Iran in turmoil…Japan’s leading energy researcher explains: “Oil is safe for the time being, but the real crisis lies elsewhere.

Japan’s crude oil is safe for the time being.”

While the world watched the situation in Iran with bated breath after U.S. President Trump took a hard-line stance that included a willingness to attack infrastructure facilities, the two countries agreed to a ceasefire. President Trump announced on his social networking site that “for two weeks from April 8, we will suspend air strikes and attacks. Following the temporary ceasefire agreement, the Strait of Hormuz, a key strait in the Middle East that had been virtually blockaded, “will be safe for navigation for a period of two weeks,” according to Iranian Foreign Minister Alaguchi.

For Japan, which depends on the Middle East for 95% of its crude oil imports, the blockade of the Strait of Hormuz appeared to be a crisis that would shake the very foundations of the nation. Pessimism was rife in the media, with comments such as, “Will we see another oil shock?” and “Gasoline prices will skyrocket,” and fears that the blockade would be prolonged and become a quagmire were growing stronger by the day.

Although the temporary ceasefire has allayed such fears, the agreement is only a “two-week reprieve. If a permanent peace is not reached during this period and the Strait of Hormuz is blockaded again, Japan’s crude oil supply may hit bottom.

Noriaki Oba, president of the Post Oil Strategy Institute, a think tank that makes policy proposals on Japan’s energy security and industrial strategy, responds to such concerns,

“Japanese crude oil is safe for the time being,” he asserts.

The real crisis we should be afraid of is the “oil crisis. The real crisis we should fear is not oil depletion. Mr. Ohba states very calmly, “The oil that passes through the Strait of Hormuz will be safe for the foreseeable future.

The oil that passes through the Strait of Hormuz accounts for about 20% of the world’s supply, which in turn means that 80% of the world’s supply is available. What’s more, a price increase will cause the overall global demand for crude oil to drop by about 10-15%.

When Europe was cut off from Russian gas supplies at the outbreak of the war in Ukraine, energy prices in the EU, including gas and electricity, soared several times. Panic ensued. However, people got over it by reducing their consumption by 15%, and things are now back to normal. Even if there is a temporary disruption, the world always adapts by finding another solution or another source of procurement.

In fact, the Japanese government has been making full use of alternative routes that do not go through the Strait of Hormuz, and in May it said it was on track to secure crude oil supplies up to about 60% of last year’s level.

The Red Sea route from the port of Fujairah in the eastern part of the United Arab Emirates (UAE) and the port of Yanbu in the western part of Saudi Arabia are being utilized. Furthermore, the company has quadrupled its procurement from Texas and other U.S. states, which have become the world’s largest oil producers, over the past year, and is also rapidly purchasing from Azerbaijan and other countries outside the Middle East.

Background of Iran’s Compromise

By combining the development of new procurement sources with the planned release of national and private stockpiles, the government expects to be able to secure the amount needed for Japan as a whole until the beginning of next year. Mr. Oba also gives his assurance on this prospect. In addition to securing about 60% of the cargo through the Middle East route, which does not go through the Strait of Hormuz, the government expects to secure 20% of the remaining 40%,

Of the remaining 40%, we will be able to procure an additional 20% through imports from the U.S., South America, and other countries. The rest will be covered by drawing down stockpiles, but if we draw down only the shortfall, the current stockpiles will last for two to three years. With a few years to spare, Middle Eastern countries should be able to fully establish alternative routes, such as new rerouting pipelines, to bring supply back to 100%,” Ohba said.

Mr. Oba said.

While it remains to be seen whether the U.S. and Iran will be able to reach a permanent peace, Ohba himself believes that a final quagmire can be avoided, saying , “President Trump wants to avoid high gasoline prices in the country. He also speculates on the situation on the Iranian side.

For Iran, it is not a good idea to prolong the blockade of the Strait of Hormuz,” he said. If countries start procuring through new pipelines or other routes, the Strait of Hormuz will lose its importance, and Iran will lose its powerful influence (card) over the international community. Iran itself will also need to sell oil to rebuild its country. My view is that Iran will compromise before it loses its influence completely.

If negotiations break down, what about the price hike? Some fear that the price will exceed $200 per barrel (it is in the low $90s per barrel following the April 8 ceasefire agreement), but Mr. Ohba clearly denies this.

