Jeffrey Spehar Professor Terry MacDougall Japan in Contemporary International Affairs 03 July 2007 Japan’s Quest for Energy Security Reforms and Responses since the Oil Crises of the 1970’s “Japan,” says the oft-repeated phrase “is a small island country with few natural resources.” Yet Japan is also one of the wealthiest nations in the world, with the third largest GDP in the world, second only to geographically much larger countries: the United States and China (CIA, The World Factbook). Because many of the natural resources required to support such wealth are not available indigenously, Japan must import them from abroad. Energy commodities are no exception – Japan imports virtually all of its oil, coal, and natural gas, all three of which occupy a major portion of its energy sector. For any industrialized nation, the energy supply is a key infrastructural component; without it, nearly all existing economic and human activity would grind to a halt. This dependence is a critical weakness for industrialized nations, especially ones that depend greatly on foreign suppliers. A drastic decrease in supply or increase in the price of energy commodities could easily create a national crisis. In the 1970’s two such situations occurred in the oil industry and in response, Japan began reforming its energy sector to depend less on oil by increasing the diversity of energy sources, stockpiling commodities, improving overall energy efficiency, and creating strong relationships with supplier countries. These policies have largely been successful and as a result, Japan currently enjoys greater energy security than in the past. Indeed, Japan is continuing to diversify its energy sector. In 2006, the Japanese government formulated a “New National Energy Strategy”,

specifying guidelines for the future development of energy in Japan. Straying little from the practices of the previous decades, the New Energy Strategy focuses on the continued reduction of fossil fuel dependence and promoting energy diversity while maintaining favorable conditions for growth abroad. There seems to be little need to change drastically the general goals and methods of creating energy sector security; one needs to look no farther than the success of Japan’s already completed reforms to see that this is true. Certainly, the Japanese state is now stronger than before and many other countries would be wise to look to Japan as an example of energy reform.

Energy Diversification In 1973, during the first oil crisis, oil provided 77.4% of Japan’s energy (METI, Fundamental Philosophy). It immediately became clear that such a high dependence on oil could create an economic catastrophe and the Japanese government embarked on a program to diversify its energy sources. Japan has consistently decreased the amount of energy it produces from oil, to 71.5% in 1979, 58.3% in 1990, and 51.8% in 2000 (METI, Fundamental Philosophy). The Japanese expect that figure to decrease another 7% by 2010. Larger percentages of coal, natural gas, and nuclear power have replaced oil-based energy. The ability to use diverse commodities increases the robustness of Japan’s energy production, benefiting economic security. With the incorporation of natural gas, coal, and nuclear energy, Japan is less dependant on a single geographic area (in particular, the Middle East) for its energy supply and is better able to deal with fluctuations due to geopolitical instability in regions of the world that supply key energy resources to Japan. The Middle East, however, is still a key supplier of energy and although increased energy diversity allows Japan some additional freedoms when dealing with

other countries (e.g. the ability to focus on environmental or human rights concerns), the need for imported energy commodities still often drives Japan’s relations with other countries.

International Ties Like all other industrialized nations, Japan depends heavily on oil for its energy needs, especially in the transportation sector where petroleum based products account for nearly 100% of energy consumption (METI, New National Energy Strategy). Much of this oil comes from a single geographic area: the Middle East. When compared to other countries, Japan’s dependence on Middle East oil, at over 88%, is much higher than other developed countries. In 1999, France’s Middle East dependence rate was 41%, the United States’ 25%, and both Germany and the UK were below 10% (METI, Fundamental Philosophy). In addition, nearly half Japan’s oil comes from only two countries – UAE (24%) and Saudi Arabia (22%) (METI, The Oil Situation). Because this region is so critical to the supply of oil, it is in Japan’s interests to promote stability and strong ties in the Middle East region. There is a conscious recognition of this fact in the government and Japan has considerable ties with UAE and Saudi Arabia, its two main oil suppliers. Relations between Saudi Arabia and Japan were established in 1955 and continue to be strong. Following a visit to Saudi Arabia by Prime Minister Shinzo Abe, the two governments released a joint statement expressing their satisfaction with current relations. Both countries agreed to strengthen economic ties even further, acknowledging the importance of the stability of the oil supply. Japan also expressed its support for Saudi political concerns in the Middle East, including the conflicts in Israel-Palestine, Lebanon, and Iraq (MOFA, Joint Statement). Other

