This commentary discusses recent global events in Japan and the Middle East within the context of the global energy market. It includes an in-depth discussion of the Middle East’s role in these markets and the outlook for the future. - Kevin Painter
Japanese earthquake and tsunami
Over the past several days, we have seen images and read headlines of the terrible tragedy in Japan. The country experienced its most powerful earthquake in 140 years, measuring 9.0 on the Richter scale. This was followed by massive and hugely destructive tsunami waves in the northeastern part of the country. We are deeply saddened by the loss of life and widespread destruction. We are also awestruck at the resolve of the nation and the global outreach of support to help Japan get through this.
As we look ahead, we seek to determine the broader implications of the aftermath of the tragedy. One of the significant repercussions is energy, as Japan focuses on trying to stabilize nuclear reactors at its Fukushima Daiichi complex 150 miles north of Tokyo. Several explosions at the plant have called into question the possibility that catastrophe could ensue on the order of the magnitude of Chernobyl or worse.
The nuclear reactor threat
The outcome of this emergency won’t be known for some time, but it will have an immediate impact on Japan’s energy infrastructure. Near-term effects, for example, have included rolling blackouts across the nation, resulting from the closure of nuclear facilities. But beyond the need to bring the current nuclear situation under control, Japan should not see a lasting impact from the loss of electrical supply. The government can replace nuclear capacity with natural gas or oil-powered generation, which should serve to limit the economic impact to industry and citizens.
In addition, even now we can begin to broadly estimate the cost of recovery. The base case from which we draw a conclusion is the Great Hansin or Kobe earthquake of 1995. At the time, the cost to rebuild was approximately 10 trillion yen (or approximately 2 percent of Japan’s gross domestic product). We can loosely project a similar or somewhat higher cost this time around.
Again, the extent of the overall economic impact won’t be known for some time, but it will likely be surmountable, given the strength of the world’s third-largest economy.
North Africa, the Middle East, and the broader energy implications
What could lead to a more significant disruption to the global recovery is the unfolding unrest in the oil-producing regions of the Middle East and North Africa. Citizens have risen up in protest against their respective governments and clashes have led to widespread loss of life. In addition to raising humanitarian and political concerns, the region grabs attention from an investment perspective; oil supply could be disrupted even as demand increases because of a continued global recovery.
A timeline of the unrest and its spread across the region helps give perspective on the unfolding events. Demonstrations began in Tunisia last December 17, leading to the resignation of its president, Zine al-Abidine Ben Ali, on January 14 of this year. In Algeria, riots commenced in early January and were followed quickly by protests in Jordan. Unrest spread from North Africa to the Middle East, when protesters in Yemen called for the resignation of President Saleh. Egypt followed, with massive demonstrations that led to the resignation of President Mubarak on February 11. Finally, the contagion spread to Bahrain, Iraq, and Iran, as citizens continued to protest government repression.
The most recent protests and conflicts in Libya, which center around calls for the removal of long-standing dictator Muammar Gaddafi, have begun to negatively impact markets. Oil prices have spiked, and global markets have sold off. Investors have begun to worry that further destabilization in the region could hamper global oil supplies. This is particularly troubling now that tensions have risen in Saudi Arabia, the world’s third-largest oil-producing nation. Events there, in Iran, and in Bahrain appear to be reviving tensions between the region’s Shiite and Sunni populations.