"Business Japan"@January 1978

Coming Decade Holds Many Questions

Taichi Sakaiya vs. Hajime Fujiwara

JAPAN since the oil shock in 1973 has ceased to grow at the high pitch that was previously the feature of its economy and stands now in a state of pitiful dejection. The panic predicted to hit the world economy several years hence in the early half of '80s, is now expected to be much more punishing or unprecedented in scale, landing a fatal blow on the Japanese economy. How should Japan face the crisis, or are there any ways to survive the disaster? Two Japanese experts on petroleum and natural resources have exchanged heated views on the forthcoming crisis to draw a clearer picture of the Japanese economy in the '80 - Shigeo Kashima, Editor


Taichi Sakaiya: Novelist, age 43, real name Kotaro Ikeguchi. After graduating from Tokyo University in 1960, he became an official of the Ministry of International Trade and Industry (MITI). He won a reputation as part of the "new elite" by submitting his plan for holding the Osaka World Exposition (EXPO '70) three years later at the age of 28 and also prepared the groundwork for the Okinawa OceanYxposition. He wrote a story titled "Yudan" (literally Oil-Cut) in 1975 which created a sensation and established a unique position in the literary world as a "bureaucrat-novelist." His recent literary works include "Generation of the Masses," and "Hadankai."

Hajime Fujiwara: A petroleum geologist aged 39 who lives in Canada. Upon graduation from Saitama University in 1963. he went to France to major in structural geology and petroleum geology. Doctor of Science. He served as consultant for probing for oil and natural resources in Africa, the Middle East and Europe. In 1971 he predicted that an oil crisis would hit Japan in two years which turned out to be correct. He now works for Petrofina Canada Inc. and is back in Japan for the first time in five years. His books include "The Oil Crisis and Japan's Fate" published by the Simul Publication Co. and "Japan Maru Will Sink" published by the Jiji Press.

Shigeo Kashima: Editor-in-chief of Business JAPAN, an English monthly published by the Nippon Kogyo Shim-bun. Served as Sankei Shimbun's Beirut correspondent for two years and seven months between December 1973 immediately after the 4th Arab-Israeli war and August 1976. He was among the last Japanese to leave Lebanon when civil war broke out in that country. Age 47.

K. Both Mr. Fujiwara and Mr. Sakaiya, according to Mr. Fujiwara, are professionals whose predictions that warned of the advent of the 1973 oil shock surprised the Japanese people because of their accuracy. It is four years since the oil shock upset the world economy and though it appears that things have settled a bit, the fact remains that Japan is extremely weak in petroleum mailers. Some take the view that the Japan Maru (ship) will sink in the '80s when the second wave of the oil shock washes the shores of Japan. Tlie purpose of this meeting is to determine the actual facts and to make clear to the readers the nature of the crisis Japan will face in those years.

F. I believe that the forthcoming oil crisis will be incomparable both in size and severity with what I predicted six years ago. It was my thought in 1971 wlien I first made the prediction that the crisis to some extent could be tackled with efficiency if certain factors pertinent to the Japanese economy were solved. The next oil crisis will be entirely different in nature as it will be coupled with a number of external factors which are beyond the control of Japan. I consider that Japan will be in the midst of this crisis by the early half of the '80s.

K. What are these external factors?

F. First is that to tide over the oil crisis, the world will be forced to make investments in various forms of energy which should add up to an enormous amount. For instance, the United States alone will be required to spend annually $100 billion for petroleum investments. At least twice or even three times that amount will be required from the whole world. Considering the great confusion that resulted when only about 10% of the oil dollars ($50-$60 billion) kept by the Mideast countries was transferred to London from Zurich, the effects of so huge an amount as $100 to $200 billion for petroleum investments can be easily guessed. It is doubtful whether the world economic order now based on the International Monetary Fund (IMF) and General Agreement on Tariffs and Trade (GATT) could remain intact in such circumstances.

K. Most probably the existing economic system will collapse.

F. Second is the Mideast situation which may be subdivided into two main problems. When I say this, Mr. Sakaiya may think that I am trying to project an opinion based on the Arab-Israeli conflict - but it is not so. The Arab-Israeli confrontation will not be the major Mideast obstacle in the '80s.

S. You figured wrong, Mr. Fujiwara. I don't think that the Arab-Israeli conflict will be the focal issue.

F. The Mideast issue in the '80s will be two-pronged, one being the traditional, hostile confrontation between Iran and Saudi Arabia. Iran in a way resembles the Japan of the pre-World War II period, seeking to expand its influence over other Arab countries as Japan did in Manchuria. Militarism is conspicuous in Iran as exemplified by their building of the world's largest hovercraft fleet and holding negotiations with the United Stales for the purchase of aircraft carriers.
The country's population too, is large, around 37 to 38 million, as compared to Saudi Arabia's 5 million. The educational level, with the exception of the privileged class, is low for the majority of Iranian people. Many of these people leave their country to seek chances in Kuwait or Saudi Arabia, rather like the Japanese farmers who sought a new life in Manchuria. Kuwait for one feels concern over this inflow of Iranians and fears that the country one day may be overtaken by these "foreigners" whose ratio in the population is ever increasing. The fear is not unfounded since Iran from the days of the Persian Empire is renowned for its feeling of superiority over other Arab countries.

