IEEJ: March 2011

Special Bulletin
A Japanese Perspective on the International Energy Landscape (36)March 25, 2011

Two Destabilizing Factors Shaking the WorldKen Koyama, PhD
Director
Strategy and Industry Research Unit
The Institute of Energy Economics, Japan

Two destabilizing factors that differ from each other characteristically coexist
now for not only the international energy landscape but also the wider international
political and economic situation. The first one is an extremely tense Middle Eastern andNorth African situation symbolized by European and U.S. military attacks on Libya.
The second is Japan’s unprecedentedly enormous damage inflicted by the Great East
Japan Earthquake and Tsunami.
In Libya, domestic armed clashes between government and dissident forcesdeveloped into a war involving the international community as British, French, U.S.
and other Western countries launched bombings and cruise missile attacks on militaryfacilities of Colonel Muammar Gaddafi’s dictatorial regime on March 19. The Europeanand U.S. military attacks on Libya came after the Gaddafi regime, which had once been
defensive, built on its military forces to enhance a counteroffensive to regain control of
Libya’s second biggest city, Benghazi, a key stronghold for antigovernment forces. With
growing alert toward the Gaddafi regime’s offensive, both Europe and the United States
made decisions to forcibly prevent the Gaddafi regime from suppressing theantigovernment forces, leading the United Nations Security Council to adopt Resolution
1973 on March 18. The resolution allows Western forces to take all necessary steps,
including the creation of a no-fly zone in Libya, to protect the civilian population inLibya. It thus effectively authorized them to launch military operations.
More than one week has passed since Western countries launched Operation
Odyssey Dawn that might have been aimed at expelling Colonel Gaddafi as well asprotecting the civilian population. The Gaddafi regime has maintained its tough stance,
continuing fierce battles with antigovernment forces. Libya’s oil output has declined to400,000 barrels per day from 1.6 million bpd in January 2011 before the Libyan
situation became tense, according to the Libyan state-run oil company. Future
developments after the military attacks are still uncertain. There are growingexpectations that the international market may lose more Libyan oil over a longer term.

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Meanwhile, geopolitical risks are growing in Persian Gulf oil producing
countries as well. On March 13, the largest-to-date clash between government forces
and protesters occurred in the wake of intensifying antigovernment demonstrations inBahrain. In response, Saudi Arabia and other Gulf Cooperation Council members sent
security forces to Bahrain on March 14. Behind the Saudi action might have been a fearthat the destabilization in the neighboring Bahrain could have spillover effects on SaudiArabia. Given the complicated relations between Sunnis and Shiites in the Middle Eastas well as the Iranian factor, the Bahrain unrest can be expected to trigger further
destabilization of Gulf countries including Saudi Arabia.
The growing tensions in the Middle East and North Africa have led to crude oil
price spikes. The benchmark West Texas Intermediate crude oil futures price rose from$97.2/barrel on March 15 to $105.8/barrel on March 23, while the Brent futures soared
from $108.6/barrel to $115.6/barrel. The growing geopolitical risks and relevant fears ofoil supply interruptions could drive crude oil prices up further.
The second key destabilizing factor is the consequence of the huge damage
inflicted by the March 11 Great East Japan Earthquake. The devastating earthquake
and its unprecedentedly enormous damage have attracted global attention. Whileinternational networks for supporting Japan and its disaster survivors have expanded,
potentially grave impacts on the world economy from the huge damage in the world’s
third largest economy have attracted attention. The catastrophic disaster has led people
in the world to recognize not only Japan’s large economic size but also its position as theworld’s most important manufacturing base. The future reconstruction of the Japanese
economy has become a matter of grave concern to the world. The Dow Jones Industrial
Average on the New York Stock Exchange plunged to 11,613 on March 16 from 12,044
on March 11 when the earthquake occurred, while the WTI crude oil futures slipped
below $100/barrel on March 15 and 16. Grave concerns about the Japanese economy
might have triggered heavy selling.
Developments involving the serious accident of the Fukushima Daiichi nuclear
power plant have also become a matter of global concern. As well as fears of serious
damage from the nuclear plant accident, various ideas and speculations about theaccident’s impacts on the energy situation in Japan and the world have risen around theworld. How will demand increase for additional fuels for thermal power plants to makeup for power generation losses on the accident? How will the additional demand affectinternational oil and gas markets? How will the nuclear plant accident affect theglobally growing moves for the expansion of nuclear power generation and the entire
international energy market over a long time? We now see these key questions that had2

IEEJ: March 2011

not been asked before the disaster.
The Middle Eastern and North African, and Japanese situations are extremelyuncertain. Their future developments are difficult to foresee. The two destabilizing
factors may continue to shake the global situation for the immediate future. Under thecircumstances, Japan faces the impact of the tense Middle Eastern and North African
situation as an external factor while making maximum efforts to stabilize thepost-disaster domestic situation and reconstruct disaster-hit regions. As crude oil pricespikes and relevant natural gas price hikes are expected to exert great impacts on
Japan’s energy supply/demand and procurement, and on its economy and citizens’
livelihood, we will have to closely watch relevant future developments.
Contact: report@tky.ieej.or.jp

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