Japan’s Crisis and the Energy Question


–Well a lot has changed since we left the Daily Reckoning offices here in St Kilda on Friday afternoon for the long Labour Day weekend. The task of today’s letter is to tell you what little we know about what’s going on in Japan. And as this is fundamentally a financial letter, we’ll discuss the financial and investment aspects of the story.

–It goes without saying that talking about Japan’s long-term fiscal position or the direction of oil prices can seem a little inhumane at times like this. There are thousands of people dead and missing and a serious nuclear emergency playing out that could affect millions more. But you can’t simply get caught up in the emotion of an event and let it overwhelm you.  That is not a good survival strategy. So let’s begin dealing with it piece by piece.

–First, as you no doubt know by now, on Friday afternoon an earthquake measuring 9.0 on the Richter scale struck off the coast of northern Japan, about 370 kilometres from Tokyo. The U.S. Geological Survey reports that it was the fourth largest earthquake recorded since 1900 and the largest ever to strike Japan. Unfortunately, because of the size of the initial quake, there is a good chance of aftershocks as large as 7 or 8 on the Richter scale.

–If there are more earthquakes, there may also be more tsunamis. The tsunami that hit Japan’s north-east coast after Friday’s quake was worse than anything Hollywood could have imagined. The death toll will likely rise into the tens of thousands. More earthquakes and possible tsunamis will complicate search-and-rescue and recovery operations.

–The most urgent problem today is the failure of the cooling systems at three separate nuclear reactors at the Fukushima Daiichi facility 240 kilometres northeast of Tokyo. The earthquake knocked out the back-up cooling systems in at least one of the reactors. Then, the tsunami swamped back-up diesel generators used in the cooling system.

–There have been three separate explosions at the facility since Friday. Nuclear fuel in at least one of the reactor cores is melting. Plant operators are trying to cool the reactors by pumping in sea water. All of the reactors are still contained in their containment structures. No major radiation leaks have been measured.

–It’s important to know that the explosions have not released huge quantities of radioactive material into the atmosphere. The explosions thus far have come from the build-up of hydrogen gas, which is apparently a by-product of over-heating nuclear fuel rods. All of the reactors are still contained.

–Of course the massive worry is that any or all of the three reactors at the plant could heat up out of control and melt through their containment buildings. An explosion would be likely, releasing radioactive gas and material into the environment.  This is what happened at Chernobyl in 1986, although it is important to point out that the there was no containment building at the Chernobyl plant and Russian scientists have told the ABC there is no comparison between the two disasters.

–That’s as much as we can say about the state of things because that’s as much as anyone appears to know. We will know a lot more in the next 24 hours. But it is fruitless to speculate here. Instead, let’s shift our attention to the reaction in financial markets and what you can expect next.

–Japanese stocks fell by 6.2% on Monday; although it was a wonder the markets were even open given the disaster. The Bank of Japan turned on the money spigots and injected $183 billion in liquidity in order to keep asset markets functioning normally. But the Japanese stock market is off another 7% this morning as we write.

–To be blunt, a worst-case scenario is that a massive radiation leak from the Fukushima facility blows down to Tokyo and makes the city a very dangerous place to live and breathe for a long time. That seems highly unlikely. But it’s certainly something people will be thinking about until the reactor problems are resolved.

–Credit ratings agency Moody’s is looking at the problem in terms of Japan’s massive public debt. In a statement released over the weekend, Moody’s said Japan could, “at some point” reach a fiscal “tipping point”. What kind? The kind where investors demand much higher bond yields because they are sceptical of the long-term soundness of government finances.

–You have to wonder about this. Any early estimates about how much it will cost to clean up and rebuild are almost certainly made up, or just loosely based on the Kobe earthquake in 1995, although there was no tsunami or nuclear crisis then. But even so, for a country that’s already running a public-debt-to-GDP ratio of 200%, what is a few hundred billion more in borrowing?

