Will Japan’s Nuclear Fallout Shift Future Focus of Energy Companies?

It’s amazing how quickly the long-term secular growth winds can reverse themselves. Just a week ago, nuclear energy (NYSE:NLR) was thought of as a safe, clean, green technology that would assist the gasoline pump pain in our wallets and purses. Now, given the events occurring in Japan (NYSE:EWJ), “nuclear” has become a dirty word equated to a life-threatening game of Russian roulette.

Despite the spotty information filtering in from the Dai-Ichi plant in Japan (NYSE:EWJ), we are already absorbing knee-jerk responses out of industrial heavyweight countries like Germany (NYSE:EWG) and China. Germany has temporarily closed seven nuclear power centers generating about a quarter of its nuclear capacity, and China has instituted a moratorium on all new facilities being built. How big a deal is this? Well, China (NYSE:FXI) is one country, and it alone currently accounts for 44% of the 62 global nuclear reactor projects presently under construction (see chart below).

 

Source: World Nuclear Association (URRE Presentation)

As a result of the damaged Fukushima reactors, coupled with various governmental announcements around the globe, Uranium (NASDAQ:URRE) prices have dropped a whopping -30% within a month – plunging from about $70 per pound to around $50 per pound today.

Where does U.S. Nuclear Go from Here?

As you can see from the chart below, the U.S. is the largest producer of nuclear energy in the world, but since our small population is such power hogs, this relatively large nuclear capability only accounts for roughly 20% of our country’s total electricity needs. France, on the other hand, manages about half the reactors as we do, but the French derive a whopping 75% of their total electricity needs from nuclear power.  According to the Nuclear Energy Institute, Japanese reliance on nuclear power falls somewhere in between – 29% of their electricity demand is filled by nuclear energy. Like Japan, the U.S. imports most of its energy needs, so if nuclear development slows, guess what, other resources will need to make up the difference. OPEC and various other oil-rich, dictators in the Middle East are licking their chops over the future prospects for oil prices (NYSE:USO), if a cost-effective alternative like nuclear ends up getting kicked to the curb.

 

Source: The Economist

As I alluded to above, there is, however, a silver lining. As long as oil (NYSE:USO) prices remain elevated, any void created by a knee-jerk nuclear backlash will only create heightened demand for alternative energy sources, including natural gas, solar, wind, biomass, clean coal, and other creative substitutes. While we Americans may be addicted to oil (NYSE:USO), we also are inventive, greedy capitalists that will continually look for more cost-efficient alternatives to solve our energy problems (see also Electrifying Profits). Unlike other countries around the world, it looks like the private sector will have to do the heavy lifting to solve these resources on their own dime. Limited subsidies have been introduced, but overall our government has lacked a cohesive energy plan to kick-start some of these innovative energy alternatives.

Déjà Vu All Over Again

We saw what happened on our soil in March 1979 when the Three Mile Island nuclear accident in Pennsylvania consumed the hearts and minds of the country. Pure unadulterated panic set in and new nuclear production ground to a virtual halt. When the subsequent Chernobyl incident happened in April 1986 insult was added to injury. As you can see from the chart below, nuclear reactor capacity has plateaued for some twenty years now.

 

Source: Wikipedia

The driving force behind the plateauing nuclear facilities is the NIMBY (Not In My Back Yard) phenomenon. The Three Mile Island incident is still fresh in people’s minds, which explains why only one nuclear plant is currently under construction in our country, on top of a base of 104 U.S. reactors in 31 states. I point this out as an ambivalent NIMBY-er since I work 30 miles away from one of the riskiest, 30-year-old nuclear plants in the country (San Onofre).

Unintended Consequences

The Sendai disaster is home to the worst Japanese earthquake in 140 years, by some estimates, but history will prove once again what unintended consequences can occur when impulsive knee-jerk decisions are made. Just consider what has happened to oil prices since the moratorium on offshore drilling (post-BP (BP) disaster) was instituted. Sure we have witnessed a dictator or two topple in the Middle East, and there currently is adequate supply to meet demand, but I would make the case that we should be increasing domestic oil supplies (along with alternative energy sources), not decreasing supplies because it is politically safe.

Time will tell if the Japanese earthquake/tsunami-induced nuclear disaster will create additional unintended consequences, but I am hopeful the recent events will at a minimum create a serious dialogue about a comprehensive energy policy. If the comfortable, knee-jerk reaction of significantly diminishing nuclear production is broadly adopted around the world, then an urgent alternative supply response needs to occur. Otherwise, you may just need to enjoy that bike ride to work in the morning, along with that nice, romantic candle-lit dinner at night.

Wade W. Slome is a CFA and CFP® at Sidoxia Capital Management.

Disclosure: Sidoxia Capital Management SCM and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in any other security referenced in this article.