Stratfor On Japan, the Persian Gulf and Energy

Tyler Durden's picture

From Stratfor

Japan, the Persian Gulf and Energy 

By George Friedman

Over the past week, everything seemed to converge
on energy. The unrest in the Persian Gulf raised the specter of the disruption
of oil supplies to the rest of the world
, and an earthquake in Japan
knocked out a string of nuclear reactors with potentially devastating effect.
Japan depends on nuclear energy and it depends
on the Persian Gulf
, which is where it gets most of its oil. It was,
therefore, a profoundly bad week for Japan, not only because of the extensive
damage and human suffering but also because Japan was being shown that it can’t
readily escape the realities of geography.

Japan is the world’s third-largest economy, a bit
behind China now. It is also the third-largest industrial economy, behind only
the United States and China. Japan’s problem is that its enormous industrial
plant is built in a country
almost totally devoid of mineral resources
. It must import virtually all of
the metals and energy that it uses to manufacture industrial products. It
maintains stockpiles, but should those stockpiles be depleted and no new
imports arrive, Japan stops being an industrial power.

The Geography of Oil

There are multiple sources for many of the metals
Japan imports, so that if supplies stop flowing from one place it can get them
from other places. The geography of oil is more limited. In order to access the
amount of oil Japan needs, the only place to get it is the Persian Gulf. There
are other places to get some of what Japan needs, but it cannot do without the
Persian Gulf for its oil.

This past week, we saw that this was a potentially
vulnerable source. The unrest
that swept the western littoral of the Arabian Peninsula
and the ongoing
tension between the Saudis and Iranians, as well as the tension between Iran
and the United States, raised the possibility of disruptions. The geography of
the Persian Gulf is extraordinary. It is a narrow body of water opening into a
narrow channel through the Strait of Hormuz. Any diminution of the flow from
any source in the region, let alone the complete
closure of the Strait of Hormuz
, would have profound implications for the
global economy.

For Japan it could mean more than higher prices.
It could mean being unable to secure the amount of oil needed at any price. The
movement of tankers, the limits on port facilities and long-term contracts that
commit oil to other places could make it impossible for Japan to physically
secure the oil it needs to run its industrial plant. On an extended basis, this
would draw down reserves and constrain Japan’s economy dramatically. And,
obviously, when the world’s third-largest industrial plant drastically slows,
the impact on the global supply chain is both dramatic and complex.

In 1973, the Arab countries imposed an oil embargo
on the world. Japan, entirely dependent on imported oil, was hit not only by
high prices but also by the fact that it could not obtain enough fuel to keep
going. While the embargo lasted only five months, the oil shock, as the
Japanese called it, threatened Japan’s industrial capability and shocked it
into remembering its vulnerability. Japan relied on the United States to
guarantee its oil supplies. The realization that the United States couldn’t
guarantee those supplies created a political crisis parallel to the economic
one. It is one reason the Japanese are hypersensitive to events in the Persian
Gulf and to the security of the supply lines running out of the region.

Regardless of other supplies, Japan will always
import nearly 100 percent of its oil from other countries. If it cuts its
consumption by 90 percent, it still imports nearly 100 percent of its oil. And
to the extent that the Japanese economy requires oil — which it does — it is highly
vulnerable to events in the Persian Gulf.

It is to mitigate the risk of oil dependency —
which cannot be eliminated altogether by any means — that Japan employs two
alternative fuels: It is the world’s largest importer of seaborne coal, and it
has become the third-largest producer of electricity from nuclear reactors,
ranking after the United States and France in total amount produced. One-third
of its electricity production comes from nuclear power plants. Nuclear power
was critical to both Japan’s industrial and national security strategy. It did
not make Japan self-sufficient, since it needed to import coal and nuclear
fuel, but access to these resources made it dependent on countries like
Australia, which does not have choke points like Hormuz.

It is in this context that we need to understand
the Japanese prime minister’s statement that Japan was facing its worst crisis
since World War II. First, the earthquake
and the resulting damage to several of Japan’s nuclear reactors
created a
long-term regional energy shortage in Japan that, along with the other damage
caused by the earthquake, would certainly affect the economy. But the events in
the Persian Gulf also raised the 1973 nightmare scenario for the Japanese.
Depending how events evolved, the Japanese pipeline from the Persian Gulf could
be threatened in a way that it had not been since 1973. Combined with the
failure of several nuclear reactors, the Japanese economy is at risk.