–In the short term, it won’t be a problem. The Japanese have been able to maintain a high sovereign credit rating (minus the occasional warning) because the borrowing was funded by Japanese savers and not foreign creditors. Will that change now? We’ll see.

–The U.S. stock market was barely bothered. This probably tells you how incredibly rigged the American investment game is at the moment. With the Fed acting behind the scenes, not a Great Arab Revolt, not an earthquake, not a tsunami, and not a potential nuclear disaster can damage the spirits of the armies of the Bernank.

–Aside from Japan’s long-term fiscal crisis, the obvious issue here is energy. Japan doesn’t have a lot of oil and gas. But you don’t get to be the world’s third-largest economy and one of the largest exporters of manufactured and high-tech goods without having a reliable source of power for industry. Japan gets about 30% of its electricity from its fleet of nuclear plants.

–Judging by the $1.5 billion hammering taken by Aussie-listed uranium stocks yesterday, the conventional wisdom (knee-jerk reaction) seems to be that regardless of what happens in the next few days, Japan’s nuclear accident is a death blow for nuclear power. Already governments in Europe have put nuclear expansions under review.

–But Japan’s energy situation is telling. Its lack of access to natural resources as it industrialised (and militarised) is arguably what got it into World War Two. It seems especially cruel, given that Japan is the only country to ever have nuclear weapons used on it, would now suffer from a major nuclear accident.

–Yet the energy problem remains. And don’t forget that this is all taking place in the midst of a fundamental change in the power structure of global energy markets. The Middle East and North Africa, as we explained in our recent issue of Australian Wealth Gameplan, are in the midst of a long revolution. This will destabilise the secure supply of crude oil from that region for many years.

–With higher oil prices (and declining global production) energy for the world still has to come from somewhere. Do you think the Chinese will summarily dismiss nuclear power because of what has happened in Japan? And more importantly, is that a rational response to what’s happened? More on that tomorrow.

Dan Denning
For Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.


  1. The Japanese have shown the uttermost dignity amidst utter devastation. No fear there and no whinging like other nations where much less is lost and ruined.
    Having no fear is positive for the future.
    Whinging is for the whiners.

  2. Here here, the Japanese have shown only the most stoic resolve in this disaster. There has been more panic here in California as idiots clear the shelves of potassium iodine to take to counter the “radiation cloud” that is on the way from Japan. I wonder how many people will be hospitalized for taking unnecessary doses of this drug that turns off the thyroid.

  3. If the Chinese are not likely to summarily dismiss nuclear power, it is because they have other considerations besides REAL cost per kilowatt hour – i.e., the have bear in mind the supply issue of fissile material for their nuclear arsenal.
    For non-nuclear powers, or those who already possess more enriched uranium and plutonium that they can concievably need to incinerate the planet, the answer to the question of the rationality of summarily dismissing nuclear power is quite different.
    The peril posed by siting nuclear reactors in areas subject to intense seismic activity, particularly in coastal areas also subject to tsunamis, has been warned about for at least the last four decades – warnings that have unfortunately been ignored and overridden by governmental regulatory agencies in many countries.
    The criminal insanity of operating badly designed reactors, with inadequate seismic structural designs, spent fuel storage pools located above the primary reactor containment vessels, ignoring internal reports of deficiencies in the cooling systems, and unprotected emergency backup electrical power systems that that have been known to consistently fail realistic testing in an undamaged condition… should now be evident to everyone.
    But even if it were assumed that only reactors of vastly superior design than those in question in Japan were being used, and that they were all sited in areas reasonably immune to natural disasters (both of these provisions are possible), and even if it were further assumed that there was never another significant nuclear accident due to human error or engineering flaw (this assurance is of course not possible), and even if we choose to overlook the extreme difficulty (arguably the impossibility), and unknown (though doubtless exorbitant) expense of isolating and securing the hideously toxic radioactive waste for upwards of two hundred thousand years (!) in as yet non-existent permanent waste storage facilities, even if we ignore the obvious fact that nuclear reactors will always be suceptible to deliberate sabotage or attack, is it not a rational response to ask this simple question: what is the ACTUAL cost per kilowatt hour that we pay for our nuclear generated electricity?
    The numbers that are generaly used when comparing the costs per kilowatt hour for various sources of electricity bring to mind Mark Twain’s famous quote of “lies, damned lies, and statistics”. As long as so many of the real costs of nuclear energy are not entirely known,are passed on to the taxpayers,and are not included in the calculations that the nuclear electic cost per kwh are based upon, these numbers are meaningless and grossly understated. When the costs of dealing with the waste are factored in, and the costs of the very predictable disasters that will continue to occur in the real world (versus the more ideal scenarios mentioned above), we can begin to see the magnitude of the actual price that we pay for nuclear energy.