bilateral visits in the past few years have included members of Saudi royalty, Japanese imperial family members, and high-ranking government officials (MOFA, Japan-Saudi Arabia Relations). Relations between UAE and Japan have come about more recently, beginning in 1971, but in 2007, the countries released a joint statement similar to the one between Japan and Saudi Arabia the previous year (MOFA, Japan-United Arab Emirates Relations). The statement listed existing examples of cooperation between the oil and financial sectors in the UAE and Japan and encouraged further cooperation. Both countries expressed support for the other in regional political issues – Israel, Lebanon, and Iraq; and Korea (MOFA, Joint Statement between Japan and the United Arab Emirates). Several factors appear to enable both countries to support the other’s regional political aims without creating strong bilateral conflicts. First, both Saudi Arabia’s and the UAE’s bilateral relationship with Japan is based primarily on economic exchange in the form of oil. The model of Japan as consumer and Middle Eastern countries as suppliers provides the countries common economic ground on which to cooperate. In addition, geographic distance prevents the countries from becoming entangled in the regional affairs of the other, leaving both states free to interact in the way that most benefits their respective economies. Such cooperation is fortunate because oil still commands half the Japanese energy sector. Because of this, relations in the Middle East will continue to be important for the energy security of Japan. Japan, well aware of this fact, has been managing its relations with oil-producing countries carefully and has expressed the intent to continue doing so in the future (METI, New National Energy Strategy). Strong ties with its oil suppliers have enabled the Japanese government to extract promises of a stable oil supply in times of need and directly arrange oil transfer agreements with

other governments. “At present, oil-producing countries are well aware that a stable supply of oil is beneficial for both oil producers and consumers. Based on this awareness, oil producing countries have assured that if there is anything wrong with oil supply, they will quickly increase production to see to it that oil supply will never be shut off” (METI, The Oil Situation). Japan has also conducted government-to-government negotiations to secure prospective oil supplies in the past. In 1974, in response to the first oil crisis, the Japanese government created a national plan to acquire rights to oil abroad. Combined with private sector mobilization, it was able to effect considerable change in the energy sector. The plan called for the Japanese government to conduct direct government-to-government negotiations with oil-supplying countries in order to arrange large-scale oil investment and trading activities (Ikenberry 113). Individual Japanese countries, in partnership with the government and each other, then deployed the necessary technical and capital resources to extract energy commodities (Vernon 96). After securing commodities abroad, the government also became involved in mobilizing individual companies to participate in projects related to energy security. In order to promote projects that build a stable energy supply, the government has been willing in some cases to subsidize risks beyond those that make a project commercially attractive. This trend will likely continue into the future; in 2006, METI committed to “drastically strengthening the supply of risk money related to the exploration development of oil and natural gas development companies” (New National Energy Strategy 27).

Stockpiling Another strategy Japan has adopted to insulate against an energy crisis is to amass large oil stockpiles. In 1975, in response to the first oil crisis of 1973, the Japanese government

enacted the Petroleum Stockpiling Law which established petroleum stockpiles in private, commercial entities. Three years later, the government inaugurated the government-run state stockpile system. As of 2002, the oil stockpile in Japan contained nearly 6 months worth of oil (170 days), 92 days in the state stockpile and 78 in the private sector. (METI, The Oil Situation) This stockpile gives industry and the government flexibility in the oil supply, helping insulate the economy from the effects of an emergency and protecting against not only human-caused shortages, but possible effects from natural disasters as well.