The comparison with World War II was apt since it
also began, in a way, with an energy crisis. The Japanese had invaded China,
and after the fall of the Netherlands (which controlled today’s Indonesia) and
France (which controlled Indochina), Japan was concerned about agreements with
France and the Netherlands continuing to be honored. Indochina supplied Japan
with tin and rubber, among other raw materials. The Netherlands East Indies
supplied oil. When the Japanese invaded Indochina, the United States both cut
off oil shipments from the United States and started buying up oil from the
Netherlands East Indies to keep Japan from getting it. The Japanese were faced
with the collapse of their economy or war with the United States. They chose
Pearl Harbor.

Today’s situation is in no way comparable to what
happened in 1941 except for the core geopolitical reality. Japan is dependent
on imports of raw materials and particularly oil. Anything that interferes with
the flow of oil creates a crisis in Japan. Anything that risks a cutoff makes
Japan uneasy. Add an earthquake destroying part of its energy-producing plant
and you force Japan into a profound internal crisis. However, it is essential
to understand what energy has meant to Japan historically — miscalculation
about it led to national disaster and access to it remains Japan’s
psychological as well as physical pivot.

Japan’s Nuclear Safety Net

Japan is still struggling with the consequences of
its economic meltdown in the early 1990s. Rapid growth with low rates of return
on capital created a massive financial crisis. Rather than allow a recession to
force a wave of bankruptcies and unemployment, the Japanese sought to maintain
their tradition of lifetime employment. To do that Japan had to keep interest
rates extremely low and accept little or no economic growth. It achieved its
goal, relatively low unemployment, but at the cost of a large
debt burden and a long-term sluggish economy
.

The Japanese were beginning to struggle with the
question of what would come after a generation of economic stagnation and full
employment. They had clearly not yet defined a path, although there was some
recognition that a generation’s economic reality could not sustain itself. The
changes that Japan would face were going to be wrenching, and even under the
best of circumstances, they would be politically difficult to manage. Suddenly,
Japan is not facing the best of circumstances.

It is not yet clear how devastating the
nuclear-reactor damage will prove to be, but the situation appears to be
worsening. What is clear is that the potential crisis in the Persian Gulf, the
loss of nuclear reactors and the rising radiation levels will undermine the
confidence of the Japanese. Beyond the human toll, these reactors were Japan’s
hedge against an unpredictable world. They gave it control of a substantial
amount of its energy production. Even if the Japanese still had to import coal
and oil, there at least a part of their energy structure was largely under
their own control and secure. Japan’s nuclear power sector seemed invulnerable,
which no other part of its energy infrastructure was. For Japan, a country that
went to war with the United States over energy in 1941 and was devastated as a
result, this was no small thing. Japan had a safety net.

The safety net was psychological as much as
anything. The destruction of a series of nuclear reactors not only creates energy
shortages and fear of radiation; it also drives home the profound and very real
vulnerability underlying all of Japan’s success. Japan does not control the
source of its oil, it does not control the sea lanes over which coal and other
minerals travel, and it cannot be certain that its nuclear reactors will not
suddenly be destroyed. To the extent that economics and politics are
psychological, this is a huge blow. Japan lives in constant danger, both from
nature and from geopolitics. What the earthquake drove home was just how
profound and how dangerous Japan’s world is. It is difficult to imagine another
industrial economy as inherently insecure as Japan’s. The earthquake will
impose many economic constraints on Japan that will significantly complicate its
emergence from its post-boom economy, but one important question is the impact
on the political system. Since World War II, Japan has coped with its
vulnerability by avoiding international entanglements and relying
on its relationship with the United States
. It sometimes wondered whether
the United States, with its sometimes-unpredictable military operations, was
more of a danger than a guarantor, but its policy remained intact.

It is not the loss of the reactors that will shake
Japan the most but the loss of the certainty that the reactors were their path
to some degree of safety, along with the added burden on the economy. The
question is how the political system will respond. In dealing with the Persian
Gulf, will Japan continue to follow the American lead or will it decide to take
a greater degree of control and follow its own path? The likelihood is that a
shaken self-confidence will make Japan more cautious and even more vulnerable.
But it is interesting to look at Japanese history and realize that sometimes,
and not always predictably, Japan takes insecurity as a goad to self-assertion.

