IEEJ：December 2017○ｃIEEJ 2017
Special Bulletin
A Japanese Perspective on the International Energy Landscape (356)

December 27, 2017

Reviewing Japanese and International Energy Situations in 2017
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
Five days are left before the end of 2017. The year saw many important events andsurprises in the Japanese and global energy situations and the overall international situation.
Regarding them, I would like to summarize the impressive points for me.
First, the U.S. Trump administration was inaugurated a year ago and has continued toshake the United States and the rest of the world. From just after his inauguration, President Donald
Trump issued many executive orders including controversial immigration restrictions and other“America First” measures. He promptly offered to withdraw the United States from the Trans-PacificPartnership free trade agreement and the Paris Climate Accord, emphasizing his differences with theprevious administration. In domestic politics, however, the Republican president has had difficulties
in dealing with Congress despite Republicans’ control of the legislature, failing to pass major bills.
Late this year, Congress passed a pending massive tax cut bill at last, allowing the president to sign it
into law in his first major achievement to put a major presidential campaign promise into practice.
However, it is still uncertain whether the achievement can shore up his administration.
Various diplomatic developments indicated that the United States’ inward-looking
approach under the “America First” foreign policy caused big problems with global stability andorder. A symbolic development regarding the global warming problem was the abovementioned U.S.
offer to exit from the Paris Climate Accord. Energy-related developments have reminded us that theUnited States’ Middle East policy has played a very big role in stabilizing the region and the energy
market. Having the most important impact has been President Trump’s recognition of Jerusalem as
the capital of Israel. The United States has traditionally served as a mediator for Middle East peace
negotiations, one of the most important issues for stability in the region. Despite opposition andcriticism from the international community, President Trump recognized Jerusalem as the Israeli
capital, indicating a major turn in the United States’ Middle East policy. The U.S. Trumpadministration’s future moves will attract attention from the viewpoint of not only stability in theMiddle East but also global order maintenance and stability.
Second, geopolitical risks grew more than ever in 2017 as the U.S. Trump administration
enhanced its inward-looking attitude under its “America First” foreign policy. Regarding geopoliticalrisks and energy, the Middle East situation attracted global attention. As noted above, Washington’srecognition of Jerusalem as the capital of Israel caused growth in anti-America sentiment and protest
rallies, leading to concerns about the destabilization of the Middle East. The U.S. action was not theonly development attracting global attention regarding the Middle East. In 2017, Saudi Arabia, theUnited Arab Emirates and some other Persian Gulf countries severed diplomatic relations with Qatar.
While Saudi Crown Prince Mohammed bin Salman expanded his power, many royal family and1

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cabinet members were arrested and detained, attracting global attention.
The Trump administration’s toughening of its policy against Iran also emerged as a major
factor for anticipating the future Middle East situation. While enhanced military operations against
the Islamic State have remarkably narrowed IS-controlled areas, concerns are growing about thefuture diffusion of IS related terrorism. Behind the fluidization or destabilization of the Middle Eastsituation are the U.S. Middle East policy and Saudi Arabia’s confrontation with Iran. While growing
geopolitical risks fell short of affecting energy flows in 2017, the world grew alert to futuredevelopments. Outside the Middle East, North Korea’s rapid development of nuclear weapons andballistic missiles grew as a key geopolitical risk affecting regional and global stability. Under the Xi
Jinping regime growing stronger, China’s strategies and actions regarding international order,
including its maritime expansion, have become a key global challenge. The development and impactof China’s “One Belt and One Road” initiative and other Chinese moves are attracting muchattention.
As the world economy grew at a rate above 3.5% in 2017, global energy demand steadily
increased. However, oversupply remained in the international energy market including oil and LNG
markets in the year. The oil market went in the direction of rebalancing on a fall in inventories as
OPEC and non-OPEC oil producing countries implemented their coordinated production cut toeliminate oversupply. Thanks to the coordinated production cut, the benchmark Brent crude oil pricerose back above $60/bbl in October for the first time in two years and three months. The LNG
market is likely to take more time to eliminate oversupply. This is because Australian and U.S. LNGprojects are entering the production stage in a manner to lead supply to increase faster than demand.
However, 2017 also saw remarkable developments regarding demand, including rapid growth inChinese LNG demand.
While renewable energy including wind and solar energy still accounts for a small share of
the global energy mix currently, interests in renewables grew globally on their substantial expansion.
Attracting attention was a rising number of cases in which competitive bidding contributed tolowering renewable energy power generation costs rapidly and increasing renewables’competitiveness against other electricity sources. At the same time, the importance of initiatives tostabilize electricity supply came to the fore in response to the expansion of intermittent renewableenergy power generation. As expectations on and interests in a shift from internal-combustion engine
vehicles to electric and other advanced automobiles grew considerably, the impact of advanced
vehicle diffusion on the world economy, and energy supply and demand surfaced as one of thelargest global matter of interest.
In Japan, the Strategic Policy Committee of the Advisory Committee for NaturalResources and Energy and the Roundtable for Studying Energy Situations started discussions on therevision of the Basic Energy Plan in 2017. Under the policy of making no revision to the target
energy mix fixed in 2015 for FY2030, the panels discussed how best to overcome various challenges
for the realization of the target energy mix. At the same time, they recognized that it would be
important to reflect the desirable direction of energy strategies and policies for a long term through2050 in the basic plan, discussing how to revise policies.

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As for nuclear power generation that holds the key to realizing the target energy mix, thenumber of restarted nuclear power plants increased up to five in 2017. In December, however, theHiroshima High Court ordered an injunction to suspend operation of Unit 3 of the Ikata Nuclear
Power Station, producing a new judicial risk. After approved renewable energy power generation
capacity expanded rapidly under the Feed-in Tariff system introduced in 2012, the system wasrevised in 2017 to reduce burdens on consumers, leading to the first bidding for large-scale solar
photovoltaics power generation. However, Japan’s renewable energy power generation costs are still
far higher than international levels. Even after some approved capacity was cancelled, cumulative
surcharges under the FIT system total as much as 42 trillion yen, indicating that the economicallyreasonable expansion of renewable energy power generation continues to be a key challenge forJapan. In 2017, Japan considered details of new systems required for the completion of the powerand gas system reform in the early 2020s. Given new uncertainty factors including the rapid
expansion of intermittent renewable energy power generation, it is difficult to design coherent,
adequate market systems. Emerging new difficult problems include the realization of a politicallydesirable energy mix under increasingly competitive electricity and energy markets and how tosecure necessary investment (and recovery of fixed costs).
Based on the important domestic and foreign situations, I would like to pay much attention
to how the year 2018 will be.

Contact: report@tky.ieej.or.jp
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