Friday, March 25, 2011

Japanese earthquake - Nuclear disaster to change global energy market

ET reported that Japan's nuclear disaster is set to bring about a dynamic change in the global energy market, which may force countries to reconsider their fuel options.


Mr Christof Ruehl chief economist of British Petroleum told ET soon after presenting BP Energy Outlook 2030 that "Rising energy prices coupled with high interest rates is a toxic for any economy that was last seen in the 1970s, and is now playing out for the first time since then."
Interest rates have already started rising in countries that are not members of the Organisation for Economic Cooperation and Development like India, China, Brazil and some European countries. The disaster in Japan will lead to a slowdown in additional or new nuclear capacity and, in the short term, lead to an increase in demand for gas and coal. Since a number of big consumers like US, Japan, China and India have to depend on imported gas, this is expected to give a push to liquefied natural gas trade, which had slipped following the global recession and the increased use of shale gas in the US markets.Mr Ruehl said that "Long term gas contracts will now be even more indexed to crude. But now that Japan and Korea will focus on energy security and long term contracts, the sellers would want it to be linked to crude oil prices."

The nuclear disaster will lead to an increased demand in the short term, which can be met easily. But linkage with crude oil will tend to keep an upward pressure on gas prices. The natural gas market had seen some significant changes in the last few years after the reforms in the European electricity market and the emergence of shale gas in the US. The power reforms in Europe had allowed the utility firms to demand re worked contracts that were not linked to crude.

The geopolitical issue could impact crude oil supplies and force countries like Saudi Arabia to bring in their spare capacities. Volatility in crude oil prices has been a factor and it is expected to remain so even in the future. Geopolitics will also play a big role in fuel pricing in the troubled nation.

Mr Ruehl said that "No matter which individual or regime wins, there will be an increased trend to subsidize fuel prices as the new governments will be forced to offer cheap fuel to keep the people quiet."

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