This was no ordinary earthquake in magnitude or in
the potential impact on Japan’s view of the world. The earthquake shook a lot
of pieces loose, not the least of which were in the Japanese psyche. Japan has
tried to convince itself that it had provided a measure of security with
nuclear plants and an alliance with the United States. Given the earthquake and
situation in the Persian Gulf, recalculation is in order. But Japan is a
country that has avoided recalculation for a long time. The question now is
whether the extraordinary vulnerability exposed by the quake will be powerful
enough to shake Japan into recalculating its long-standing political system.

This report is republished with permission of STRATFOR

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The Axe's picture

Not in the 25 years that I have been trading have I seen a market so broken from reality then this one, and so controlled by the COMPUTER..and the FED.

flattrader's picture

Agreed...and the last three trading sessions even more so.

8 mins. to green close on SNP.

asteroids's picture

Thousands dead. Billions in damages. Potential catastrophe around the corner and the $IWM yawns. Closes down less than 1%. It's evil and immoral.

clymer's picture

 

Let's just all pray (it's just a figure of speech for you atheists), that in addition to the safety and security of the survivors of this tragedy, that this ushers in a new and unprecedented global effort to get out from under the thumb of the energy monopoly that uses the Heinz Kissinger methodology of controlling nations with oil, and develop a new direction - hydrogen, zero-point, cold-fusion, charge clusters - anything new that will change the global power balance away from the dinosaur plutocracy, and toward a new age of enlightenment.

 

A guy can hope some good comes out of this..

alien-IQ's picture

from what I've read, Thorium seems to have great potential and Nuclear plants can be retrofit to run on it.

Of course, I'm not a scientist (but I did play one on TV once...so I've got that going for me).

Some more information on Thorium here:
http://energyfromthorium.com/

and here:
http://www.popsci.com/technology/article/2010-08/thorium-reactors-could-...

check it out. it's very interesting stuff.

New_Meat's picture

a-IQ: thorium not even in serious consideration.  That means huge investments in RnD, lots of type testing, scale up, etc.  That is in the like 30+ years range for practicality. - Ned

A Texan's picture

While Stratfor can be dead wrong on some things, they are correct here on the Japanese insecurity regarding energy.   They are insecure because they should be - nature was not kind to them.

Sooooo, what do you do about the energy situation if you're the Japanese leadership?   Press on, just more intelligently.  The nuke stations in trouble were built in the '70s, and technology has moved way beyond that by now (much of it because of Japanese innovations).  Japan should move whole hog into 2 areas of nuclear:  1)  Pebble bed reactors, which CAN'T have a meltdown and CAN'T spew radioactivity all over the place; and 2)  Thorium reactors - similarly, they cannot have some of those same problems, plus thorium has the added advantage of being extremely plentiful.  In fact, the coal that Japan buys has more energy in it in the form of thorium than it does as coal - heck, even the coal ash has thorium in it.

Aside from that, they need to retrofit some of the existing plants with failsafe backup systems that depend on things that don't go out when the electricity fails or something gets wet - like gravity.  I'm sure that all of the engineers in Japan can design an amazing system in a very short time.

Heck, they might even get into pebble beds and thorium reactors to the extent that they become leaders and can export them to backwards nations ... like the US.

JR's picture

Perhaps that is why in his book, The Next 100 Years, Friedman believes that Japan will ally with Turkey, for the oil, and that the great crisis of the mid-21st century will be a war between the U.S. and a Turkish-Japanese alliance.

Maybe that also means we lose. After all, he says the great powers of the future are Japan, Turkey, Mexico and Poland.  Maybe by then the U.S. will simply be Amexico.

DeeDeeTwo's picture

Gonna live forever, baby?

alien-IQ's picture

I think you'd have a hard time finding many people here on ZH that would disagree with your statement. Even the most blindly bullish must be well aware of the fact that they are, in fact, participating in a massive fraud with no correlation to reality.

A Man without Qualities's picture

The entire system is insolvent, so once the markets start to price in reality, it will fall apart very fast. This market will continue to ignore all events, no matter how absurd it may seem, until one day, everything finally snaps. But, I've got to admit, today is something special.

the not so mighty maximiza's picture

that's it really, the market must ignore reality in order too still exist.   Institutions that should have gone bankrupt still exist and are larger and more powerful with the same incompetent leadership.   No arrests prove there is no longer any reality.

A Man without Qualities's picture

The corporations that became powerful through making large profits, now use this power to hide the fact this is no longer the case...

terryg999's picture

That's for sure.  I had to re-learn how to make money in this crazy market.

M2Market's picture

Totally... Just check the US equity day session's open to close for the last three days.... lower open, higher close, followed by even lower open, higher close, and so on.  This market is rigged to the core, courtesy of the Chairman B. There is talk of "fundamental" for the US equities... Hell, the only fundamental that matters is how much money will be printed. 

