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How the disaster in Japan will drive up energy prices
It's too early to tell how much damage will be done by the nuclear disaster in Japan. But the impact on the nuclear industry is already becoming clear. And that can only drive energy prices higher in the long run, says John Stepek.
First some EU official who should have known better shot his mouth off about an impending 'catastrophe' in Japan. Markets sold off hard. His department then admitted that his views were based as much on media reports as anything else in other words, he knew nothing more than the rest of us.
More worryingly, the US nuclear regulator said that things were worse than the Japanese were letting on. They don't want their people going anywhere within 50 miles of the Fukushima reactors.
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The Nikkei seems to have regained a touch of composure this morning. It ended down just 1.4% compared to earlier falls of 4%. And the yen has stabilised a little after surging wildly last night, although it remains at post-war record highs against the dollar.
So as investors, what can we gather at this stage?
No one knows how bad Japan's nuclear disaster will get
You've probably already guessed this, but I'm not a nuclear physicist. Nor am I based in Japan. And to put it bluntly, even those who are don't seem to be any more capable of pronouncing accurately on what's happening at the Fukushima plant than anyone else.
(You may have missed it, but as the disaster started, a blog post by an MIT physicist declaring "Why I'm not worried about Japan's nuclear reactors" whizzed around the internet. It was briefly lauded as an antidote to 'media scaremongering'. So much for that.)
What I'm saying is, I can't tell you anything useful about whether or not Japan is facing another Chernobyl, a Three Mile Island, or something worse. So I'm not going to add to the deluge of pointless speculation by trying.
Here's what we do know. First off, whatever the outcome, this disaster will hurt the nuclear industry's prospects. At the very least, this is likely to delay approval of future projects. Even the Chinese who are generally accused of a gung-ho attitude towards health and safety when it comes to big infrastructure projects are reviewing their safety measures.
It doesn't matter that Fukushima is a 40-year-old reactor built in a risky location. Voters are going to opt for the 'safety-first' option, and it's hard to blame them.
No doubt power stations will still get built as reviews are completed and PR campaigns launched. The trouble is, nuclear stations already take a lot of time and money to build. And time is something we don't really have. If you wipe out nuclear as a feasible option, then you need to get energy from somewhere else.
My colleague Dominic Frisby who frequently looks at stocks in the uranium sector has put together a piece on what all this means for uranium miners and whether or not this is a buying opportunity you can read it here: Is this a buying opportunity for uranium stocks?
But in any case,nuclear's loss is likely to be the gain of other energy sources.
Bad news for the nuclear industry is good for other energy sources
I won't go into them all here. But this certainly strengthens the bullish case for natural gas. My colleague David Stevenson covered these stocks in a MoneyWeek cover story last November: Natural gas the fuel of the future. They've done very well since, particularly LNG tanker operator Golar (GLNG). The stock is up by around 15% in the last week, but David says he'd still be very happy to hold on to it.
Another of my MoneyWeek colleagues, James McKeigue, recently covered alternative oil sources such as oil shale: The scramble for alternative oil sources. Although the crude price has eased off, I find it hard to see how that can last. While the world's eyes have been on Japan, a whole other tragedy is playing out in the Middle East. Libya is apparently on the verge of crushing its rebellion. And Saudi Arabia and Bahrain seem to be learning that the effectiveness of bribery pales beside the option of acting fast and hard.
I'm not saying we should have intervened. Iraq was a huge mistake. But what will the geopolitics of the Middle East look like when and if Gaddafi is back on top? Any risk premium oil held before now, should realistically be even higher.
Then there's alternative energy. Sure, it hasn't a hope of filling the energy gap so we're constantly told but this can only encourage efforts to invest in alternatives. James also took a look at the solar sector in a recent MoneyWeek: Solar energy's bright future.
Arguably, this is all inflationary in the longer run too. There might be an impact on global economic activity in the short term. And the prices of the most liquid assets tend to be the ones that sell off first in a disaster. But it all adds up to higher energy prices plus yet another reason for the world's central banks to print more money. To me, that's another sound reason to hang on to gold.
My colleague Merryn Somerset Webb looks at the wider implications for Japan in the next issue of MoneyWeek out on Friday. If you're not already a subscriber, subscribe to MoneyWeek magazine. But I suspect this is all going to have a much bigger impact in terms of global monetary policy and the knock-on effect on markets than anyone quite yet realises.
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