March 11, 2016
With the Middle East in Turmoil, Japan Looks to Diversify its Energy Options
By Ashish Kumar Sen
Japan imports about eighty percent of its crude oil and around thirty percent of its liquefied natural gas from the Middle East. “Should regional tensions in the Middle East escalate, and the flow of energy be in danger, the impact on Japan’s economy will be enormous,” said Masataka Okano, Minister of Political Affairs at the Embassy of Japan in Washington.
Okano noted that Japan’s primary challenge is to diversify it energy sources. “We all know that this is not an easy task,” he said.
Okano spoke at an event hosted by the Atlantic Council’s Rafik Hariri Center for the Middle East and Global Energy Center in Washington on March 10. Following Okano’s remarks, Frederic C. Hof, a Resident Senior Fellow in the Hariri Center, moderated a panel discussion with Ken Koyama, Managing Director and Chief Economist at the Institute of Energy Economics, Japan; Sara Vakhshouri, a Nonresident Senior Fellow in the Global Energy Center; Yasuyuki Matsunaga, Director of the Graduate Program in Peace and Conflict Studies at the Tokyo University of Foreign Studies; and Kota Suechika, a Visiting Scholar at the London Middle East Institute.
The discussion took place on the eve of the fifth anniversary of the Fukushima Daiichi nuclear power plant disaster. A magnitude nine earthquake that triggered a deadly tsunami led to the triple meltdown at Fukushima on March 11, 2011. The nuclear disaster reduced Japan’s energy self-sufficiency to 6 percent, said Koyama.
In the years since the Fukushima disaster, the Japanese government has sought to establish a long-term energy policy. Last year, it decided on a “desirable energy mix” to achieve “3-E energy policy goals”: energy security, environmental protection, and economic efficiency, with safety as a precondition, said Koyama.
“Establishing this goal is a very important milestone for Japanese energy policy priorities, but…setting desirable targets is different from implementing desirable targets,” said Koyama. “Frankly speaking, achieving this target is very, very difficult.”
Despite its diversification plans, energy-hungry Japan will continue to have close ties with the Middle East.
Stability of the Middle East is a matter of great concern, said Koyama. The region has been rocked by conflicts in Syria and Yemen, the rise of the Islamic State of Iraq and al-Sham (ISIS), a sharpening rivalry between the Sunni Kingdom of Saudi Arabia and the Shia Islamic Republic of Iran, and a sharp decline in oil prices.
Impact of low oil prices
Oil prices have dropped to below $30 a barrel from more than $100 a barrel in June 2014. Low oil prices, while good news for consumers, are hurting economies that are dependent on oil revenues. It could also set back efforts to develop and adopt cleaner sources of energy as people gravitate toward cheaper fossil fuels.
This low-price environment poses a big challenge, especially to energy exporting countries in the Middle East and Latin America, and Russia. “There is a very strong vulnerability in their economic structure,” said Koyama, adding that these oil-dependent economies must think seriously about economic diversification. This is a challenge that the United States and Japan can help these countries address, he added.
The Saudi-Iran rivalry is, in part, behind the dip in oil prices. Saudi Arabia, which leads the Organization of the Petroleum Exporting Countries (OPEC), and Russia, which is not part of the oil cartel, in February announced a decision to freeze output at record January levels in an attempt to stabilize world oil prices. They were joined in this decision by two other major producers—Venezuela and Qatar. However, the success of this deal hinges on support from Iran. Iranian officials have indicated that since Iran is now free from the restrictions of sanctions as a consequence of a nuclear deal, they intend to ramp up oil production.
“I am really not a big supporter of the Saudis keeping [oil] prices down to hurt Iran or Russia,” said Vakhshouri. She noted that the Saudis are reluctant to give up market share to Iran, but added that it was Russia, not Saudi Arabia, that had taken Iran’s traditional market share in China.
Low oil prices have provided Saudi Arabia with the opportunity to reduce fuel subsidies, something Iran managed to do many years ago, she added.
Japan and Iran
Japan was forced to reduce its oil imports from Iran as a consequence of international sanctions over the Islamic Republic’s nuclear ambitions. As sanctions on Iran are lifted as a result of a deal it signed with the P5+1 countries that curbs its nuclear program, Japan is now looking to boost this relationship.
This intention was cemented by this week’s announcement of Japanese Prime Minister Shinzo Abe’s intention to visit Iran in August. While Abe has met Iranian President Hassan Rouhani multiple times at the United Nations in New York, he will become the first Japanese leader to visit Iran since 1978 when Prime Minister Takeo Fukuda made the trip.
Abe’s visit will send a clear signal of support to the Japanese private sector, which is looking to do business in Iran. Japanese companies have a “comparative advantage” because most of them have been involved in Iran since the 1970s, said Matsunaga.
Despite a general spirit of optimism about economic prospects in Iran, Japan is anxiously awaiting the results of the US presidential elections to get a better sense of the prospects of the US-Iran relationship. “We are anxious to be honest,” said Matsunaga. “As our experience for the last three and a half decades shows, it has always been the Iran-US relations, not Iran-Japan relations, that will condition how secure Japanese economic involvement with Iran” will be, he added.
Japan and Syria
Suechika focused his remarks on Syria, a country that does not produce energy, but whose stability is vital to the Middle East, and, therefore, to Japan’s energy security. Whether Syria’s embattled leader Bashar al-Assad remains in power or not does not concern Japan. “The matter is not who governs Syria, but whether Syria is governed or not,” said Suechika.
Syria’s collapse would have repercussions across the Middle East. The question then is, what policy options does Japan have, asked Suechika. Noting that Japan’s hard power projection is “very, very limited due to both international and domestic constraints,” he added that Japan does have a trump card that it can play.
The fact that Japan maintains close ties with the United States, Saudi Arabia, and Iran “should be regarded as Japan’s diplomatic advantage” when it comes to maintaining stability in the Middle East, Suechika said.
Ashish Kumar Sen is a staff writer at the Atlantic Council.