IEEJ e-NEWSLETTER
No. 140(Based on Japanese No. 178)

Published: July 17, 2018
The Institute of Energy Economics, Japan(As of July 16, 2018)

Crude Oil Prices

80

80

US$/bbl(Jul'17-Jul'18)

75
70

75
70

UK‐ Brent

65

65

60

60

West Texas
Intermediate

55
50
45

55
50
45

(Front‐month Futures)2017‐/‐2018

40
/ J

/

A

/ S

/ O

/

N

/ D

/

J

/ F

40
/ M

/

A

/ M

/

J

/

J

/

Sources:(1) Ministry of Finance "Japan Trade Statistics"(2) Ministry of Economy, Trade and Industry(contract month basis)(3) Estimated by World Bank and World Gas Intelligence(4) DOE-EIA, NYMEX (Front-month Futures)(5) Investing.com

Source: DOE-EIA, Financial Times, NASDAQ

Stock Exchange

Currencies Vs US$

1.15

1.15

Jul03,2017= 100

1.10

1.10

Euro

Yuan

Yen

1.00

1.05

1.00

GBP

J

/ A

/

S

/ O

/ N

/ D

/

120

120

Dow Jones

115

J

/ F

/ A

/ M

/

J

/

J

/

110

Nikkei

105

105

100

Financial Times

0.95
/ M

Upward sloping indicates appreciation relative to the US$

Source: x-rates.com

110

100

2017‐/‐2018
/

125

115

1.05

0.95

Jul03,2017= 100

125

2017/2018

95
/

J

/ A

/ S

/ O

/ N

/ D

/

J

/ F

95
/

M

/ A

/

M

Source: Financial Times

Contents【World Monitoring】
Summary
1. US: Risk of a Supply Shortage in the US Power Market

2. EU: Countermeasures against the US
and the Draft Revised Renewable Energy Directive
3. China: Tensions Rise as US-China Tariff Dispute Intensifies
4. Russia: Responses to the Economic Sanctions and Joint Production Cut

/

J

/

J

/

Summary【World Monitoring】
1. US: Risk of a Supply Shortage in the US Power Market
The summer reliability report of NERC indicated risks of a supply crunch in Texas and otherareas that are becoming dependent on renewables and gas-fired thermal power. This may leadto renewed recognition of the importance of diversifying power sources.
2. EU: Countermeasures against the US and the Draft Revised Renewable Energy
Directive
In response to the US tariffs imposed on steel and other products, the EU decided to impose
tariffs on US products. Further, the EU revised the Renewable Energy Directive, raising thetarget share of renewables to 32%.
3. China: Tensions Rise as US-China Tariff Dispute Intensifies
The retaliatory war of tariffs due to US-China trade friction is intensifying. The Chinese
government is refusing to back down in response to US action. If the two nations plunge intoa trade war, US oil exports to China are likely to decrease considerably.
4. Russia: Responses to the Economic Sanctions and Joint Production Cut
Russia launched a new plan to counter the US economic sanctions. With the increase in oil
prices, a decision was made to increase output from July partly due to Russia’s proposal to
OPEC to ease the joint cut.

1. US: US: Risk of a Supply Shortage in the US Power Market
Junichi Ogasawara, Senior Economist, Group Manager
Electric Power GroupElectric Power Industry & New and Renewable Energy Unit
On May 30, North American Electric Reliability Corporation (NERC), the oversight andassessment organization for maintaining the reliability of North America’s power systems,
released their summer reliability report. The report expressed concern over a supply shortagein Texas this summer. The supply margin of 18.9% stated in the 2017 summer reliability
report is expected to shrink to 10.9%, below the 13.75% margin required for a stable supply,
as more coal-fired thermal power plants close, the start of new power plants is delayed, andmore power plants stop operation. This, if combined with normal levels of unplanned outagesof thermal power plants, very hot weather, or a reduction in wind power output, could resultin a negative supply margin.
Further, the Midcontinent Independent Transmission System Operator (MISO), which isexperiencing significant growth in wind power, says that it is often necessary to takeemergency procedures due to frequent demand response and adjustment of BTMG
(behind-the-meter-generation: on-site generation behind the meter) output. California’s ISO
also points out the possibility of a shortage of operation reserve capacity, with the risk risingparticularly if the water level for hydropower and solar PV output drop concurrently. Supply
risks in gas pipelines could also elevate the risk.
As all these regions have increased their levels of renewable electricity and are highly
dependent on gas thermal power, problems emerge when the supply capacity of both energies
comes under threat. Renewable energies have the risk of a simultaneous drop in output while
gas thermal power may face a stoppage of gas supply facilities such as gas pipelines underabnormal weather conditions.
Coincidentally, according to media reports, President Trump has ordered the Departmentof Energy to consider measures to avoid closures of nuclear and coal power plants. While theorder was issued to address any impact on employment, it may have also been caused by themounting risk of supply disruptions due to an imbalance in supply capacity. So far, thereliability assessment for power has not been considering gas supply facilities. However, withthe recent rise in dependency on gas in the US, information has begun to be gathered on theadequacy of gas procurement, and a method of evaluating the risk of gas supply disruptions isbeing studied. However, the method is yet to be fully established.
In 2017, President Trump ordered a study on a plan to subsidize nuclear power to makethe power grid more reliable and resilient, but in January 2018, the Federal Energy Regulatory
Commission declared the end of the study saying that it was not possible to ensure
consistency with market procedures. Should a supply shortage emerge this summer due to the
supply capacity imbalance, however, the importance of a diversified power mix could comeunder the spotlight again.

