What Will 2011 Bring to Energy in Southeastern Europe? (Part III)

In response to what I posted earlier to that online group, someone from Croatia recently asked the following question there:

Hi Mark,

situation in Japan seems like besides "lost x years" there is "lost space", too. How do you expect it to affect global and in that regard SEE economy in the 1 year term?

Here is what I responded (slightly edited):

_____,

I think it is still too early to tell how great the impact of the events in Japan will be on Southeast Europe’s economy and the energy sector in the short (1 year) term. As of this date the information that is being published seems to indicate that a corner has been turned at Fukushima Daiichi, that perhaps all 5 of the charged reactors (unit 4 was emptly at the time of the quake) and all 7 spent-fuel pools there are cooling down. I have my doubts about the veracity of this, but that is the gist of the Japanese news. (The most frequent reports – though rather dry and devoid of any colorful detail – can be found at “TEPCO 福島第一原子力発電所 プレスリリース-ホームページ掲載情報” at http://www.tepco.co.jp/nu/f1-np/press_f1/2010/2010-j.html, and much of the same information can be found in English at the IAEA’s “Fukushima Nuclear Accident Update Log” at http://www.iaea.org/newscenter/news/tsunamiupdate01.html.) As for my own thoughts on the safety record of Japan’s nuclear industry, based in part on my experience working as an engineer for a couple of Japanese companies, see my recent blog entry “What I Wrote in October 2010 about the Poor Safety Record of Japan’s Nuclear Power Industry”.

Last week, when the roofs of the reactors were exploding and people were just beginning to talk about soaring temperatures in the spent-fuel pools, it seemed like the much-touted “nuclear renaissance” was over. At that point any talk of moving forward on Cernavoda 3 & 4 (Romania), Belene 1 & 2 (Bulgaria), Paks 5 & 6 (Hungary), Krško 2 (Slovenia), as well as the 8 nuclear plants that Berlusconi’s administration wants to build in Italy (one of the 45 sites under consideration for which is readily visible from my apartment window) seemed absurd. (See http://www.world-nuclear.org/info/inf17.html for information on proposed nuclear plants.) But if the situation at Fukushima Daiichi stabilizes, and they are able to remove bad nuclear news from Japan from the news cycle quickly enough, then a year from now the “nuclear renaissance” might well be on track again. Nevertheless, if worrying levels of radiation begin to be reported on the western coast of the U.S.A., then there will be no forward movement on these nuclear projects.

Any forward movement on these nuclear projects, obviously, would not lead within one year to any increase in nuclear TWh generated. But the idea that dozens of GW of new nuclear production might be in the pipeline could discourage those who are considering investing in other large energy projects (such as oil & gas pipelines, or coal-fired power plants). Also, we seem to be seeing in Italy that the big business lobby (Enel and the big-business-oriented chamber “Confindustria”) is trying to get the government to reduce its support to renewable energy sources so as to free up more money for nuclear energy (which is low-carbon, though not renewable).

That is the direct impact of the nuclear safety side of the recent events in Japan. But aside from the nuclear safety issue, the destruction, power outages, and food quarantines caused by the earthquake and tsunami will have a generalized impact on the world economy as a whole. See, for example, the article “Japan Quake Shakes U.S. Treasury Bond Market: Get Ready for Financial Meltdown”, at http://www.marketoracle.co.uk/Article27004.html, where they write the following:

“In this issue, we anticipate that the sudden shock experienced by the Japanese economy will lead not only to the halt in US T-Bond purchases by Japan, but it will force the authorities in Tokyo to make substantial sales of a significant portion of their US Treasury Bond reserves to finance the enormous cost of stabilization, reconstruction and revival of the Japanese economy.”

The article maintains that the Japanese earthquake crisis will boost inflation worldwide, although they base a portion of the expected inflationary effect on the hypothesis that the Fukushima Daiichi situation – which at that time was rapidly worsening – will lead to a complete abandonment of nuclear construction plans worldwide, and a resulting long-term increase in the price of oil.