    Stuart Davies
    March 22, 2011
  4. The French seem to be managing their nuclear power generation pretty well and as well as giving them around 80% of supply it also appears to be giving them a reasonably low cost of electricity as well. As to all that scary waste, they also appear to be addressing that also.

  5. Hey Don, if you buy the myth that the French pay “a reasonably low cost” for their nuclear generated electricity, and that they “appear to be addressing… all that scary waste”, please have a look at this brief video clip: http://www.youtube.com/watch?v=fQ5dXnpJQxM
    I have seen various versions of the idiotic claim that the French are dealing with most of their nuclear waste “because they are removing 97 percent of the uranium and plutionum, so they only have to dispose of the remaining 3 per cent”. As I mentioned above, here we go again with lies, damned lies, and statistics. In fact, the waste contains a witches brew of many highly radioactive isotopes with varying half-lives… 96 per cent of which are isotopes other than uranium and plutonium. So, even if the reprocessing removed ALL of these two you would still have that same 96 per cent of the original volume. right? Not quite… it gets worse!
    In fact, the reprocessing itself ends up producing more waste. According to the DOE, reprocessing spent fuel ends up increasing the total cumulative volume of nuclear waste by more than six times—thanks to more materials being contaminated with plutonium—from a little less than 74,000 cubic meters destined for some form of repository to nearly 460,000 cubic meters! Reprocessing also results in radioactive liquid waste: the French reprocessing plant in La Hague discharges 100 million liters of liquid waste into the English Channel each year. They have polluted the ocean all the way to the Arctic – eleven western European countries have asked them to stop reprocessing. And of course, they HAVE NOT addressed the problem of permanently isolating, storing, and securing the remaining (increased!) waste. What will this ultimately cost, and who will pay for it?
    This leads back to the question I posed in my original comment – what is the ACTUAL cost per kilowatt hour that we (or the French, in this case)pay for our nuclear generated electricity? The French spend roughly an extra 800 million euros ($1.1 billion) per year for reprocessing this waste…. at the taxpayer’s expense. The National Research Council estimated in 1996 that reprocessing existing U.S. spent nuclear fuel would cost at least $100 billion. Are these costs included in the calculations that generate the “reasonably low cost” per kilowatt hour of electricity? Of course not!
    Neither are the costs of decommissioning the nuclear plants at the end of their life cycle, nor the as yet uncalculated and unimagined costs of “permanent” waste storage and security. It is all but impossible to know what these actual costs might be, but we do know that if they were included in the actual cost per kilowatt hour of nuclear generated electricty we would see that it was in fact insanely expensive – even if we never see another nuclear accident.
    One last question that I have been itching to ask. The majority of the Daily Reckoning writers (and presumably many of the readers) seem to be of a “libertarian” bent… they tend to view taxation and government spending with great distaste, particularly when said government spending is for social programs such as social security or anything that reeks of socialized medicine. Yet they seem to be uniformly in favor of nuclear energy, in spite of the fact that the industry is so utterly reliant upon hidden taxpayer subsidies for it’s existence.
    Please explain to me, my friends, why it is so abhorent when we have genuine progressive taxation and government spending that benefits the majority of the population (downward distribution of wealth, or socialism), yet we hear this incredible, deafening silence when the majority – the diminishing middle class and the working poor – have their hard won earnings garnished to subsidize the profits of weathy corporations?

