Energy Prospectus

From this mornings Pritchard Morning Intelligence report:

Thought of the Day – Japanese Earthquake Impact – The unfortunate earthquake and subsequent tsunami in Japan has resulted in widespread devastation, and is the biggest challenge Japan is facing since World War II. The nuclear meltdown at probably three of its reactors is resulting in radiation leaks, which although not as bad as the leak at Chernobyl, would nonetheless have far-reaching consequences. Over one fourth of Japan’s approximately 50,000 MW nuclear generation capacity is currently down and much of it would take a long time (months for partial and years for full resumption) to come back online. Although a large part of this shortfall could be met by the coal and petroleum fired generation, much of this shutdown capacity will be substituted by natural gas (LNG) fired power generation. Even if only 50% of the shutdown nuclear capacity gets substituted by natural gas, this could result in over 1 Bcf/d of additional LNG demand. More immediately, the demand destruction in the aftermath of the earthquake could limit the overall demand for energy imports. However, in the near term, the petroleum product (resid and diesel) demand would climb sooner since between 0.8-1.0 MMbbl/d of the total 4.6 MMbbl/d Japanese refining capacity is likely to be down due to the earthquake. This might put downward pressure on crude prices but will be supportive for product prices and crack spreads. The Asian LNG prices are likely to strengthen on expectations of higher demand which in turn will also provide support to UK NBP prices. Since the domestic natural gas market is more localized and the LNG imports at about only 1 Bcf/d currently have become less of a factor in supply/demand dynamics in the U.S., the Japanese earthquake might not immediately have much impact on the U.S. natural gas markets. Over the medium term, LNG and coal should benefit as much of the shutdown nuclear capacity will take months for partial restart and years for a full resumption. In fact some of the capacity might be permanently shut. The resulting increase in the Japanese LNG demand and higher Asian LNG prices would attract more LNG cargos to Asia. Japan is the biggest LNG user in the world and already consumes over one third of global LNG supply. The long term impact of the Japanese nuclear meltdown could be far-reaching. This is not only Japan's Three Mile Island, it will also cause alarm globally about the safety of nuclear power plants. In the U.S. nuclear power already needs government loan guarantees to justify economics and the potential incremental costs and regulatory delays associated with additional safety scrutiny could nip most of the new build proposals in the bud. This should benefit the natural gas industry and LNG markets in the long run as it would make the usage of natural gas as a power generation fuel even more attractive. (Sharma)

My take is that after a few months of lower oil demand from Japan there will be a strong rebound. Japan will need more oil and LNG to generate the power that has been lost due to the shutting down of nuclear power plants. They will also need a lot of fuel to rebuild. - Dan

NEW YORK (TheStreet) -- The toll in human misery wrought by the tsunami and earthquakes in Japan tests the imagination of economists, but the effects on Japan's GDP and wealth are a different matter.

GDP, which measures goods and services produced, will immediately dive in Japan and stay lower through the second and into the third quarters of 2011, but will then surge as construction and spending on capital equipment to rebuild drives up growth.

Overall, however, Japan will be poorer, for this disaster. Lost infrastructure, factories and the like will be replaced but wealth is the sum of what citizens and governments own -- those include physical assets like those just noted and financial wealth, namely securities and cash. Rebuilding will run down Japan's financial wealth to replace lost physical assets.

As estimates of the damage emerge, those totals are real deadweight losses to wealth. To the extent Japan must run down financial assets and bring home foreign investment to rebuild, the net wealth of Japan is permanently reduced.

Generally, after three years or so, the impact on GDP is small -- production is lost in the first two quarters but more goods and services are produced in later quarters to rebuild. Often the net loss in GDP, from even the largest natural disasters, comes to no more than one percent of GDP in large advanced industrialized countries.

Replacing lost production and rebuilding lifts output in a nation's geographic areas less affected by the disaster to provide the resources to rebuild and compensate for lost output in the most affected region.

However, this time could be different. Japan has encountered two disasters -- the tsunami and earthquake, and the nuclear explosions -- and globalization may make Japan more vulnerable rather than in the past.

The double whammy has the potential to keep the Japanese economy shut down longer and globalization offers Japan's export customers alternatives they might not have enjoyed a decade or two ago. Hyundai and Ford now are good substitutes for Toyota's cars, and even more so, Caterpillar tractors made in China can replace Komatsu's land movers.
The pause and uncertainty effected by the nuclear shutdown will cause production to rev up more outside Japan and take longer to return to full capacity inside the country. Longer term, the nuclear disaster will accelerate the implosion of Japan's economy caused by an aging population, just as Hurricane Katrina caused people and activities to permanently leave more economically depressed areas of the Gulf Region permanently for faster growing places in the United States.

Some of New Orleans' and Mississippi's lost capital will never be restored -- it went elsewhere in the United States. For Japan's disaster stricken economy, that elsewhere may be other places around the world.

For the global economy, the nuclear disaster in Japan will cause more delay in reducing dependence on oil from the politically volatile Middle East. Wind, solar and other alternatives hold great promise but nuclear still offers the safest, large-scale option around. The problem is the loss of life associated with nuclear failures gets concentrated, even if it is much smaller over time per BTU produced, at events like Fukushima. That latter will increase hesitation around the world about building nuclear plants and keep the global economy in the grip of oil longer.

This time, the path to recovery will be tougher for Japan, and for the global economy, ripped by the Great Recession and high-priced oil, the path of recovery will be inexorably altered.

March 17 comments from Energy & Capital:
Japan suffered a triple nightmare of earthquake, tsunami, and nuclear meltdown... and the country’s currency took off.
It makes no sense — until you realize the Japanese are selling their foreign assets and bringing the money home.
This means, of course, that the dollar will continue to go down and the price of most commodities like oil, natural gas, and coal will continue to go up.