Japan, the Middle East and European debt – storm fronts combining

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by David Malone

Events in Japan and the Middle East will now, I think, slowly start to combine.

Japan has lost the output from a large number of reactors.  One of her largest, one of the largest reactors in the world in fact.  Japan has lost a great deal of power generating capacity, about 9.7 gigawatts from closed nuclear plants alone, which she will have to replace.   Japan will not replace the capacity with nuclear any time in the near future simply because it takes too long to build nuclear reactors.  Plus there might be just a little opposition to any new reactors.

So Japan will build either coal or gas.  Natural gas fired power stations are far quicker to build and bring on line than nuclear facilities.  And of the fossil fuel burners, gas has lower CO2 emissions than coal or oil.   If Japan goes for oil or, in my opinion far more likely gas due to its rapid build, then the global demand for oil or gas will jump.  At precisely the moment when because of events still unfolding in Libya, Yemen, Bahrain and Saudi, we already have a shortage of gas supplies and the distinct possibility of further disruptions and restrictions to output.

Oil prices have been gyrating around, falling a little recently, on the assumption that demand will remain low in Japan because of the vast disruption to normal life.  No roads, no cars, no heating.  But this temporary fall in oil will I think be almost immediately off-set by a jump in Japanese demand for gas for power generation.  Already there are reports that Japan is seeking gas in every available market.  And gas contracts in London for the summer have jumped 11% since last Friday.

The gas Japan will now buy will not come from spare capacity.  Even before any of the Middle East troubles began, there was a global shortage of supply relative to global demand.  So much so that new LPG facilities were being completed and brought on line in, for example, Yemen.  So far, as far as I know, production at the fairly newly opened Yemen plant, which is fed by Total, I think, has been unaffected by unrest in the country.  How long that remains true as unrest increases in Bahrain, I do not know.  Today in Bahrain, the army launched a large scale attack on pro-democracy protesters, firing into them and killing two.  And then there is Libya.  There, oil and gas production have both dropped.  The longer the civil war goes on the more likely further output disruption is.

So we have a huge new demand for gas, due to one disaster, about to hit just as supplies are declining due to massive and spreading civil unrest.  And in between we have the ever-present threat caused by speculators and banks, causing swift price bubbles whenever there is a natural shortage they can amplify.  So I expect we will see a ramp up in gas prices above and beyond what supply and demand would naturally cause, as speculators smell a chance for a quick profit.

This combination of causes is also combining with yet another of the pressures we face, namely the European debt crisis.  Spain and Greece have both been downgraded recently because the ratings agencies doubt either nation will be able to meet its debt cutting targets, due in turn to not achieving the growth they had planned on.  And the growth estimates are falling because of one thing more than any other – the rocketing price of energy.

Today Portugal’s government debt rating was downgraded two notches by Moody’s because of doubts about its growth.  And in Spain bank shares were down sharply.  Spain relies heavily on gas imports from Libya.  Italy too is strongly tied to Libya.  The longer unrest goes on there the greater the effect on Spain and Italy.  The higher gas prices go, the more likely it is Spain will stumble and fall.  Spain relies heavily on massive imports of gas, much of it from Libya.

In the UK unemployment has risen to 2.53 million, the highest since 1994.  And the bulk of the public sector job losses are still to come.  In the US house starts and permits for building have fallen to the second lowest level ever, while prices for finished consumer goods (an indicator of coming inflation) jumped to their highest since 1974.  And there too job losses from insolvent municipalities and cities are still in their early days.

And just to return to where we started, Japan.  Japanese people as well as their governments will now need to spend money on reconstruction.  They will be doing it in areas now contaminated with nuclear materials.  Not huge amounts, certainly not by Chernobyl standards.  But longer lived radio nucleotides will be around and will frighten people.  The clean up, never mind the re-build costs, will be massive.

The government is attempting to simply print its way to salvation.  As they have done for twenty largely abortive years.  I do not think this plan will last.  The bond market will, at some popint, seriously wonder if Japan can repay.  When they do that and the interst demanded goes up …  On top of which Japanese industry and private individuals will also need to lay their hands on their cash.  Which means funds of Japanese money could well start to sell their assets to raise the cash they will then return to Japan.  What this will do to the markets for the stuff they have to sell is anyone’s guess.

David Malone is the author of the book Debt Generation. You can read and listen to excerpts from his book here: http://www.debtgeneration.org/index.php