Japan, Once World’s 2nd Largest Oil Consumer, Cuts Back on Refining as Demand Sinks

It looks like the sun may be setting on Japan's thirst for oil. (image: allamericanpatriots.com)

Nippon oil recently announced that it will process 4% less crude oil in June 2009 than it did a year ago, owing in large part to a reduction in oil consumption. And this is not an isolated event: Nippon closed one of their refineries earlier this year, and is converting another over to service the Chinese, not Japanese, market.  Again, the culprit is lower Japanese crude oil consumption; oil sales for the year ended March 31 were down 8%. Lest you think the recent global recession is the sole, or even main, culprit, think again: Japanese oil consumption has declined for six straight years—their oil usage was already falling back in 2003, when the U.S economy was roaring along and GM and Citibank were still stalwarts of the Dow Jones.

That’s not to say that the current recession hasn’t had an effect—it’s pushing down Japanese oil demand even faster. What though, have been the main reasons for this decline in demand? Some of the causes of the reduction are good: Japan has been shifting towards more fuel efficient cars and greener energy sources. But more significantly, Japan is staring down the barrel of a loaded demographic gun. Its population is aging faster than the population of any other country in the world. The reason? A low birthrate coupled with lengthening lifespans. (Sorry: even though it seems—given that this is Japan, home of Godzilla and anime—that the cause should be radiation or an alien plot, it’s not.) The combined effect is the reduction of the number of workers and increase in the number of retirees, which in turn reduces economic activity (both industrial and consumer). As the Council on Foreign Relations puts it, “in less than five years, the country’s demographic trends will give it a population profile like Florida’s.”

The other big reason for the decline in Japanese oil consumption is that the global recession is old hat for them—their economy’s been struggling since the early 1990s, when their real estate bubble burst, deflation picked up, and some large Japanese companies went bust.  The global recession may have hit them when they were down, and it certainly has choked off some nascent economic improvements (for example, exports, which had been climbing, plummeted again in December), but the important thing is, they were already down.

So bearing in mind the demographics, the long-term economic doldrums, and shifts in behavior (like those fuel efficient cars), what is the prognosis for crude oil demand and petroleum product consumption in Japan? Negative, to say the least. It’s going down like a balloon tied to a brick.  Japan expects to shut at least one fifth of their refineries by 2013—that’s only four years away!—to accommodate the falling demand. And the amazing part is, that’s the at least projection—actual fall off in demand, and therefore reduction in consumption, could be steeper still.

What does that mean for the rest of us? It will reduce global demand, and therefore likely exert a downward pressure on crude oil prices. It’s true that the developed world is not the main driver of growth in oil consumption—prior to the recession, China, India, and the Middle East were fueling most increases.

On the other hand, Japan is a heavily industrialized nation. With less than 2% of the world’s population, it still imported almost 6% of world oil production in 2007.  A 20% reduction in Japanese consumption would reduce global oil consumption by around 1.2%, which would free up another 1 million barrels of crude per day. That’s the equivalent of reducing U.S. consumption by 5%, reducing our imports by almost 8%, or increasing our production by around 12%—none of which would be small changes.

For example, 1 million barrels a day is more than the world-wide reduction in oil demand due to the global recession which the International Energy Agency has forecast for 2009. And we know that the recession-driven decrease in demand has driven reductions in oil prices.

There’s every reason to think that the projected demand decline in Japan will have the same sort of effect on prices as the recessional decline. After all, when supply and demand meet to determine price, neither cares much what the source of the supply or demand is—just its magnitude. A reduction in demand over the next four years equal to over 1% of current global production will have an impact on price.

So for those looking for lower crude oil prices, Japan’s economic and demographic woes are good news.