There may be a moment when the price reaches $200 per barrel, but unrealistic prices will not last long,” he said. This is because prices are determined by the ‘strength of the buyer.

If the price rises too high, countries without foreign currency or countries with low purchasing power will not be able to buy, and demand will decrease. As a result, the price must settle at a level that the market can afford. In terms of a sustainable price, the high end of the range is $100 to $120 per barrel at best. Basically, it will settle in the $80-$100 range.”

Once the supply of crude oil is secured, the major energy problem will be cleared up. What Mr. Ohba fears is that there will still be a shortage of “petroleum products” in supply.

The real pinch is not crude oil but naphtha

In fact, about one-third of Japan’s oil-related imports are not crude oil, but naphtha and LPG (propane gas),” said Kiyoji Ohba, president of the Post Petroleum Strategy Institute, a leading think tank. More than 80% of LPG is imported from the U.S., and there is a stockpile of LPG, so it is not a major problem, but naphtha is at risk of a serious shortage.

Naphtha is the raw material for all plastic products. Japan is one of the few countries in the world that consumes a large amount of naphtha, more than it refines domestically from crude oil.

However, there are no stockpiles of naphtha, and inventories are generally said to last about 20 days. Until now, naphtha has been most heavily imported from the Middle East via the Strait of Hormuz, followed by South Korea and Singapore.

Naphtha itself is made from crude oil, so it will never be completely depleted. However, if the blockade were to be imposed again and supplies from the Middle East were to disappear completely, imports from South Korea and other countries could increase sharply, and the supply chain would be severely affected.

Naphtha is a raw material for plastics used in most of our daily necessities, including packaging materials, plastic bottles, home appliance parts, and construction materials, and it would be difficult to find a product that does not depend on naphtha. If naphtha cannot be secured in sufficient quantities, it is certain to have a major impact on all industries.

Even if overall crude oil prices remain calm, individual petroleum products such as naphtha can easily become an onsite battle over ‘who will buy a limited amount,’ and there is a risk that prices could suddenly jump if there is just a small shortage in supply.”

If the U.S. and Iran do not ultimately reach a peace agreement, a blow to industry is inevitable. However, the nation’s overall crude oil supply is likely to hold up. Rather, Ohba warns that the real crisis is the “awareness” that lies at the heart of Japan’s energy strategy.

The Real Crisis is Japan’s “Normalcy Bias

The biggest problem facing Japan is the “normalcy bias,” the tendency to maintain the same dependence on the Middle East even in the face of a crisis of this magnitude.

The ministries, agencies, and industries involved justify the status quo, and in the end, Japan will continue to rely on Middle Eastern crude oil. Even if alternative energy sources are discussed, it is likely to be settled in favor of nuclear power plants and coal-fired thermal power generation, which are politically easier to advance.

However, both coal and uranium, the fuel for nuclear power plants, are still nearly 100% dependent on imports.

Looking at other countries, many are strongly promoting a shift to electric vehicles (EVs) and the introduction of renewable energy, which is purely domestic energy, and many are steering a shift to home-grown energy from the perspective of energy security. Japan’s strategy of relying entirely on imports must be fundamentally changed.

Mr. Ohba points to “the expansion of purely domestic renewable energy” and “the spread of electric vehicles (EVs), especially in rural areas,” as the direction for Japan’s future energy security. He believes that having a minimum level of energy and transportation options in each region, such as EVs for households with multiple cars, will directly lead to reduced oil consumption and security in the event of an emergency.

In the first place, the promotion of such renewable energy and EVs should be the main countermeasure,” he said. If a situation of this magnitude does not provide an opportunity to fundamentally change the way energy is used, Japan will never change. Unless we can break through this normalcy bias, true energy security for Japan will never be realized.”

Japan is trying to somehow overcome the uncertainty over crude oil supply caused by the unprecedented tension in the Iranian situation through stockpiling and alternative procurement. At the same time, however, what will happen if Japan does not have a drastic strategy that looks “beyond” the crisis?

If Japan continues to refuse to change and remains dependent on imports, it will no longer be able to weather the “next energy crisis,” which is sure to come sooner or later.