2. EU: Countermeasures against the US and the Draft Revised Renewable
Energy Directive
Kei Shimogori, Researcher
Global Energy Group 1, Strategy Research Unit
The United States announced that it would impose additional tariffs of 25% and 10%
from June 1 also on steel and aluminum exports from some of its allies including the EU,
which were tentatively exempted in March due to national security considerations. In
response, the EU instituted dispute settlement proceedings at the WTO on the same day.
It is interesting to note that the EU has ongoing legal proceedings in the WTO against
China as well as the US. Chinese regulators require European companies to transfer theownership and right to use their IP rights to Chinese companies, and the EU believes this isunreasonable. EU Commissioner for Trade Cecilia Malmstrom explained that challenging
both the US and China at the WTO is a declaration that the EU does not intend to take sides.
On June 6, the European Commission decided to impose additional tariffs on all US
products notified to the WTO to counter the US tariff measures. The WTO Safeguards
Agreement allows for a rebalancing corresponding to the damage caused by the US measures,with EU exports worth €6.4 billion (2017) being affected. The EU announced that it will
therefore exercise its rights immediately on US products worth up to €2.8 billion of trade.
As measures against US products valued at €2.8 billion, on June 20, the European
Commission gave final approval to impose additional tariffs of 25% on agricultural products,
bourbon whiskey, and jeans, as well as US steel and aluminum products. The measures will
be implemented on June 22. Meanwhile, energy resources such as LNG are not included in
the scope of additional tariffs on either side. The EU reportedly intends to withdraw the tariffs
if the US does so, but the situation remains extremely volatile.
As another high-impact event for EU energy policy, on June 14, the negotiators of theEuropean Commission, European Parliament, and EU Council agreed on the contents of therevised Renewable Energy Directive. The current target for 2030 of covering at least 27% of
the EU’s final energy consumption was a non-binding target. In contrast, the newly agreed
target set a binding renewable energy target of 32% and contains a clause for an upwards
revision by 2023.
The new target shows the EU’s commitment to climate action and reducing its
dependency on fossil fuels, including coal. Despite an 18-month negotiation to revise the
Directive, however, not all EU member states have approved the new target. In particular, thefour Visegrad countries (the Czech Republic, Hungary, Poland, and Slovakia) have shown
certain openness to raising the target but have presented conditions for its implementation
including maintaining the renewable target for the transport sector (14%) and the maximum
blending ratio of biofuel (7%), arguing that escalating requirements on advanced biofuels is
not realistic.

