The mid-July closure of a major nuclear power plant by Tokyo Electric Power Co. is posing some interesting questions that economists and watchers of markets can ponder.
The closure is very real in the Tepco offices, where The Barrel and some colleagues paid a visit earlier this week. At least two elevators are shut; the air conditioning is operating at minimal level; and lights are not operating in many places. It's all part of a conservation effort that they hope the rest of the country will follow.
The size of the actual impact is not completely clear. At a press conference in late July, Tepco President Tsunehisa Katsumata said the company's oil purchases would rise to about 63 million barrels for the fiscal year that ends March 31, 2008. That's off an initial target of 24 million barrels, for an extra demand jolt of about 107,000 b/d. There is no indication from anybody at Tepco that the buying spree will be brought to a close in the fiscal year that starts April 1; the reactor appears likely to be down for quite some time.
That's not a lot of oil, but at the same time, this is not a market with much slack between supply and demand. And since prices are set at the margin, another 107,000 b/d of unanticipated demand probably does register in the price of oil. The question is to what degree.
Another notable aspect of the TEPCO purchases is that the company is trying to make those acquisitions without excessively stirring the market. This is another topic that economists could debate endlessly. As Platts' Takeo Kumagai in Tokyo reported earlier this week, TEPCO is buying all its direct-burning crudes -- which are crude oil grades that get thrown right into the boiler to generate electricity, without any processing -- from domestic Japanese suppliers. This does keep Tepco away from the vagaries of the spot market, but the company also seems to believe that there will be less impact on the broader market by, in essence, keeping the problem "in-house," localized to the Japanese market.
It is easy to mock such a view. Classical economics would hold that in a truly global market like oil, that much new demand can't be hidden, and will have the same impact on the market whether it is being supplied by a local company or tendered to the broader market.
In the long run, that's almost certainly true. But markets have a long history of short-term gyrations spurred by unanticipated shifts in supply and demand where the numbers, at first glance, don't appear to be all that significant. Often they gyrate more over a highly-visible problem, and react less ferociously on a disruption that is not as well known, even if the magnitude of the latter problem is equal or exceeds the former.
If a 100,000 b/d refinery in the US Gulf Coast goes down, the market will inevitably react. If a refinery of the same size or more goes down in some place like Trinidad -- where unscheduled maintenance this past June removed 160,000 b/d in processing capabilities, as Platts reported at the time -- the reaction in the market is close to nonexistent. Both are Atlantic basin refineries, and theoretically, the impact on the market is equal, or in the case of the Trinidad plant, more than the loss of 100,000 b/d at our unspecified Gulf Coast refinery. Yet that's not how the market reacts.
There are a lot of eyes on Tepco, and it's hard to imagine that its relatively small addition to the world's demand figures isn't going to be noticed, no matter how much the company tries to keep the trouble "in-house."
A couple things to keep in mind there...low sulfur fuel oil is cheaper than direct-burn crudes. Tepco buying LSFO from local Japanese refiners helps those refiners get rid of negative-margin products, and get much quicker delivery than, say, crude or LSFO from Indonesia or even the US Atlantic Coast (from where some supply has been sourced).
On your other point about the different reactions, the 100,000 b/d refinery on the Gulf Coast may be producing higher-quality gasoline, and is closer to the market hub, than the 160,000 b/d Trinidad refinery, which could cause the outsized reaction.