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Japan earthquake may push oil prices higher

The earthquake forced the shutdown of several oil refineries and some nuclear power plants in Japan. If they can't reopen soon, the country probably will want to import more gasoline, diesel and jet fuel.

March 12, 2011|By Ronald D. White and Don Lee, Los Angeles Times
  • The earthquake and tsunami have caused the loss of substantial refining capacity in the world's third-largest economy, which may inject more volatility into gasoline prices ? raising the risk of even higher pump prices for American motorists.
The earthquake and tsunami have caused the loss of substantial refining… (Yuriko Nakao / Reuters )

Reporting from Los Angeles and Washington— — The powerful earthquake and tsunami that slammed northern Japan knocked out car plants and steel mills, stranded thousands in offices and at Disney's resort in Tokyo, and pummeled financial markets in Asia and Europe. But the biggest effect on the world economy may yet come in further roiling oil prices that already have cast a pall on the global recovery.

That's because the 8.9-magnitude temblor forced the shutdown of a number of Japan's oil refining facilities as well as some of its nuclear power plants. The loss of substantial refining capacity in the world's third-largest economy is likely to inject more volatility into gasoline prices — raising the risk of even higher pump prices for American motorists.

Industry experts say that if Japan can't get its refineries back on line quickly, there will be a spike in that country's demand for gasoline, diesel and jet fuel. Global suppliers, including refineries in California, may find it more profitable to increase shipments to Japan instead of selling the fuel domestically, resulting in a bidding-up of prices.

Photos: Scenes from the earthquake

"It's a 'yikes' situation," said James DiGeorgia, editor of the Gold & Energy Advisor. "The sudden importation of large amounts of distilled products is expensive and it's a heavy logistics burden. That is going to drive up the market price for everything from diesel and gasoline to jet fuel."

At least two nuclear power plants in Japan were reported to have closed after the earthquake. An extended shutdown would probably push up demand for fossil fuels.

Bob van der Valk, a fuel-price specialist and consultant, took note of news footage of a refinery burning in Japan.

Videos of the earthquake

"Someone is going to have to make up for that," he said. "That could come from the West Coast."

American consumers can ill afford to pay more for gas. On Friday, the U.S. average for a gallon of regular gasoline was $3.54, up 7 cents from a week earlier, according to AAA. The California average was $3.94.

Oil prices declined sharply Friday, with crude futures briefly dipping below $100 a barrel. Investors figured that damage to refineries as well as disruptions to Japan's economic activity would result in reduced demand for petroleum, easing some of the global supply concerns from the political turmoil in Libya and elsewhere in that region.

In the view of some energy analysts, the disaster in Japan isn't likely to weigh much on the movement of oil prices.

But with oil prices already cutting into economic growth, President Obama on Friday again sought to reassure Americans that the U.S. was closely monitoring supply disruptions.

"Here at home, everybody should know that should the situation demand it, we are prepared to tap the significant stockpile of oil that we have in the Strategic Petroleum Reserve," he said.

The fallout from the earthquake comes at a delicate period of the global economy. The U.S. and some other countries have shown signs of a broadening recovery. At the same time, higher oil and food prices, along with ongoing fiscal troubles in Europe, have raised concerns about inflation, a possible tightening of credit by central bankers and the prospect of slower growth.

Financial markets in Asia and Europe took an immediate hit Friday as investors unloaded shares of insurance firms, leading Japanese makers of autos and electronics and some other global companies. A number of American firms, including 3M, Dupont and Wells Fargo, reported damage to their facilities in Japan, and many others said they had suspended production or services.

The reaction on Wall Street was more encouraging: The Dow Jones industrial average climbed back above 12,000, rising 59.79 points, or 0.5%, to 12,044.40.

Shares of some U.S. companies moved higher on the belief that firms will benefit from extensive infrastructure rebuilding in Japan.

Engineering giant Fluor Corp. was up more than 4%. Although past disasters have crimped the economy in the short term, rebuilding efforts often have spurred longer-term growth, said Brett Hammond, chief investment strategist at TIAA-CREF in New York.

In Japan, the Nikkei closed down 1.7%, with the Japanese auto industry hit particularly hard.

Nissan, Toyota and Honda all shut down plants. Honda reported the death of a 43-year-old worker at its research center in Tochigi.

Jeffrey Smith, a Honda spokesman in Torrance, Calif., said the company was working hard to assess the effect on its U.S. operations.

Although much of what Honda, Toyota and Nissan sell in the U.S. is made in North America, it was unclear whether lines that are manufactured in Japan, including the high-profit Toyota Lexus and Honda Acura brands, could face shipment problems.

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