Groty's picture

Buy 'em boys!  You'll never get 'em cheaper than they are today!  If only a major asteroid would hit, we'd be in a super bull cycle!

Motorhead's picture

OT - is it just me, or is the stock market "going up" in the afternoon after its morning constitutional dump the past 2-3 days?

flattrader's picture

mid morning ramp o rama has moved to mid afternoon ramp o rama.

They have to change it up a little every now and then.

Hacksaw's picture

@ Motorhead

Like the nic

 

We live on borrowed time

Hope turned to dust

http://www.youtube.com/watch?v=O02Gnzn5JDY

azengrcat's picture

They bought the Derp

24KGOLD FOIL HAT's picture

Japans actions do not make sense.  They have not been in the best interest of Japan.  Why would a fiscally very conservative nation take on 200% of GDP in govt debt?  Their overlords profited greatly from that and other actions.  Who exactly their overlords are I dont know but can take a few educated guesses.

Hacksaw's picture

This is yet more evidence that the central bankers and others directing policy place the interests of the financial sector at the centre of their concerns. For the financial industry, a modest rise in the inflation rate would genuinely be bad news, reducing the value of their assets and the real value of their interest income. In order to ensure that the major banks of the world do not have to deal with this situation, the central banks are prepared to force tens of millions of people to remain out of work.

http://www.guardian.co.uk/commentisfree/cifamerica/2011/mar/15/economics...

 


EscapeKey's picture

Because the alternative was to go through a severe recession.

And who wants one of those on their watch? GWBush? Tony Blair (2003)? Gordon Brown (2008)?

The Tories took the UK through a recession in the 90'es, and they get absolutely slaughtered for it in the socialist press, who actually believe Gordon Brown solved the financial crisis back in 2008.

No-one considers the long term, because they might not be around by then if they do.

Michael's picture

Will industries serviced by Japanese monopoly's lead to inventory reductions worldwide do to parts and materials shortages?

How is this going to be priced in? Toyota is already cutting overtime at US plants to conserve parts.

IrrationalMan's picture

only 7 more points till breakeven on the ES

Financial_Guardian_Angel's picture

IMO this all hinges on what happens over the next week or so to the reactors. If the situation goes south and a hole is opened to hell, George will be right and the psyche in the land of the rising sun will be destroyed for a long time. If ther reactors are stabilized, then I see this as a victory for the people. They will still build and use nuke power because they have no choice. They will just need to be smarter about it...

JR's picture

Maybe this report is properly sourced and maybe it isn’t. For me, I’m unable to look at it without bias because of Stratfor’s reputation.  And I’m hopeful ZH can find another, more reliable source for critical events such as this instead of pro-war, neocon George Friedman..

Here’s a little of what I remember of Stratfor bias:

Stratfor has argued that, despite their rhetoric, Arab regimes really support Israel’s punitive invasion of the Gaza strip that began in late 2008 and inflicted many civilian casualties. Israel’s action was condemned by a UN report for war crimes and crimes against humanity; the Stratfor article implies the invasion was not a war crime.

Among Friedman’s predictions:  America’s south western states will secede and join Mexico. This move toward a breakup of America will be brought about, according to Friedman, by large scale Mexican immigration to the region, the rising economic power of Mexico, and Mexico’s festering resentment over the U.S. conquest of its territory.

Stratfor’s  Wikipedia entry describes a close working relationship with the U.S. military; his private intelligence corporation is called “The Shadow CIA” by Barron’s.

SDRII's picture

+10 Take a look back to the experiment when George posted a blog. He pulled it shortly as it was a disaster. his analysis on the economic situation was absent. His analysis of the NIE was beyond dismal. No credibility.

Ruffcut's picture

Thanks JR for some background on Strat's cred.

Only had been reading their spew for a couple weeks.

Oh well, as it goes, never believe what you read and only half of what you see.

Misean's picture

Yeah...I was just gonna ask that he give a hat tip to Dr. Phil for his poigniant analysis of Japan.

Drek.

Henry Chinaski's picture

Not exactly actionable intel here, but it sorta explains why the Japanese are so polite.

Ahmeexnal's picture

When the silver Amero/SuperPeso arrives, and the USD is in full hyperinflationary hell, where do you believe a nation whose major allegiance is to money will prefer to pay their taxes?