    Stuart Davies
    March 24, 2011
  6. Thanks for the detailed answer Stuart. So I guess based on your figures that is why everyone is looking at effectively burying high level waste and not reprocessing as a viable option then. I would appreciate any links you have regarding the reprocessing so I can give it further study as I am interested in such things as part of my profession.

    With regards to the “progressive taxation” – that would be great if it just stopped there but as history has shown that will not be the case. All this will end up doing is facilitating the growth of government to the point where they will figure that they can effectively legislate every part of your life to conform to what they think is right and correct.

    I believe that history has shown that any government system, no matter how benevolent and well meaning in its initial set up goes about increasing its power and influence as much as possible, a critical part of that is increasing its revenue stream and legislative reach and consequently workforce. The other outcome is as this grows, people dependance on things like benefits, pensions, welfare increases to the point where the political process itself becomes distorted when parties start pandering to this need by offering unsustainable increases in benefits and entitlements to get into power. Once that loop is in place – it is a steady spiral down as we are seeing in places like Greece, Portugal, Ireland and maybe even soon the US.

  7. Here are some links that you requested, Don.



    As always, you can find contradictory claims on any topic under the sun on the internet. I have read several of the “pro-reprocessing” sites/articles as well, and have noted an interesting pattern. Many of them make claims that reprocessing reduces the waste to a small percentage of the original volume, or create that impression, but read it carefully and you will see that they will say something like “over 90 percent of the ENERGY (in other words, the uranium and plutonium) in the spent fuel rods is available for reprocessing, and only 3 or 4 percent remains as waste after reprocessing.”
    What they fail to mention is that this “energy”, the uranium and plutonium in the spent fuel rods, comprises only about 4 percent of the overall volume. They simply pretend that the other 96 percent (the highly radioactive, non-“energy” waste isotopes) does not exist, and that the remaining 3 or 4 percent of the URANIUM and PLUTONIUM which remains mixed with them after reprocessing is ALL of the waste! Neat trick, eh?
    A few individuals who know the truth of this matter perfectly well came up with this clever little obfuscation to create an illusion which inverts the reality, and other people (lazy journalists, for example)pick it up and repeat it without understanding what they are talking about. This is a classic example of the clever use of statistics (and semantics) to create a goddamn lie.
    As for your response (progressive taxation, etc) to my question about the inconsistency of libertarians condemning taxation and government spending on social programs, yet remaining silent and otherwise supportive of an industry which is reliant on taxpayer subsidies…. you didn’t address the real issue I raised. I understand (and even partially agree with some aspects of) the libertarian take on the problems of “Big Government”.
    However, the point I wanted to make is, why do you guys support this industry when it is so clear (if you care to look) that there are all these massive and obscene costs that are being hidden in plain sight and fobbed off on the taxpayer? There is no way this industry could survive without huge subsidies… they can’t even get financing for new construction on the open market, and have to rely on taxpayer backed loans! Once again, we have the risks and the costs passed on to the large majority, while a tiny minority walk away with publicly funded profits. Where is that famous libertarian outrage?

    Stuart Davies
    March 24, 2011
  8. Good move photoshopping those cooling towers pink, Dan.
    (Or are they _glowing_?!!~ )

    Meanwhile, this highly-scientific research link may add much-needed fuel to the debate:


  9. I was thinking about your comments about the French, Don.

    We love France, we’re francophiles in fact.

    Despite our love for the country and its people, the French appear to tolerate the filthiest stuff. Their extensive use of lead plumbing has only recently been seen as a health issue, for example.

    You can see the immense plumes of their reactors’ cooling towers for well over 30km. With some alarm, riding towards them, we thought at first we were approaching a twin hurricane.

