The Japanese crisis and global commodity markets

A week after the massive earthquake and subsequent tsunami which devastated the eastern coast of Japan, the effects continue to be felt.

Of particular concern has been the crisis at the Fukushima Daiichi nuclear reactor, about 250 kilometers northeast of the capital city of Tokyo. Workers are fighting – at great personal cost – to keep the reactors from overheating, and the Tokyo Electric Power Company (TEPCO) recently told the press that it has succeeded in bringing external power to the stricken site.

This should allow the teams there to restart the pumps which circulate coolant through the reactors – after the tsunami, these pumps failed, which caused overheating in several of the reactors. It’s extremely important to note that even the worst-case meltdown scenario for the Fukushima plant would not approach the scale of the Chernobyl catastrophe. Japan’s nuclear agency has rated the disaster as a “five” on the International Atomic Energy Agency’s seven-step scale.*

The only event to hit the seventh level on that scale was, in fact, Chernobyl.

Still, the broken plant poses a severe threat to the surrounding region – and it’s raised some difficult questions about Japan’s economy, as well as the global energy situation.

Despite its traumatic history as the only nation to ever receive a nuclear bombing as an act of war, Japan embraced atomic power in the post-war period. Indeed, one of the primary catalysts for the Japanese Empire’s expansion in World War II was a desire to secure sources of oil and other raw materials in the region. The island, despite its stunning industrial power, is quite resource-poor and has always depended on imported energy and other commodities.

There are 54 nuclear power stations in Japan, and a further 12 or so were in planning stages at the time of the quake. According to Reuters, these 54 plants provided almost a third of the country’s electricity.

Nuclear power was widely seen as the future of electrical generation in Japan, especially in a global economy characterized by rising crude oil prices and scary questions about the security of supplies from the volatile Middle East. But the momentum of nuclear power projects around the globe has been arrested, with projects on hold in the U.S., Europe and Japan itself.

This has weighed on certain commodity futures markets – but the effects are mixed, complicated by the ongoing civil war in Libya and the threat of unrest in other Middle Eastern nations.

Brent crude oil futures have climbed dramatically in the last three-month period; the May delivery contract rose from less than $94 per barrel to nearly $120 as uprisings toppled the governments of Tunisia and Egypt.

Initially, the earthquake dealt a sharp blow to crude, part of a general flight from risky assets and an expectation that a disaster-stricken Japan will consume less oil and fuel. However, the commodity quickly rebounded. West Texas Intermediate light, sweet crude futures experienced a similar track, though because that commodity product is more tied to the U.S. market, it hasn’t been as volatile.

Overall, fear surrounding nuclear power is likely to be fundamentally bullish for crude oil futures, natural gas futures, coal futures and the shares of clean energy companies like solar panel makers and wind turbine manufacturers. However, the market is as volatile as it has been in a long time, and dramatic political shifts in the Middle East in particular could alter the paradigm.

*The official disaster rating was later revised to a Provisional INES Level 7 Rating.