As the nuclear threat in Japan steps up a gear, global politicians have pre-empted a wave of anti-atomic feeling from their public and spoken out against nuclear reactors, which threatens its future as a viable alternative to oil.
As Japan has found out with devastating consequences when things go wrong with atomic energy the effect is both devastating and immediate. Unlike carbon fuels, which have a lagged detrimental effect on the atmosphere, a nuclear accident doesn’t get worse in increments – once radioactive material is released into the atmosphere the damage to the surrounding areas is done.
In contrast carbon-based fuels are more of an incipient threat. Increased rates of asthma, holes in the ozone layer and deterioration in air quality take many years take of oil-burning to come about, which makes it hard to pinpoint who the real culprit actually is. But if a radioactive cloud suddenly appears you know exactly where it has come from, Reuter reports.
The outlook for nuclear energy is not good at this juncture. The relative infrequency with which nuclear disasters happen (there have only been three notable accidents in the past decade including the events in Northern Japan) seems to only increase their negative impact on public opinion. In contrast, individual oil companies can have multiple spillages over the same time frame and demand for crude will continue to rise.
For a world addicted to electricity, finding clean energy sources is vital. Nuclear is extremely clean and when it functions without a problem it causes very little damage to the environment. While oil usage may be tapering off in the developed world, it’s the emerging market powerhouses that are gulping down ever increasing amounts of “black gold”.
Disasters such as the one now facing Japan makes the adoption of a clean nuclear energy solution less likely in the emerging world – the centre of future demand for fuel.
This has important implications for investors. In the short-term increased demand for non-nuclear forms of energy such as gas and oil may put upward pressure on commodity prices. That feeds into higher inflation rates, especially in the emerging world where higher energy prices feeds into overall price growth quicker than it does in the West. This makes interest rate hikes and/or currency appreciation important for these economies to thwart price pressures in the coming months.
Whereas emerging market central banks were unhappy to hike rates and allow their currencies to appreciate when commodity price gains were blamed on the Fed’s QE2 programme, they may be more willing to tighten policy in response to this crisis as the shift away from nuclear to carbon-based fuel could prove to be a permanent shift depending on how things pan out at the Fukushima Dai-ichi plant.
This move also impacts stock investors. Tepco – the utilities company that runs the damaged Japanese plant – was downgraded this week and the cost to insure its debt spiked. Utility companies tend to provide a good income stream for investors, revenues are fairly predictable and they tend to have government support. Nuclear stocks outside of Japan have held up fairly well throughout the crisis, but their future resilience depends heavily on the outcome of the crisis. If it deepens then nuclear utility companies may find it hard to attract investors going forward.
The situation in Japan is changeable, and if it doesn’t stabilise in the coming days and weeks then nuclear energy may be shelved for good. This would have serious implications for investors and for the environment.