The Long and Short of Energy Prices
8:00 PM, Mar 18, 2011 • By IRWIN M. STELZER
The disaster at Japan’s Fukushima Daiichi nuclear plant, and the upheavals in the Middle East are the sort of events that send economists back to their forecasters’ drawing boards. As usual, there is a tendency to confuse the long-run and the short-run, and to blame developments that were due to occur anyhow on the most recent events.
There is no doubt that the supply chains on which many industries rely -- from electronics to auto making -- have been interrupted. Everything from Apple’s new, hot iPad to Sony’s flat-screen television sets, to Nokia’s handsets to the cars produced by General Motors in its Louisiana plant, shut down awaiting supplies, will be in short supply. At least for a while. But these companies are resilient, will link together new supply chains sooner rather than later, and resume the growth that is propelling the American recovery. If they don’t, their competitors will.
It is also likely in the short run that cross-currents will batter financial markets. The prospect of a sell-off of American assets by Japanese companies, especially insurers in need of yen to cover losses, would have driven down the price of US Treasuries -- if there had not been compensatory purchases by investors seeking a safe haven in an increasingly unsafe world. The prospect of yen-buying by companies repatriating funds should have and did drive up the yen, but a massive, coordinated central bank intervention drove it back down. I leave a guess at future developments to those expert in these markets.
Turn to longer-run consequences. Two seem visible at this time. First, with even construction-minded China calling a pause in construction of new nuclear plants, General Electric’s plans for a nuclear industry renaissance should be on hold, despite the fact that newer reactors -- the troubled Japanese reactors went into service some 40 years ago -- have design features that should prevent a shortage of cooling water.
Second, many companies’ just-in-time ordering of parts and components will need to be re-evaluated to factor in the newly discovered risk of over-reliance on smoothly functioning supply chains.
Which brings us to the sector most analysts are expecting to bear the brunt of the upsets in Japan and in the Middle East: Energy. The problems with Japan’s nukes are thought to have brought an end to a of the US nuclear power industry. That is wrong.
For one thing, President Obama, committed to transforming the energy economy so that 80% of electricity comes from “clean energy” sources by 2035, has restricted himself to a measured reaction: Re-check the safety of all US plants, which account for 20% of our electricity. Energy Secretary Steven Chu told congress, “I think, no matter what happens, we will try to take the lessons of Fukushima and apply them to our existing fleet and any new reactors we will be building.” He is opposed to backing down on the government’s commitment of $36 billion in loan guarantees for companies trying to build nuclear power plants.
More important, it is highly unlikely that any new nuclear power stations would have been built in America even if Japan’s stations had not proved vulnerable to natural disasters, despite the 12 applications now being reviewed by the Nuclear Regulatory Commission. Anti-nuclear activists have a new stick with which to beat any regulators who dare to approve such plants. In addition, there is wide agreement that new nuclear power plants are too expensive to compete in now-largely-deregulated markets for electric power. John Rowe, CEO of Exelon, the largest nuclear plant operator in the US, first points out that we don’t yet know the extent of the problem in Japan, and that every energy source presents environmental problems (think mine disasters in Chile and West Virginia). But he then tells me, “In any event, new nuclear plants are not economic investments with today’s natural gas forecasts.” So Exelon will “concentrate on keeping its existing plants safe.” No new nukes for this shrewd utility executive.
Peter Bradford, a former regulator and long-time Rowe sparring partner and skeptic about the safety and economic viability of nuclear power, agrees. He tells me, “The nuclear renaissance was dead in the water anyway, because nuclear power is just too expensive. At today’s gas prices, private capital was not going to be available for new nuclear. What couple is now looking up from the smoldering wreckage on the TV screens and saying to each other, ‘Dear, this seems just the moment to take on more nuclear risk in our portfolio’?” He might have added that the refusal of the government to open the Yucca Mountain nuclear waste repository is an additional impediment to new construction.