination of thesubsidy system at the end of September.
The above discussed the subsidy system as a major factor driving retail gasoline prices andthe price changes toward the reduction and termination of the subsidy system. As a matter of course,
however, attention should be paid to crude oil price changes as another important factor behind retail
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gasoline price hikes.
Various changes have come in crude oil prices since early 2023. Particularly, future crude
oil price trends are important for anticipating gasoline prices. In response to the outbreak of theUkraine crisis in 2022, crude oil prices topped $130 per barrel temporarily, reaching their highest
levels since the global financial crisis. Later in the first half of 2022, crude oil prices remained highabove $100/bbl. Later, however, crude oil prices declined gradually in response to global economicdeceleration. In early 2023, the benchmark West Texas Intermediate crude stood around $80/bbl.
Crude oil prices remained under downside pressure later. In March, WTI slipped below $68/bbl, hitting
a year-to-date low. In response to this price decline, the OPEC-plus group of oil-producing countries
enhanced their coordinated production cuts, and Saudi Arabia and some other group members
voluntarily implemented additional production reductions. The group thus moved to defend crude oil
prices. While their enhancement of production cuts contributed to supporting crude oil prices, news
such as a global economic slowdown, European and U.S. financial instability, and the sluggish Chinese
economy affected the international oil market, exerting downside pressure on crude oil prices. In June,crude oil prices slipped below $70/bbl frequently. Recently, however, crude oil prices have been on anuptrend again.
WTI turned up from less than $70/bbl on July 3 and rose above $80/bbl on July 28 for the
first time in three months since April. It moved around $80/bbl until August 3. Although there are still
uncertain factors, such as developments in the Chinese economy and the impact of the downgrade ofU.S. Treasuries, the waning of anxiety about the global economy as a whole has supported crude oilprices. In this regard, global economic trends and global oil demand growth in the second half of thisyear and 2024 will attract attention. According to the latest monthly Oil Market Report by theInternational Energy Agency, global oil demand in 2023 is expected to increase by 2.23 million barrels
per day from the previous year to 102.08 million bpd, exceeding the 2019 level before the COVID-19
pandemic. Depending on whether future demand growth would accelerate or decelerate, crude oilprices may change.
What is even more important is the future of the OPEC-plus production reduction policy.
This is because the OPEC-plus group has exerted great influence on the supply-demand balance in theinternational oil market by continuing the coordinated production reduction system. In addition to thecoordinated production cuts, some group members’ voluntary production cuts, including a 1 million
bpd cut by Saudi Arabia from July, have had an impact on the market. On August 3, it was reported
that Saudi Arabia would continue its voluntary production cut in September, attracting attention frommarket participants. Furthermore, further extension and enhancement of the voluntary production cuts
have been suggested, leading market players to focus attention on specific future OPEC-plus initiatives.
This is because the current and anticipated future trends of global oil demand, the current coordinatedproduction cuts by the OPEC-plus group, and voluntary production cuts by Saudi Arabia and othercountries lead market players to expect that demand in the international oil market will exceed supply
in the second half of 2023. If so, additional upside pressure on crude oil prices may arise. Such pressure
could grow further, depending on the extension or enhancement of the voluntary additional production
cuts.
If the uptrend in crude oil prices becomes apparent, it will naturally push up gasoline prices,
apart from the effects of the reduction and termination of subsidies. As a matter of course, attention
should be paid not only to changes in dollar-denominated crude oil prices but also to currency
exchange rate fluctuations. Whether the yen will remain weak or turn up against the dollar could havean important impact on gasoline and other energy prices in Japan.
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Energy prices, symbolized by gasoline prices, are part of familiar price indicators, exerting
direct impacts on people's lives and the economy. We should pay attention to energy price changes inthe second half of 2023, which will have great economic, political, and social impacts in Japan, which
depends heavily on energy imports.

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