I had not yet heard of the Japan earthquake and tsunami when, on the morning of 11 March, I posted personal updates on LinkedIn with links to the following two articles:

The Tragic Failure of "Post-Communism" in Eastern Europe

by Dr. Rossen Vassilev

http://www.globalresearch.ca/index.php?context=va&aid=23616

Bond Market Anticipates Greek Default

by Mike Shedlock

http://globaleconomicanalysis.blogspot.com/2011/03/bond-market-anticipates-greek-default.html

The first of these would seem to augur the possibility of complete political and economic disruption in Eastern Europe (including, to a lesser extent, former Yugoslavia) if the present U.S. financial meltdown, with the Fed’s resulting policy of monetizing the U.S. debt, continues to lead to an outflow of U.S. funds to world markets and a further rise in commodity prices (including oil and foodstuffs) such as has already sparked unrest in Tunisia, Egypt, Bahrain, etc.

The second article indicates what many analysts have been saying for a while: the global recession (“crisis”) is not over, but the vast debts of the private sector (banks) have simply been taken on by the public sector (governments), and the public sector worldwide is now no longer able to support that level of debt. So we can expect sovereign defaults in a number of countries, such as Greece, Ireland, Portugal, and Japan. (Indeed Japan was already high on the default watchlist even before the earthquake.) The events in Japan will certainly lead to 1) considerable new debts for Japan, and 2) a rise in commodity prices both to make up for a decline in production from Japan and to begin the rebuilding of Japan. So although the price of oil was already on its way upward even before the earthquake, the events in Japan guarantee that it will remain high, while the events in Libya will provide additional upward pressure.

All in all, I think that the events in Japan will have the following effects on energy and the economy in general in Southeast Europe over the next twelve months:

1)   Continuing upward pressure on all commodity prices, which should lead to economic slowdown, but also upward pressure on the price of oil, which should encourage investment in other sources of energy.

2)   Higher inflation worldwide, which will lead to economic slowdown, sovereign defaults, and political unrest, which will all lead to further economic slowdown.

After posting the above to that group yesterday, this morning I ran across the following excellent article by James Quinn about the economic effects – in Japan and globally – of the earthquake and tsunami in Japan:

Tsunami Accelerates Japan's Economic Meltdown Driven by Debt and Demographics

by James Quinn

http://www.marketoracle.co.uk/Article27101.html

A couple of excerpts:

“Japan is a one trick pony that just broke two legs and is waiting to be put down [i.e., put to sleep, killed off gently]. They have experienced a two decade long recession. Their stock market is still 70% below its 1990 peak. They have no natural resources. They allow virtually no immigration. And their population is in a death spiral. The one and only thing they have going for them is their phenomenal ability to manufacture high quality products and export them to the rest of the world. The earthquake and tsunami that struck Japan severely damaged their just in time manufacturing machine. A surging yen would destroy their export machine by making their products more expensive. Hundreds of high tech Toyota, Honda, and Sony factories are shut. Four hundred miles of ports and harbors have been wiped out. There are rolling blackouts, with one million households without electricity. Over 500,000 people are still homeless.”

“Japan is trapped, with no way out. They will need to issue hundreds of billions in new debt, which cannot be bought by its citizens, pension funds, or insurance companies. How many foreign investors will buy a 10 Year Japanese government bond paying 1%, knowing that Japan wants to weaken its currency? NONE. The only choices are to raise interest rates to attract buyers or print more money. With an already suffocating level of debt, they can't allow interest rates to rise. They would choke on the interest.

The Bank of Japan will follow the same script as Ben Bernanke. They will print new Yen and buy the newly issued debt. What an original idea. Japan is caught in a debt stranglehold and demographic nightmare. Their currency will ultimately collapse like a nuclear reactor after a tsunami. When Japan defaults on their debt, the pain will be intense, as they will be throwing their own aged population under the bus. America, on the other hand, will throw the whole world under the bus when we default.

The Japanese own $886 billion of US Treasuries and have bought $256 billion of our debt since October 2008. Timmy Geithner will need to issue $1.5 trillion of new bonds per year. Japan will no longer be a buyer. They will be a seller. This will put upward pressure on U.S. interest rates. Japan's reconstruction needs will put pressure on commodity and energy prices. Production and supply problems for Japanese parts and goods are already creating problems for GM and other car companies in the U.S. Lack of supply leads to higher prices. The great earthquake/tsunami/nuclear meltdown of 2011 will result in more quantitative easing in Japan and the U.S.”

Photo by 9m2ji1etu from Panoramio