    Sadly, despite the beauty of much of the French countryside, their public conveniences are the filthiest we’ve (tried to) use(d) travelling in over thirty countries. The toilets 50m from the police station in Orange and a couple of hundred metres from the historic Triumphal Arch, may be the filthiest in the world. Second may come those near Dunkirk.

    Waste issues don’t appear to be of much concern to the French. In the very south, fast food containers, bottles and cans perform constant aerial feats, littering roadsides, smashing on roadways and cliff sides.

    Despite what may be written-off as stereotyped generalisations, I’m not sure the French have solved such complex matters as nuclear waste, given their high tolerance of these issues in an otherwise beautiful country…

    I hope I’m wrong.

  10. One thing you have to say about the French Biker is that they have their national interest first and foremost at heart. France absolutely and always first. I can’t help but admire their skills on the international stage – for example:

    – they are a member of the UN security council amongst the only 5 who have veto rights despite their countries size
    – they seem to be able to get away with things that other nations cannot, nuclear testing in the pacific and bombing Greenpeace amongst many instances
    – they can on one hand vehemently critise the US and then turn around and be their best mates soon after
    – they have nuclear weapons (around 300 at last count?) which no-one seems to mention

    I could go on and on but really – hats off to them – you might not like them but you have to admire their achievements.

  11. All true, Don.

    And for some reason, their bikers are the friendliest in the world.

    (Hope it’s not simply due to ‘la belle femme’ riding pillion!~ :D )

  12. I really don’t think so mate – as you know the French have no eye for the ladies……

  13. Great link Biker – I just saw that on another site and thought of this discussion. But I don’t expect our libertarian friends will want to touch that one, any more than they want to talk about taxpayer subsidies to the nuclear industry masking the real cost of nuclear generated electricity…

    Stuart Davies
    March 25, 2011
  14. Just the cost of the clean-up alone should scare us all spitless, Stuart.
    And what price can one put on human health?!~

  15. “what price can one put on human health” – Well Homo sapiens isn’t exactly an endangered species Biker. Just maybe it could become one of those toss ups as to whether we want to kill ourselves off slowly with radioactive accidents or quickly with radioactive bombs squabbling over hydrocarbons???

  16. Never fear Tokyo is not a radioactive wasteland and Dan’s worst case scenario was never on the cards. The reactors shut down correctly and despite all the hype in the press the situation at the Fukushima nuclear facility although very serious, appears to be slowly coming under control. (well at least it seems so today)

    The real tragedy is the more than 10,000 people killed and the more than 10,000 people still missing.

    One final note, the Fukushima reactors were 2nd generation and around 30 years old or more. Despite this they shut down correctly despite being hit by a massive earthquake, a 14 metre tsunami and numerous large aftershocks.

    P.S By the way, to see some of the sensationalist reporting about the Japan earthquake have a look at the Journalist Wall of Shame: http://jpquake.wikispaces.com/Journalist+Wall+of+Shame

  17. Greg I bet the Japanese will be strong even through the grief and overcome this.
    I wish the very best to Japan going forward.

    However I hope you can be sure of safe (no radiation) food supplies over there….then maybe I’ve heard too much sensationalism.
    Cheers Greg

  18. Great posts Stuart adding a different perspective.

  19. Hi Lachlan, the food situation is a touch confusing to be honest and some of this is caused by the very strict standards in Japan. In other words the authorities in Japan will declare food (or water) legally over the limit at levels which would be acceptable in other countries.

    Having said that, the all-clear has not been given yet and so I personally won’t be rushing out buy any vegetables from Fukushima or the other affected areas in Tohoku for quite a while.

    By the way if anyone is interested you can news direct from NHK in Japan (in English) via this link to their website: http://www3.nhk.or.jp/nhkworld/index.html

  20. “then maybe I’ve heard too much sensationalism” – Last week it was sensationalism over nuclear being ‘bad’. Next week it’ll be back to sensationalism over “the greatest moral challenge of our time” (not that it hasn’t been in Oz anyway.)

