IEEJ: February 2012 All Right Reserved
Special Bulletin
A Japanese Perspective on the International Energy Landscape (73)January 20, 2011

Two Risk Factors Emerging for International Energy Market Destabilization
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
With the year 2012 having just started, international energy markets see two emerging risk
factors that are characteristically different and could affect markets in the opposite ways. One is thegrowing tension of the Iranian situation (a geopolitical risk). The other is the European economiccrisis (a global economic risk).
Tensions in the Iranian situation began to grow late last year. U.S. President Barack
Obama signed the National Defense Authorization Act for Fiscal Year 2012 into law on December
30, prompting the tensions to intensify from the beginning of this year. The act pursues economic
sanctions that could effectively work as an embargo on Iranian oil exports through punitive measuresagainst the Central Bank of Iran. In a new development, U.S. Treasury Secretary Timothy Geithnerhas visited China and Japan as major Iranian crude oil importers to call for their cooperation in thesanctions, indicating tough U.S. diplomacic stance toward Iran.
As some countries could be conditionally exempted from the sanctions under the act, how
an Iranian oil embargo could be imposed is still uncertain. Also uncertain is how China, India andEuropean countries would respond to the U.S. request for an Iranian oil embargo in consideration of
their respective degrees of dependence on Iranian crude and their respective relations with theUnited States and Iran. We will have to closely watch future developments in anticipating realeffectiveness of the embargo.
Given the importance of Iranian crude oil for the international oil market, however, we canexpect that a ban on oil imports from Iran by some U.S.-supporting countries may reduce Iranian oil
supply in the international market to tighten the overall supply-demand balance. Other members ofthe Organization of Petroleum Exporting Countries may increase oil production to make up for theloss of Iranian crude (although Iran could strongly oppose such OPEC production expansion). In
such event, a fall in surplus OPEC oil production capacity could be interpreted as a decline in thesupply-demand buffer to put upward pressure on oil prices.
A greater factor behind the growing tensions since the beginning of the year is the problemof safe passage through the Straits of Hormuz. Angered by moves for economic sanctions including
the oil embargo, Iran has threatened to block the straits. U.S. Defense Secretary Leon Panetta
described the possible Hormuz blockade as a “red line” that could not be brushed off, leading theproblem to attract attention.
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Passing through the Straits of Hormuz are more than 17 million barrels a day in oil (some20% of global oil supply) and more than 82 million tons in LNG (about 30% of global LNG supply).
The Straits of Hormuz is a major artery of energy transportation. Safe passage through the straits isvital to energy security for the entire world.
Some people view Iran as unlikely to implement the Hormuz blockade which could
amount to “suicide” for the country. Given the complicated Iranian situation, Israel’s possible
preemptive attacks on Iranian nuclear facilities and Iran’s growing tensions with neighboring
countries as well as the United States and Europe, however, no optimism can be justified. If safe oiland LNG passage through the straits is affected for a certain period of time, it may inevitably exert
great impacts on energy prices and supply-demand conditions. We now see a great risk for securing
stable energy supply for Japan where LNG and oil thermal power generation has grown more
important for electricity supply/demand measures.
At the same time, we must pay attention to downside risks for the world economy. TheUnited States has seen improvements in some macroeconomic indicators since the second half of lastyear, but it has yet to achieve any full-fledged economic recovery. Given the lingering slump in theresidential sector, no optimism can be warranted. In Europe that has attracted attention most in theworld, Standard & Poor’s downgraded sovereign debt ratings for nine major countries on January 14,
shaking financial markets in the world.
In the downgrade, France and Austria lost their most creditworthy status with their ratings
lowered to AA+ from AAA. Although four countries including Germany and the Netherlands
maintained their AAA ratings, the downgrade for France, which constitutes the core of the European
economy and is in position to rescue Greece, Italy and others plagued with credit crises, hasheightened concerns about a rise in fundraising costs for the European Financial Stabilization
Facility and doubts about the credit scheme and its effectiveness.
Regarding the European debt crisis, some people say that the sovereign debt rating
downgrade for major European countries had earlier been viewed as possible and factored into themarket to some extent. But the development indicates that one of the expected risks regarding theEuropean crisis and countermeasures has actually emerged. We must pay attention to thedevelopment’s future impacts. We must take note of the possibility that the credit and banking crisis
could deteriorate the real European economy further and lead to international financial market
destabilization, shrinking international trade with other spillover developments affecting the realworld economy. In another development attracting global attention, China’s growth ofOctober-December 2011 GDP from a year earlier dropped to a 10-quarter low of 8.9% that has
driven the world economy since the Lehman Shock, indicating an economic slowdown more clearly.
At the beginning of 2012, the world economy is plagued with a growing number of uncertain factors.
In our institute’s International Oil and Gas Situation Outlook for 2012 published late lastyear, I cited the Iranian situation and the European economic crisis as major factors affecting energy
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IEEJ: February 2012 All Right Reservedmarkets. Since the beginning of the year, we have seen simultaneous developments regarding thetwo factors, indicating a stormy start for the year. While Japan is fundamentally reviewing its energy
policy, the international environment and situation surrounding Japan are growing tougher. While
watching future developments regarding the risk factors, Japan must promote its energy measuresand policy review in consideration of various possibilities and scenarios.

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