News in Depth: Japan’s Shift Towards Fossil Fuels Raises New Questions about Emissions and Nuclear Investment

Introduction

The Wall Street Journal recently reported on Japan’s increasing investment in coal, oil, and natural gas as the country strains to produce enough electricity following the idling of all nuclear plants in the aftermath of the Fukushima disaster in March of 2011.

Japan’s embrace of fossil fuels has a number of implications, most notably the pressure on emissions standards and on medium and long term investments in nuclear and renewable energy sources more broadly. In this week’s News in Depth feature, we explore Japan’s recent moves with respect to fossil fuels and the impact those moves have on emissions and strategies for energy infrastructure investment.

The Low Price of Oil and it’s Impact on Japan’s Energy Sector

As of writing, Oil is priced at ($53.44 for Brent Crude), reflecting a downward trend that began in 2014.

Crude Oil 6 Month Price Trend

Goldman Sachs analysts suggest that we may see the price of U.S. crude drop as far as $40 a barrel in the near-term, as inventories begin to rise.

While we continue to forecast a strong demand recovery in 2015, we believe that sequentially weaker activity, the end of winter and the end of potential restocking demand, will lead to a sequential deceleration in demand-growth as we enter the spring.

These prices, in addition to low coal and natural gas prices, have had a major impact on Japan as it seeks to fill the capacity void left by its 48 idled nuclear plants. Japan brought 14 new gas and coal-fired power plants online by the end of 2014 alone. It’s also been reported that by the end of 2025, Japan hopes to have a total capacity of over 13GW of new coal generation.

Reactions to this shift towards oil, coal, and gas have been mixed. There are clear political and economic advantages to Japan’s diversification. Perhaps most importantly, reliance on the cheaper fossil fuels will help Japan ease it’s energy import bill. In the first half of 2014, Japan’s trade gap reached 4.8 trillion yen. Moves to these cheaper energy sources are projected to lower that deficit and to ease pressure on and lower costs for Japan’s economy and manufacturing sector.

However, with Japan being the world’s fifth-biggest emitter of carbon dioxide, concerns have been raised about its increasing reliance of fossil fuels. Aaron Sheldrick, reporting for the Japan Times, writes that Japan is seeing increasing pressure from other countries, including China and the US, to meet it’s emission targets.

Balancing Short Term and Long Term Energy Investments

While the situation in Japan reflects many unique factors, including the Fukushima disaster and the public distrust of nuclear energy, it also provides a number of interesting angles of analysis. There is the broader phenomena of cheap oil and fossil fuels. However, the concerns highlighted above, including climate change and the regulation of carbon emissions, highlight the importance of keeping a longer term view on energy infrastructure investment. Moreover, it is important to consider the balance of an interest in highly elastic and less capital intensive energy sources, such as fossil fuels, with an interest in longer term infrastructure investments, such as nuclear, that pollute less and provide for greater supply certainty for growing economies.

For more on these issues, listen to The Bulletin with UBS podcast by Monocle, which this weeks focuses on global investment strategies in the oil sector. For further reference and cost comparisons between different energy sources, see also The Economics of Nuclear Power.

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