3. China: Tensions Rise as US-China Tariff Dispute Intensifies
Li Zhidong, Visiting Researcher
Professor at Graduate School, Nagaoka University of Technology
The second US-China trade talks on May 17-18 agreed on avoiding a trade war (see theJune edition of this Newsletter). However, the ‘ceasefire’ ended in less than a month as the
Trump Administration launched a new offensive in the ongoing tariff dispute.
The duel began on May 29 immediately before the third US-China trade talks (Beijing)when the US abruptly announced that it will release a list of items subject to additional tariffs
by June 15. In response, on June 3 after the talks ended, the Chinese government mentioned
in a statement that the two countries had made positive and concrete progress regarding
increasing exports of US farm and energy products through good dialogue, while warning thatthe agreement should be “based on the premise that the two sides should meet each otherhalfway and not fight a trade war” and “any agreements reached on trade and businessbetween the two countries will be void if Washington implements tariffs and other trademeasures.” Though not officially announced, China has agreed to purchase 70 billion dollars(approx. 7.7 trillion yen) of US farm and energy products per year according to the US WallStreet Journal (digital edition) dated June 5.
On June 15, despite China’s warning, the United States announced additional tariffs of
25% on 50 billion dollars (approx. 5.5 trillion yen) of Chinese products. The tariffs will be
imposed first on 34 billion dollars of products on July 6 and the timing of the remaining 16
billion dollars of products will be decided later. In response, China announced on the next day,June 16, that the same rate of additional tariffs will be imposed on the same amount of US
products at a similar timing. Further, on June 18, President Trump warned of an additional
10% tariff on 200 billion dollars (approx. 22 trillion yen) of imports from China and on
another 200 billion dollars of goods if China retaliates. China did not budge in the face of thisthreat: the next day, June 19, the Ministry of Commerce declared that “to respond strongly,
China will have to adopt comprehensive measures in quantity and quality.” According to US
statistics, exports from China to the US were around 500 billion dollars in 2017 but onlyaround 130 billion dollars in the other direction. Running out of goods on which to impose
tariffs, China has to seek “qualitative measures” outside of trade. Experts consider that a
voluntary public “boycott” of US products made in China as well as imports would be
effective. For example, 21% of US Apple’s sales came from the Chinese market in the firstquarter.
China is making it clear that it will never bow to the United States. Meanwhile, on June
10, the Shanghai Cooperation Organization Summit of eight states including China, Russia
and India met in Qingdao and released a leaders’ declaration that the member states will
“reject protectionism in any form.” The State Council has released a notification oncomprehensive measures including an easing of foreign direct investment regulations andenhanced protection of IP rights. Both are strategic messages directed at the US-initiatedglobal trade friction.
So far, the US-China friction has not directly affected the energy area. However,American crude oil is included in the second set of retaliatory measures to be implemented by
China. If the two countries plunge into a trade war as declared, US crude oil exports to China
are likely to decrease considerably.

4. Russia: Responses to the Economic Sanctions and Joint Production Cut
Sanae Kurita, Senior Researcher
Global Energy Group 2, Strategy Research Unit

On June 4, President Putin signed the federal law on Countermeasures against
Unfriendly Actions of the United States of America and Other Foreign States, which tookeffect immediately. Prime Minister Dmitry Medvedev had condemned the US sanctions
imposed on Russia on April 6 as an illegal act of protectionism and had ordered the cabinet totake effective countermeasures and consider ways to support the Russian companies hit by the
sanctions. Enactment of the law is part of the effort to put these measures into action.
The law applies to states and individuals who take hostile acts against Russia and enables
the government to terminate international cooperation with the unfriendly state and limit
exports and imports. The law stipulates that the industries, products and services to beprohibited or limited should be specifically determined by the federal government, notspecified by laws. Views are divided as to why the scope of the sanctions is not clearly
defined; some Russia experts point out that through the sanctions, Russia intends to sow
doubt between the United States and its allies and maintain tension by not revealing who will
be sanctioned next; some media reports interpret the lack of detail as a sign of ineffectivenessand remain optimistic.
New moves are emerging as international oil prices increase. On June 22, OPEC
announced that the level of output reduction, which is now being exceeded, will return toinitial levels from July, effectively increasing output. Before the OPEC decision, the Russian
government had considered that the joint production cut had met its goal of correcting stocklevels and had proposed a discussion to ease the reduction. Russian oil companies opposed
the cut from the beginning and repeatedly emphasized the need to restore output levels. In
particular, Rosneft had argued that the joint cut could hamper the development of oil fields ineastern Siberia that supplies oil to the Eastern Siberia–Pacific Ocean oil pipeline.
The rising oil prices are affecting the daily lives of Russian people. To stabilize the risein domestic petroleum product prices since the start of the year, on June 1, the government
lowered the commodity tax on gasoline and diesel by 48 US dollars and 31 US dollars per
tonne, respectively, and a further tax cut of 11 US dollars is scheduled for July 1. According
to First Deputy Prime Minister and Finance Minister Anton Siluanov, the series of tax breaks
will reduce tax revenues by 2.2 billion US dollars, which will be offset by an increase in
non-oil revenues and borrowings in amendments to the 2018 budget scheduled for autumn.
The government is certain that this can be achieved as the Finance Ministry has revised the2018 federal budget upward to 0.5% over GDP. In addition, Russia plans to abolish the oil
export tax and mineral resource exploration tax toward 2024. Reforms of the oil tax system toaccelerate oil exports and to switch from uniform volume-based oil and gas taxes to ones
based on the difficulty of development of each field have been discussed repeatedly, but thepolicy has also been changed repeatedly and no consistent direction has been set. The reformsof the oil tax must be closely monitored as, depending on the situation, it could affect Russia’s
oil business in which Japanese companies are participating.
6

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