Implications of Japanese earthquake on energy
Earthquake damages on nuclear plants are important
Although it is too early to fully assess the extent of the damage, it is clear that the earthquake that hit Japan on March 11th has affected several nuclear plants and led to the shut down of about 15% to 20% of the country’s installed nuclear capacity. Japan’s electricity generation is mainly ensured by gas (30%), followed by nuclear and coal (25% each) with oil only representing one-tenth of the total.
Gas primary source of electricity generation
In the year following the 1995 Kobe earthquake (6.9 on Richter scale, compared to 8.9 this time), the loss in nuclear generated electricity was mainly replaced by gas, with consumption increasing by 6.7% compared to an average growth of 4% in the preceding years. After the 2007 earthquake (6.8 on Richter scale), nuclear consumption fell by 8% while gas and coal consumption rose by 8% and 5%, respectively.
Oil constitutes more than 40% of Japan’s total energy consumption, but as we mentioned before, very little is used for electricity generation. Since oil is mainly used for transport, oil consumption actually fell heavily in the two years following the earthquakes in 2005 and 2007.
No impact on oil market
Assuming that none of the lost nuclear output comes back this year, and given existing capacity, gas would cover about half of the lost output, coal about 40% and oil only slightly more than 10%. Even assuming that only oil is used in replacement, this would constitute an increase in demand of 0.24 mn barrels/day, or about 0.3% of total world demand. The demand/supply dynamics of oil is thus not impacted by the earthquake, and our equilibrium price remains intact at $91/bl.
This explains the reaction of gas and oil prices just after the earthquake: oil prices remained stable while natural gas prices for summer delivery increased by 7%.
However, nuclear installations were not the only facilities to suffer from the earthquake, and since both gas and oil-burning plants have also been damaged, it is still unclear at this stage where the replacement will come from.
Uranium to suffer most
The commodity that will, however, suffer the most from the earthquake is uranium. Throughout history, every time nuclear plants have been damaged resulting in radioactive leaks, even very limited ones, nuclear energy has been questioned and led to substitution by other energy sources.