What will replace Japan's lost nuclear power? Oil.
When Japan's economy recovers, it will have to burn more fossil fuel. Oil is the most likely choice, says one energy analyst.
While oil – and just about everything else but Treasuries – sold off Monday in the wake of the Japanese nuclear crisis, oil prices may be poised to surge as demand for 'alternative' energy sources to replace lost nuclear power in Japan ramp up.
I spoke with Brad Schaeffer, CEO of INFA Energy Brokers, after the closing bell Monday to get his perspective on the global oil markets.
But when the crisis passes, the third largest economy in the world will need to begin planning how it will replace the energy production capacity it lost to the tsunami.
"Japan has some of its industry curtailed," Schaeffer says, "like auto and steel – but that's not going to last too long. People are starting to realize that there economy is not going to be shut down for long -- and they're going to have to start to look for alternative fuel sources."
In this context, Schaeffer means 'alternative fuel' in the exact opposite sense of what it usually denotes – as Japan turns from nuclear energy to burning fossil fuels.
As Schaeffer points out: "About 27 percent of their power needs come from nuclear plants. So if they take them all offline, they are going to have to compensate for the shutdown by running their generators on other fuels."
And oil will likely be the natural choice to replace.
The other option, on the fossil fuel front, is liquefied natural gas.
But, as Schaeffer explains, "LNG is a more complex process. The very notion that it is liquefied means you have more complex tankers mechanism you have to use. You have to freeze it down – then you have to heat it back up. Whereas crude oil is just a very easy to move and easy to transport fuel. It makes a lot more sense that the Japanese will lean more towards oil imports than they will LNG."
Not just that but, according to Schaeffer, "There are more tankers available to deliver crude oil. And there are more dedicated facilities available in Japan to accept it. Overall, it's easier for them to get crude into the market place."
And, as the economy ramps back up, as it certain to do, "They're going to be casting about for everything. When you think about it, Japan uses 4.4 million barrels of oil a day. That's only 45 percent of their energy needs. If you do the math, 27 percent of that is from nuclear. These nuclear plants aren't just down for maintenance," Schaeffer says.
"Remember, they need to get their nation back on their feet. They aren't worrying about their carbon footprint so much. They're thinking we need to get oil here now – so we can get our generators up and running."
The bottom line is increased demand as Japan substitutes oil for atomic power.
"You're going to see demand for crude oil go higher again," says Schaeffer.
– Bradley Schaeffer, is the CEO and co-founder of INFA Energy Brokers. He's also recently published his first novel, Hummel's Cross.