Can Japan Break Free From Middle East Oil

Economist Yasuhide Yajima said companies are increasingly asking whether they should shift their energy strategies over the next three to five years in response to tensions between the United States and Iran. The central problem, he said, is that moving away from Middle East oil would create new risks that businesses must incorporate into investment and management plans.

Japan's dependence on Middle Eastern crude remains exceptionally high compared with other countries. The country suffered two oil shocks in the 1970s, yet has been unable to substantially reduce its reliance because crude from the region remains difficult to replace.

Middle East oil can be transported to Japan in about three weeks, is available in enormous volumes and has exceptionally low production costs. The region also accounts for 48.3% of the relevant global oil supply discussed in the program.

Another advantage is the quality of the crude. Much of the oil imported by Japan is medium-grade crude, which can be refined into a wide range of products. Its combination of low cost, large supply, versatility and relatively short shipping time has prevented other sources from becoming complete substitutes.

Oil is used not only as an energy source but also as a raw material for products ranging from clothing and packaging to contact lens cases. Plastics, most of which are derived from petroleum, offer a combination of low cost, light weight, hygiene and airtight storage that is extremely difficult to replace.

Japan may be able to reduce the amount of oil used for energy, but replacing petroleum in everyday products would be far more difficult. Even in the energy sector, no other region offers the same combination of supply volume, price, product yield and proximity.

The country's refining infrastructure presents another major obstacle. Imported crude is carried by tanker to refineries, where it is processed into gasoline, naphtha and many other products before being distributed to filling stations and manufacturers.

Those refineries have been built over decades to handle particular grades of Middle East crude. Oil from Russia, the United States or other regions has different characteristics and yields different products.

Switching a refinery designed for Middle East oil to crude from Alaska or elsewhere could require investments totaling tens of billions of yen or more. Existing operating knowledge and production formulas could also become unusable.

Much of the crude produced in the United States is lighter because it is extracted near gas fields. Feeding it directly into Japanese refineries designed for medium crude could cause operational problems. One possible response is to blend lighter American crude with existing inventories to bring its characteristics closer to the oil normally processed in Japan.

Heavy Venezuelan crude has also been discussed as a possible blending component, but Yajima said the idea that light and heavy grades could simply be mixed into an ideal medium crude was unrealistic. Japan's refineries and technical processes have been developed around highly specific recipes, making rapid conversion extremely difficult.

When conflict broke out between Iran and the United States, the Japanese government sought to avoid an abrupt energy shift by drawing on stockpiles and purchasing crude from other sources.

The short-term strategy appeared to be working by early July as the two countries moved toward a possible ceasefire, crude prices fell to around $60 and vessels continued passing through the Strait of Hormuz.

Oil prices began rising again around the second week of July, however, as Iran adopted a tougher stance toward the United States. That left the outlook for the government's emergency measures uncertain.

In the near term, Japan has little choice but to buy time. That means using strategic reserves, securing alternative supplies and offering support to households and businesses because substitute oil is generally more expensive and could intensify inflation.

Reducing dependence over the medium and long term would require action in four main areas: cutting crude oil demand, expanding electrification and electric vehicles, increasing renewable energy and improving energy efficiency through technological innovation, while also diversifying suppliers.

Each option creates its own risks.

Electrification would require households and companies to replace existing equipment with electric alternatives, imposing substantial costs. Government subsidies could accelerate the transition, but large-scale support would place additional pressure on public finances at a time when rising interest rates are already a concern.

Renewable energy also faces obstacles. Solar power has not expanded quickly enough, while the restart of nuclear reactors has made limited progress. Building solar panels requires investment, and the technologies needed to deliver major energy savings are not necessarily ready for immediate use.

Businesses also face uncertainty over the meaning of medium- and long-term policy. Companies deciding whether to replace aging facilities must know when new energy systems will become available and which technologies the government intends to support.

Installing new equipment too early could leave companies with technology that fails to become commercially viable. Spending heavily to renew existing facilities could also prove wasteful if policy or technology makes them obsolete soon afterward.

Diversifying crude suppliers may reduce exposure to the Middle East, but alternative regions carry geopolitical risks of their own. A country that is stable today could face conflict or political disruption in the future.

Yajima said a dramatic reduction in Middle East dependence would probably be impossible within the lifetimes of people living today. Japan can lower the ratio gradually, but it cannot simply abandon the region.

Electrification also risks replacing dependence on Middle East oil with dependence on China.

China overwhelmingly dominates the production capacity for solar power equipment, including about 97% of silicon-related capacity cited in the program. It also accounts for about 55% of the electric vehicle market.

The shift toward electric power requires not only renewable generation but also transmission networks, storage systems and electric vehicles. China increasingly controls much of that industrial ecosystem.

Japan could therefore reduce its exposure to Iranian and Middle Eastern risks only to become more vulnerable to Chinese economic pressure. A disruption in relations with China could threaten supplies of solar equipment, batteries, vehicles and other essential components.

Japan's most realistic course is to pursue all four strategies gradually rather than concentrating on a single solution. Middle East oil would remain part of the supply mix, while the country slowly expands electrification, renewable energy, conservation and procurement from other regions.

Domestic production would be the strongest solution, but Japan has limited energy resources. Rare-earth deposits have been identified in areas including waters near Minamitorishima, while offshore wind power could alter the outlook if current projects become successful.

China now produces roughly twice as much electricity as the United States and has developed strong transmission and storage capabilities. That power supports data centers and other infrastructure driving the artificial intelligence economy.

The United States, meanwhile, is trying to expand generation through projects including Japanese small modular reactor technology. SpaceX has also discussed placing data centers in space, a strategy that could reduce some terrestrial energy constraints.

Japan must consider its Middle East oil dependence as part of a broader industrial and energy strategy rather than as an isolated petroleum issue.

Technological innovation may offer the country's best opportunity. Japan could draw on its strengths as an engineering and manufacturing nation by increasing government, corporate and academic investment in new energy technologies.

Faster development and larger investment would be necessary to achieve a breakthrough. If Japan produces a valuable energy technology, demand from the United States, China and other countries could generate extensive international cooperation.

Japanese companies supplying specialized materials and technologies for artificial intelligence have already attracted strong investor interest. Companies developing fundamental energy technologies could become the next focus of the market over the coming years.

There is no simple choice that would allow Japan to eliminate Middle East oil without creating major economic, fiscal or security problems. The country must instead set clear schedules and reduction targets, accelerate technological development and balance the risks across its entire energy system.

Source: テレ東BIZ