    Three warnings to get our collective act together (Three Mile Island, Chernobyl and Fukushima) over three decades hardly sounds like it’s going to make a long term dent re what happens from a practical perspective globally going forward to me? With those three not even sounding all that different collectively than the likes of Exxon Valdez (which was really only a bit of baby when it comes to oil spills being the 54th largest) and the more recent BP hiccup up in the Gulf of Mexico (with it being suggested it could cause REALLY nasty stuff re tsunamis and whatever.)

    Lesser of evils I’d suggest with the practicalities being that ‘we’ WILL run out of hydrocarbons in the next few hundred years while we won’t run out of uranium for over a million years. (Which is just another way of saying there is PLENTY of it.)

  21. Well, now that the authorities have initiated measures to stabilise the globe’s tectonic plates and prevent them from colliding, I guess our worries are over. ;)

    Seriously, I suspect we’ll see a few more Chernobyls before we decide this stuff is just too high-risk. We’ll always have very reasonable scientific explanations for why systems failed, but ultimately, the world we inhabit is a highly-unstable place. Very few structures outlast the earth’s immense shifts in mood.

    Maybe pyramids are the answer(?) Anyone interested in a pyramid scheme, in which we entomb the dirty stuff, with a three-thousand year guarantee?!~ Probably not immune from the occasional terrorist, but irradiation might mean the terror is fairly short-lived.

    Truly hope you’re right, Greg. Contamination of drinking water must be a major ongoing concern, dwarfing the unsaleability of food items for the foreseeable future… .

  22. I’m no expert BP but I think its all too dangerous from the accidents we’ve seen.
    I was just thinking the other day how when I go bush I eat dinner 5 mins before dark and then jump into bed. Like living before the light bulb. Its a healthy way, mentally and physically, granted I enjoy the spoils of home. I think of the home life then with all the gadgets we use and lights turned on and lights to make night into day. Much of it’s not so necessary. We are however conditioned to it and this can be changed by some degree. How much power could/would we save if power was not so cheap.

    Of course I’d like to see forever cheap/safe power sources developed like anyone just that until then it’s not all so black and white.
    How much power could we save? Enough to make a difference?….I don’t know.

  23. Many of our rentals now carry credit forward, Lachlan. Seems to work well where there are a maximum of four people. Mind you, those homes have solar HWS, solar electricity, reflective window tinting and inverter-type A/C.

    At home, once our own SES is operational (four months’ wait!~) we expect to be in credit, too. Installers went home for harnesses and haven’t come back with mountaineering gear yet… . Our power bill dropped dramatically after we bought the widescreen. It appears our 15 yo old, much-loved Panasonic 68cm was costing us a fortune in power! Our thirty year old 10 cu ft freezer will be next to be replaced. (Gadgetry? You wouldn’t believe how much we run… but most of it’s turned off centrally, when not in use.)

    Camping is hard to beat, mate. Shows you how little you really do need. When biking months-at-a-time, we carry minute technology. TV is a thumb drive. Hard drive (500GB) half the size of my palm. Petzl (string) head lamps, tiny gas cooker, etc. The new Mac Air will be half the thickness and a third the weight of our MacBook Pro. Little of this was possible two decades ago, before the improved rechargeable lithium battery technology.
    Makes me wonder where battery technology will be in a decade or two… .

    Gotta laugh. Right now we’re ‘camping’ in the fifth bedroom of a massive double-storey near the beach: bedrolls on the carpet. Final weekend dressing it up for its debut. Car, bike and boards in the garage. Don’t miss all the technology at home any more than we do when we’re away for several months abroad. Mind you, these days you really can take it with you… . ;)

    Biker Pete
    March 26, 2011
  24. Japan’s energy crisis could really affect the worldwide economy since they are among the top performing nations. I feel sorry for them, lets hope and pray they can get back.


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