WATCHING THE WORLD JAPAN'S DEREGULATION UNDER THREAT

With David Knott from London Before Iraq's invasion of Kuwait in August 1990, Japan imported more than 1 million b/d of petroleum products, or about 27% of its total demand. Two thirds came from the Middle East, one third from Singapore. Since 1990, products imports from the Middle East have fallen by 250,000 b/d, with declines most noticeable in middle distillates and heavy fuel oil. Imports from Singapore have remained about the same.

May 24, 1993

3 min read

Before Iraq's invasion of Kuwait in August 1990, Japan imported more than 1 million b/d of petroleum products, or about 27% of its total demand.

Two thirds came from the Middle East, one third from Singapore.

Since 1990, products imports from the Middle East have fallen by 250,000 b/d, with declines most noticeable in middle distillates and heavy fuel oil. Imports from Singapore have remained about the same.

Japan's recession accounted for some of the fall in heavy fuel oil demand for industry. At the same time, crude oil prices fell faster than products prices. As a result, Japanese oil companies have been relying on their own refineries rather than imports of petroleum products.

The trend accelerated in April last year, when the Ministry of International Trade and Industry (MITI) scrapped its crude throughput quota guidance.

HIGH THROUGHPUT

Some Japanese refineries attained utilization rates of 80% throughout 1992, which is thought to be the maximum practical level, said Makoto Homma, executive secretary of Showa Shell Sekiyu KK. Produce imports were then squeezed down to 15-17% of total domestic consumption.

Japan is under pressure from other governments to reduce trade surpluses, which reached $111 billion in March. Since 1987, MITI has deregulated Japan's oil sector. Gasoline quotas were abandoned in 1988, new construction and brand conversion of service stations was allowed from 1989, crude throughput quotas went in 1992, and residual oil import quotas were axed Apr. 1 this year.

"Refiners now face a make or buy decision at their own discretion," Homma said. "They must assess the relative economics of refining crudes against importing products, based on their own judgment."

If Japan emerges too quickly from recession, however, Homma warned, government may feel the need to intervene again.

ALTERNATIVES

Homma developed two outlooks for 1995-2000 based on stimulation of the Japanese economy by government measures and deregulation in the oil sector.

If gross domestic product grew at 5%, rather than 3% as government predicts, refiners would enter a "free for all" struggle, maximizing crude throughput and cutting margins. One result would be a fall in products imports, maybe to as low as 400,000 b/d in 1990.

Alternatively, a 5%/year growth in the economy may be accompanied by MITI intervention to guarantee security of supplies. Oil companies would once again work out the best combination of refining and imports, and products imports could rise to 830,000 b/d in 1997.

This "safety first" approach would hold imports to about 18% of total demand. Homma said this could be the best compromise between working refineries without spare capacity and attracting criticism for cutting imports.