Prime Minister Fumio Kishida announced this week that Japan would, for the first time, release part of the government’s oil reserves to ease pressure on steadily rising oil prices.
While the move is being done in coordination with other nations, Japan is uniquely vulnerable to this problem. Unfortunately, the release is a veritable drop in the barrel when compared to demand for this vital commodity.
Energy price increases are to be expected as the global economy recovers from COVID-19. While efforts to ease that bottleneck are to be appreciated, they should be done in moderation, to avoid enduring market distortions and the promotion of greenhouse gas producing fuel consumption.
Crude oil constitutes 40% of Japan’s primary energy supply and the country imports 99.7% of its petroleum. That dependence and the resulting sense of vulnerability it creates have been a focus of Japanese foreign and economic policy for years. It motivated the adoption of nuclear power, a policy that has encountered difficulties of its own since the disaster at the Fukushima nuclear power plant in 2011, suspending operations at nuclear facilities across the nation.
The Petroleum Stockpiling Law, a product of the 1973 oil crisis, required Japan to create a reserve of crude oil and kerosene for use in emergencies. The law was amended after the 2011 crisis to include gasoline, fuel oil and light oil. The government is mandated to hold 90 days’ worth of daily imports in reserve, but total holdings by the public and private sectors, 145 days and 90 days, respectively, along with agreements with oil-producing countries, are the equivalent of 242 days’ worth of domestic consumption.
To address recent price hikes, the government also included a new subsidy for oil wholesalers in the economic stimulus package that was just approved by the Cabinet. That program, anticipated to last until March 2022, will offer subsidies of up to ¥5 a liter if the average retail price of regular gasoline exceeds ¥170 and will apply to kerosene, light oil and heavy oil.
Japan has tapped its private stockpiles five times before as a result of domestic or international crises that squeezed energy supplies, but this is the first time that the government has touched its own reserves, reasoning that “the stability of crude oil prices is a very important issue in economic recovery from the coronavirus.”
Kishida’s decision was driven by rising gas prices, which now average nearly ¥170 per liter, the highest in 13 years, as well as the urgings of U.S. President Joe Biden, who has released 50 million barrels from his country’s Strategic Petroleum Reserve and pressed other governments to do the same. A number of nations, Japan, China, India, South Korea and the United Kingdom among them, have said that they will follow suit, although details remain unclear.
This is the first time that Washington has attempted to build such a coalition. Usually, governments follow the lead of the International Energy Agency, a 30-member group of oil-consuming countries. Historically, it has called for action in the event of emergencies and not just because prices are increasing. But as prices continue to climb, rising more than 50% this year and reaching their highest since 2014, political pressure is mounting and guiding principles are being adjusted.
The potential for the success of those efforts is uncertain, but most experts have modest expectations. The total amount to be released is unknown, but in the absence of a truly jaw-dropping move by China, it’s unlikely to move markets. The headline U.S. figure, 50 million barrels, is the largest release in its history, but it is only two and half days of U.S. demand and the equivalent of 12 hours of global consumption.
In addition, the U.S. actions don’t change supply parameters. Some 35% of the U.S. release was previously authorized; it’s just occurring earlier than scheduled. The remainder is an exchange that will have to be replenished later.
Ultimately, the problem is that the global economy is beginning to recover from the pandemic-induced slowdown and there isn’t enough oil to meet surging demand. Oil-consuming nations have pressed the principal suppliers’ group, the Organization of Petroleum Importing Countries, and its allies, collectively referred to as OPEC+, but it has been slow to respond.
The group previously agreed to boost production by 400,000 barrels a month but has been unable to hit that target. The group’s meeting next week should provide additional insight into its thinking but OPEC officials have warned that the release of reserves would further inhibit their inclination to boost supply, as they fear that another COVID-19-prompted slowdown may be looming, and they point to the shutdown in Austria as a portent. The markets are anticipating that outcome: Oil futures went up after announcement of the coordinated release plans.
There is another consideration. The price hike is occurring after the Glasgow climate summit with its disappointing results. Rather than softening the impact of high oil prices, this moment should be used to encourage a shift away from a fuel that produces ghastly amounts of climate-altering greenhouse gasses. It is worth exploring whether similar analgesics or inducements could be used to speed up the transition to less damaging energy sources. That is a long-term process but that doesn’t mean we can’t start now.
The Japan Times Editorial Board
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