There is an interesting story developing in Japan that no one is really talking about – the land of the rising sun just might be taking another big step toward economic resurgence. When one peels back the mundane layers of the story, it is actually quite compelling on a number of levels. And guess what? Part of the Japanese story is about the price of oil, so let’s start there.
Oil has recently bounced quite bit higher, as Yemen jumped into the spotlight as the latest geopolitical drumbeat of the breathless media (what happened to Ukraine?) To the credit of the breathless media, though, (this is difficult, but …), Yemen is a real story, as it relates to the flow of oil, so a price jump was to be expected, however …
- The current correction should not be a surprise as the nearby fundamentals remain bearish while the projected outlook shows an improving situation but with only a very mild uptick in forecasted demand. Also, the massive overhang in oil inventories is nothing other than production that will hit the market as soon as the forward curve structure moves into a mode of supporting a destocking pattern.
In other words, don’t expect the price of oil to go any higher based on the fundamentals, which brings me to Japan.
- Japan posted its first trade surplus in nearly three years in March as exports of cars and electronics picked up, an encouraging sign that economic growth may be back on track after a sluggish start to the year.
Okay, that is good fundamental economic data, yes, but we get that all the time, everywhere, and it can change month to month. One has to look deeper to see if there is any support for trend development.
- Japan, the third-largest global net oil importer, is highly dependent on the Middle East for most of its supply.
On the surface, the above seems a negative, but when you put in context with the current price of oil and a rising need for Japan to import even more oil, one can see a trend developing. Here is why …
- Nuclear generation in Japan represented about 27% of the power generation prior to the 2011 earthquake and was one of the country’s least expensive sources of electric power. Japan replaced the significant loss of nuclear power with generation from imported natural gas, low-sulfur crude oil, fuel oil, and coal.
Yes, Japan has increased its oil imports because of the Fukushima nuclear disaster, and it appears that will continue to be the case, but let’s step back just a bit to look at what was happening just last year and what is happening now, relative to oil.
- Despite some strength in export markets, the yen’s depreciation and soaring natural gas and oil import costs from a greater reliance on fossil fuels and sustained high international oil prices through the first half of 2014 continued to deepen Japan’s recent trade deficit.
Okay, that issue was just a year ago, but what are we looking at now with oil prices low because of a fundamental issue – supply exceeds demand? If oil prices stay low for some time (barring some geopolitical crisis, they should), then the economic numbers above point to a trend developing in Japan, which is good news for the global economy.
And here is where it gets interesting. The problem with oil is supply and demand, and demand has increased considerably since the Fukushima disaster in 2011, specifically since 2013, and that demand might now be lessening. It has peaked.
- Two nuclear reactors, Kansai Electric’s Ohi reactors 3 and 4, were restarted in July 2012 and represented the only source of nuclear power in the country for more than a year. However, these two reactors were shut down again in September 2013, suspending all of Japan’s nuclear power generation for a second time in more than 40 years.
So, here is the question. What if Japan goes back to nuclear power, or, better yet, what if Japan pushes really hard to get to a higher percentage of renewables?
- There were some big numbers coming out of Japan too. The Ministry of Economy, Trade and Industry had approved more than 75GW of clean energy projects by the end January [2015], of which almost 72GW are solar. Actual solar installations since the beginning of the incentive program in July 2012 totaled 15GW by the end of December.
This all bodes well for Japan economically – lower oil prices, improving export picture, lower trade deficit. The move to renewables will certainly help them step away from oil imports, which will help. Now, here is another part of this story that is interesting – The Saudi desire to keep the price of oil low because it fears the world moving away from oil. Check this out …
- China connected over 5GW of solar power to the grid in the first quarter of the year, according to a statement from the National Energy Administration (NEA) earlier this week. About 4.4GW were utility-scale plants while distribution-grid-connected projects accounted for the rest.
- The Asian nation now has 33GW of solar power supply and aims to add 17.8GW of solar power this year – more than double the capacity installed by the US in 2014.
And yet there is more …
- Another country seeing significant build-out is South Africa, which plans to buy an additional 6.3GW from private producers through its auction program. It also announced the preferred bidders for 13 clean energy projects adding up to 1.1GW of capacity last week.
Japan is on the rise and the world’s dependence on oil is on the decline. Now, this is a good story.
Trade in the day; invest in your life …