Combine that with the fact that the rest of the US will treat soutwesterners as leppers when the radioactive clouds turn prime real estate into cesspool priced assets.

Son, we ain't seen nothin yet.

Mad Max's picture

Very interesting analysis.

So, from this, does Japan go forward (as it were) with the national psychology of a dying cripple, which is where they were very slowly heading anyway, or does this turn them around into a still crippled but resurgent militant, much like Putin's Russia?

And of course, neither option is good for the US, but then hardly any recent development has been positive for the US.

Vampyroteuthis infernalis's picture

Mad Max, you ask a very relevant question. I do not think that Japan will go militant for the simple reason they have an ageing population. Grandpa does not make a good soldier.

Ahmeexnal's picture

An army of Mazinger-Z bots remotely controlled by an army of elderly japanese will beat the crap out of any army of steroid overdosed, 6-hour a day gym, don't ask don't tell kneepad wearing, young buff metrosexual elite commandos.

IrrationalMan's picture

the overnight volume vs the regular hours volume of the es is rediculous.  Without the 3:59 and 9:30 bar the highest volume was around 5:30 in the morning. 

americanspirit's picture

Gotta keep those 401Ks pumped or folks might start thinking something's wrong. Uncle Ben's just doing his patriotic duty. Give the guy a break. I mean, if people actually realized what was happening to them even TPTB couldn't keep the lid on. 401k up - all's good. Let's do McDonalds tonite kids.

Tail Dogging The Wag's picture

I feel sorry for anyone with a 401K plan or ETF's, or anything in paper. There is no credibility anymore, yet, they still hang on.

paramitas's picture

every thing is up in the air right now,(radioactively speaking) but in the long term the politics/people will fall into the Chinese sphere of influence.

Buckaroo Banzai's picture

Am I the only one here who doesn't trust STRATFOR?

Example: "Rather than allow a recession to force a wave of bankruptcies and unemployment, the Japanese sought to maintain their tradition of lifetime employment."

If STRATFOR was honest, here's the way it SHOULD have read: "Rather than allow a recession to force a wave of bankruptcies and failed banks, the Japanese sought to maintain their tradition of crony capitalism and TBTF banks, corporations, and keiretsus."

samsara's picture

Yes,  Think of them as a CFR/CIA News Agency. 

They are an important read, like reading CFR articles as long as you factor for the slant to get the true meaning....

Sudden Debt's picture

Who cares anymore about the markets. It's all nationalized and without any future real div. returns to cling on.

 

Jim in MN's picture

More VBN from NHK: Unit 4 storage pool getting no remediation/cooling at all

TEPCO: Spraying water from air "difficult"

Tokyo Electric Power has found it difficult to spray water from a helicopter to cool down a storage pool for spent nuclear fuel inside the No.4 reactor at the Fukushima Daiichi nuclear power plant.

The reactor was undergoing an inspection when the quake occurred. The firm says the temperature of the storage pool for spent nuclear fuel was 84 degrees Celsius on Monday morning, more than double the normal level. More recent temperatures are not available due to a technical failure.

On Tuesday morning, an explosion was heard and the roof of the building that houses the No.4 reactor was damaged. Tokyo Electric Power, the operator of the plant, says it appears a lack of coolant caused the fuel rods to be exposed, adding that a hydrogen explosion might have occurred.
If the reactor can't be cooled, the fuel rods may emit hydrogen or melt down. Tokyo Electric Power considering pouring water onto the storage pool in the containment vessel through a hole on the roof created by the blast.

However, the firm concluded that it would be extremely difficult to spray water from a helicopter as the hole is dozens of meters from the storage pool and a helicopter can only carry a limited amount of water on a single flight.

Workers are currently unable to approach the storage pool due to the high radiation levels. Tokyo Electric Company is studying the possibility of using fire engines and other options to inject water into the reactor.

Wednesday, March 16, 2011 03:04 +0900 (JST)

Stuck on Zero's picture

Every fireboat in Japan should be parked next to the reactors pumping water through hoses into the plant.  Barges with water and electric generators should be anchored in the inlet.  Military vehicles with air filtration systems should be everywhere.  Power should be restored.  Sprinklers should be hosing down everything continuously so that there is no radiation in the form of airborne particles leave the site.  Huge air filter bags should be taking in particulates, water filters with activated carbon should be concentrating an particulate and soluble wastes. Welders, masons, engineers, and builders should quickly getting all coolant systems running.   At least 100,000 people should be working on this problem. 

Anything short  of this scale of effort is sure criminality.