IEEJ: December 2012 All Right Reserved
Special Bulletin
A Japanese Perspective on the International Energy Landscape (115)

December 28, 2012

A Review of 2012 Japanese and Overseas Energy Situation
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
Only four days are left before the year 2012 ends. The year saw various problems, key
developments and new challenges emerging in the Japanese and overseas energy situation. In
reviewing the year, I would like to highlight some points that I view as important.
First, crude oil prices have remained high. From the beginning of 2012 through December
27, the benchmark Brent futures price averaged $111.7/barrel on a daily closing basis and the West
Texas Intermediate futures $94.2/barrel. Given that the benchmark WTI price has deviated far fromthe Brent price for its own unique reasons, we can conclude that crude oil prices on the international
market have remained above $100/barrel since 2011. While crude oil prices have remained high,global oil demand has decelerated with unconventional oil production accelerating. The
Organization of Petroleum Exporting Counties, which has grown more willing to see higher crude
oil prices, is now required to sensitively manage oil production. As some experts have compared thecurrent situation with a high oil price period after the second oil crisis, we must closely watch
international oil market developments.
Second, international imbalances or deviations in energy prices by region or by type ofenergy have expanded. As noted above, there is a gap of some $20/barrel between the prices of thetwo benchmark crude oil prices that are similar to each other in physical quality. In the international
gas/LNG market, Asian LNG prices linked to crude oil prices have recently ranged from $16 to $18
per million British thermal units (MMBTU) against around $3/MMBTU for U.S. Henry Hub andimported gas prices depending on gas supply-demand conditions (gas-to-gas competition) andaround $10/MMBTU for Europe where oil-linked and hub gas prices co-exist. There are thus large
gas price gaps between regions. The U.S. gas price of about $3/MBTU amounts to a calorie-based
oil price of some $20/barrel. Gas prices are thus extremely lower than oil prices. Furthermore, theU.S. gas price plunge has led coal to be substituted in the U.S. power generation sector and flow into
the international market, bringing about a softening coal supply-demand balance. In Europe, as aresult, coal has increased its competiveness against gas, reversing the U.S. case. Coal consumption
has thus been expanding in Europe at a cost of gas consumption. Relations between coal and gas
prices thus differ from region to region. The year 2012 has thus featured expanded energy priceimbalances between regions and by type of energy. Will the deviation narrow, remain unchanged orwiden in the future? We must pay attention to relevant future developments.

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IEEJ: December 2012 All Right Reserved
Third, the year 2012 saw further progress in the “U.S. shale revolution” as a factor behind
the abovementioned deviations between energy prices. The shale gas revolution, which has become abuzzword, and a subsequent shale oil (tight oil) production expansion have been dramaticallychanging U.S. and global energy supply/demand conditions. Some experts have noted that as theshale revolution has made progress, the United States has steadily increased its energy
self-sufficiency rate and is going in the direction of its future “energy independence”. Amid suchchange, a U.S. energy cost drop symbolized by the gas price plunge and macroeconomic effects ofdeclining oil imports payment which accounts for dominant part of the U.S. trade deficit are working
to enhance U.S. economic power. The enhancement of U.S. economic power and international
competitiveness will allow the United States to remain a superpower status longer than previously
expected and will provide various implications for international politics, the global economy and theinternational energy situation. At the same time, the United States' transition to energy independence
is a key development that can turn around the paradigm of the world energy security problem. Thisis because the traditional international energy security system has been based on a basic recognition
that the United States will remain dependent on energy imports. What implications will future U.S.
changes have on U.S. policies on the Middle East, Asia and China? How will relations between Asiaand the Middle East change? Future U.S. developments are likely to trigger a wide range of deep
geopolitical energy problems for global stakeholders.
Fourth, developments in the Middle East and Asia continued to attract attention in 2012. In
the Middle East, the impact of the “Arab Spring” movements has remained strong. As represented by
the confusion and extreme instability in Syria, the region has destabilized further after the wake of
the “Arab Spring”. Meanwhile, Iran's crude oil exports have declined substantially as the UnitedStates and EU have toughened economic sanctions on the country. But the Iranian situation has notgone so far as to trigger any emergency as feared once. Nevertheless, the future course of the “ArabSpring” movements and the Iranian situation has grown more uncertain and unstable. We must
continue to closely watch future developments. In the past year, China and other Asian emerging
countries saw slower demand growth on a global economic slowdown after driving global economicand energy demand growth. Asia featured developments that heightened tensions over territorial
disputes between major countries, attracting global attention from the geopolitical viewpoint.
Following the birth of new governments in major countries including Japan, China and South Korea,
the future Asian political and economic situation will grow more important for analyzing energy
problems.
Fifth, renewable energy use made rapid progress under powerful policy support, thoughwith various relevant problems emerging. Renewable energy, which emits no carbon dioxide and is adomestic energy source subject to high social acceptance, has diffused rapidly in major European
countries and China as their governments have provided policy support including the feed-in-tariff
system on expectations to benefits mentioned above as well as those related to industry promotion
policies. At the same time, the rapid diffusion has led people to pay attention to cost hikes rising
economic burdens for the FIT system and requirements for grid stabilization measures responding to
the expansion of unstable electricity sources. In Germany that has attracted global attention as anadvanced renewable energy promoting country, the rapid expansion of wind power generation has2

IEEJ: December 2012 All Right Reserved
caused the so-called “loop flow” problem in which unplanned current flows exert negative effects on
stable grid management in neighboring countries. In addition, the renewable energy use expansion
has discouraged Germany and neighboring countries from using natural gas thermal power plantsfrom the viewpoint of the so-called “merit order” supply/demand adjustment, making it difficult tomaintain such plants for stabilizing the electricity supply-demand relationship. The year 2012 thus
saw new attention-attracting problems involving renewable energy.
Since the March 2011 Great East Japan Earthquake, Japan has tried to revise its energy
policy in the face of new realities. Eventually, however, the government delayed its conclusion on
the revision beyond the end of 2012. The new government led by the Liberal Democratic Party hastaken over the energy policy revision efforts. Sharp changes in the international energy situation in2012 indicated anew that Japan must continue efforts to work out its energy policy or strategy for its
survival and development in line with underlining global trends.

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