“Bond investors are grappling with an existential question: When does something temporary become permanent?,” writes Agnes Crane in today’s Wall Street Journal.

“When the price of crude oil rose above $40 a barrel this year, many market pundits and central bankers brushed aside the negative implications for the global economy, claiming the surge likely would prove transitory. But oil has continued to climb, with benchmark November crude-oil futures in New York breaking above $54 a barrel and setting yet another record high, nearly 70% above last year’s level.”

“The gains in oil, which fell yesterday, haven’t hurt the bid in global bond markets one bit. Yesterday, the yield on the benchmark 10-year Japanese government bond closed down 0.095 percentage point, while the 10-year Treasury note fell back to the low end of its yield range to fetch 4.1%. The yield on the 10-year German bund, a proxy for euro-zone debt, also fell.”

“Though this might seem counterintuitive to anyone who remembers the double-digit inflation and soaring bond yields amid the oil shocks of the late 1970s and early 1980s, this time around the oil squeeze is viewed as bad news for growth and therefore, good news for bonds. The longer it persists, the greater chance it will have of curbing consumer and business spending as both groups attempt to plug a widening cost of energy with discretionary income earmarked for other goods and services. A long period of high energy prices also risks feeding through to inflation.”

“Earlier this month, finance ministers of the Group of Seven industrialized nations reiterated concern that high oil prices represent a risk, but offered little in the way of concrete solutions to a problem that threatens global growth. Instead, they called on oil producers to step up efforts to meet expanding demand and on consumers to rein in wasteful ways.”

“The Federal Reserve also has been vocal about the impact of rising oil costs on the U.S. economy. It has insisted the recent surge is a temporary phenomenon that eventually will correct, although some officials have sounded less certain about the duration.”

“Benchmark oil prices have held above $40 a barrel — once considered to be the rock-solid resistance threshold — since mid-July and have shown no sign of heading back below that level.”

“ ‘I don’t think it’s temporary anymore,’ said Sung Won Sohn, chief economist at Wells Fargo Bank in Minneapolis. ‘It has already begun to affect the economy.’ He estimates high oil costs have shaved 0.5 percentage point from annualized gross domestic product in the U.S. ‘If it stays at $55 per barrel, it will probably shave another 0.3 to 0.5 percentage point through 2005,’ he added.”

“The U.S. isn’t the only major economy vulnerable to high oil prices. Though it burns through about a quarter of total world consumption, Japan, which depends on imports for its energy needs, is also in the cross-hairs. ‘The problem we are facing in the U.S. is magnified in Japan,’ said Mr. Sohn.”