Energy Efficiency at Home and Abroad The final major component of Japan’s energy security plan is promoting efficiency. Japan is a leader in this area with one of the most energy efficient economies in the world. Energy efficiency to this degree is a result of technological advances and domestic policy changes. Reforms have cut across all sectors: industrial, commercial, residential, and transportation. In some cases, the government enforced minimum efficiency requirements using fines and taxes. In others situations, cooperation was voluntary, but the government took a very active role promoting efficiency. For example, the government directly helped companies and sectors develop plans for “rational energy use” (METI, Present Energy Conservation Measures). In addition to administrative measures, METI has also directly invested in developing energysaving technologies. In fiscal year 2001, METI had a budget of 4.3 billion yen allocated to direct technology development. METI estimates that Japan’s energy efficiency has improved by about 37% in the last 30 years (METI, New National Energy Strategy). Continued support of energy efficient technologies has given Japan advanced technological resources in this area, and although they have been used extensively inside the

country, recently, for environmental and security reasons, Japan saw the need to begin promoting these technologies abroad. In the 1980’s, two five-year Japanese studies showed that the acid rain problem in Japan was originating on “the continent”. With China’s growth showing few signs of slowing, it became critical to Japanese environmental interests to promote cleaner technologies in China. Also, with the instability of the Gulf region in the early 1990’s, Japan realized that promoting more efficient usage outside of Japan could alleviate competition for resources in times of crisis. (Evans 828-831) Japan’s Green Aid Plan was formed to facilitate the transfer of cleaner, more efficient technology from Japan to China and other neighboring Asian countries. Although the basic premise of GAP, technology demonstration, has been successful, these more efficient technologies have failed to take root in foreign economies. Peter Evans has summarized the situation very clearly: In narrow terms, the Green Aid Plan has been successful. … Most of the planned projects have been installed and tested under a range of conditions. Local staff have been trained in proper operation and maintenance procedures. The program has contributed to enhancing the awareness of the role that technology can play in improving environmental conditions in the targeted countries. However, in broader terms, the program's success is more questionable. Little transfer of knowledge has taken place regarding how the recipient countries can manufacture cleaner technologies. Even diffusion of technology in an embodied form has been disappointing. Seven years after the program was launched there were still no follow-on orders among the 48 technologies selected for demonstration. (827) Without close industry-government ties and lacking the ability to intervene directly in the local economy, the Japanese government was unable to effect widespread change in energy

technology. The model that worked so well in Japan – direct governmental involvement and financial subsidies – was more difficult to do in other countries. Perhaps other states will devise their own workable solutions suited for their unique context, but they would all do well to copy the effectiveness of reforms carried out in Japan. As Raymond Vernon points out, “The Japanese plans differed from those of most other governments in one critical respect. … Japan succeeded in implementing its plans to a degree that other governments found difficult to achieve” (97).

Energy Reform In the past 30 years, Japan has been able to reform its entire energy sector for the single purpose of a more stable energy supply. Through source diversification, strong international relations, stockpiling, and efficiency improvements, Japan has built an advanced and more secure energy system. This in turn has provided the support necessary for its successful domestic economy. Japan’s success is due to a myriad of details, but a few larger themes stand out. First, the Japanese government, METI/MITI in particular, has been committed to long-term energy security. Over the last 30 years, the country has been weaned away from its oil dependence, specifically for the purpose of long-term energy security. In the 1980’s, when oil prices had dropped, MITI continued its plan of energy diversification and research into more efficient technologies against the pressure of the energy sector. MITI, being somewhat insulated from the demands of the energy sector, was able to continue its long-term policies. This turned out to be beneficial as the price of oil went up and mounting environmental concerns demonstrated the importance of energy efficiency in the 1990’s (Lesbirel 292).

Second, the strong ties between the energy sector and the government often made enacting reforms easier. In the case of stockpiling, both the government and commercial sectors cooperatively hold oil reserves, working together to ensure energy security for Japan. When dealing with other countries, the government negotiates supply guarantees while the private companies do the work of actually extracting commodities. Similarly, in R&D, the government was willing to take the financial risk, providing subsidies to companies that developed energy efficient products. The examples of close collaboration between the government and energy sector are numerous. Using these industry ties, the government was able to mobilize the entire energy sector, transforming the foundation of one of the largest economies in the world. The intervention of the government was invaluable in making such change possible. Japan’s level of government involvement seems to have struck a successful balance between long-term stability and market dynamism, allowing for both the procurement of secure energy resources and the creation of a viable energy sector, creating more prosperity than a focus on either alone. Although the exact structure and details of implementation of the Japanese method are likely not directly transferable to other nations, Japan demonstrates that it is possible to have both a strong economy and long-term energy security. Hopefully other nations will not wait any longer to follow Japan’s example.

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