Facing Two Energy Crises

S. I think the forthcoming energy crisis is double-faced. One is the "supply-cut" type. While the supply cut backs in 1973, because they took the form of politics and diplomatic strategy, did little damage in terms of either period or depth, the energy crisis in the '80s will be much more severe with practically no leeway left for talks leading to settlement. I consider that physical destruction will be rampant not because of an Arab-Israeli war but because, as Mr. Fujiwara has suggested, social uneasiness will arise within the Arab countries. Taking for example Kuwait. The population is about 950,000, of which native Kuwaitis number a mere 200,000. The other 750.000 are all foreigners who are resentful of the various discriminations imposed on them despite the similar identity in race, religion and language. This dissatisfaction may well flare up and develop from a local struggle to one of international scale. This also applies to Saudi Arabia, the United Arab Emirates, and all other sheikdoms in the Arab world.

F. What Mr. Sakaiya has just mentioned is the second theme I wanted to add to my opinion concerning the Mideast. In the case of Saudi Arabia, this country until up to 40 years ago had isolated itself entierly from the outer world. The country's nobility wields superior power and regards all foreigners in the country as merely manual laborers or slaves. Complaints are mounting in the country parallel with the progress of modernization as most of the technocrats and engineers contributing to the progress come from Lebanon, Yemen, Palestine and Syria. If the need for human resources persists, the securing of skilled workers from abroad in turn should increase the chances of allowing the entry of extremists. It is possible that ihese extremists in cooperation with the anti-establishment and anti-sheikdom elements in the country will stage an uprising whenever the time seems right to topple the existing system.

K. Which means chances are very high for a coup d'etat in Saudi Arabia?

F. Yes. In Iran on the other hand, some 20,000 students and intellectuals have been jailed since the suppression of the Mossadegh croup in 1953. I know many Iranians in Europe who are mends or relatives of these prisoners. These arenice, decent Iranians who have no relationship whatsoever with the extremist Red Army factions. Even these people when they speak of their country criticize the Shah establishment, saying that the Shah must be toppled for the people's sake. 1 have a strong feeling that something drastic will happen some day in Iran.

K. All the talks seem to suggest that these countries in addition to being pitched against each other face the possibility of an uprising within their own country.

S. Right. And in considering the Arab problems, we ought to follow the pattern of their own way of thinking, as their ethical concepts are very different from those of the Japanese.

F. Arabs on the surface appear to behave "naniwa-bushi"-like (heroic sentimentalism) from the eyes of Japanese. Japanese people tend to approach the Arab people with such an assumption without knowing, however, that their ways are beyond comprehension from the Japanese viewpoint. For instance, if one deemed it necessary to kill his own brother to become the king, he could do it without hesitation which is rather inconceivable from the ethical standards of modem Japanese.

S. The wide gap in ethical concepts is best told by the Arab proverb that "to avoid if possible paying off debts with blood, but sweat is an act of cowardice." This marks a sharp contrast with the postwar Japanese way of thinking which would be that "those who pay off debts with blood are evil. while those who pay off through sweat are good." Obviously, the chances for a civil war turning into an international war are very high considering the Arab cultural attitudes. A good example is the current Lebanese civil war in which one finds it hard to decide which side is fighting which with such outsiders as the Syrian army and the Palestinian guerrillas joining the battle. In view of such propensities inherent with the Arab outlook, there is high possibility that social uneasiness or war in that region would quickly spread among all oil-producing nations when the price of oil increases even more with the consequence of widening the gap between rich and poor.

F. There is a narrow waterway called the Hormuz Straits at the mouth of the Persian Gulf. You see when you get there that the whole area is filled with coral and that since the distance between the islands in the passage and the shore is only a stone's throw, any tanker passing through the straits can be easily sunk by gunfire from the shore. Because of this geographical feature it is a common belief that any country who occupies the area is assured the power to take over the Mideast politically. In this regard it should be recalled that Iran has built the world's largest hovercraft fleet and that six years ago that country occupied the Tunb Island and other adjacent islands in the area by force. Iranian authorities termed the action reconnaissance in force, but actually it was a plain military occupation.
Saudi Arabia knows well that the occupation of that area by any foreign military force will lead to chaos in the country's oil operations and fears that foreign residents in the country, taking advantage of the situation, will add fuel to the uneasiness and disturbances in Saudi society. To prevent such occurrences, Saudi Arabia is pushing three projects for the construction of new pipelines. First is the pipeline that crosses the Arabian Peninsula to reach the Red Sea, second, the pipeline that is directed to southern Yemen, and third the pipeline which heads directly to Oman on the shores of the Indian Ocean. Iran on the other hand seems to hold the same thought and is planning to extend its pipeline to Europe via the Soviet Union. It is interesting to note that this plan has been developed in spite of Iran's traditional feelings against the Soviet Union, the timehonored hostile feelings the Iranians have held against Russia since the days of the Czar.

K. It is reported that Iran has already completed a pipeline for natural gas....

F. The project I spoke of is many times more extensive. Incidentally, we Japanese tend to believe that OPEC (Organization of Petroleum Exporting Countries) is the top oil group, wielding tremendous influences on world politics. This concept is wrong since it is not OPEC but the Soviet Union whose voice carries the most weight. The power that turned the East European countries to satellite states was the Soviet Union's enormous resources of oil - and now they are extending a pipeline which they call the "friendship pipeline" to even France. Italy and West Germany. The Soviety strategy, apparently, is aimed at bringing Western Europe under its control not by military strength but by the control of the valves of their pipeline to the West. NATO of course is not silting idle, and efforts are being concentrated on developing the oil fields in the North Sea. So in a sense, a world war is already under way in Europe between the Soviet "friendship" oil and NATO's North Sea oil.

K. I see. Japanese people in general lack the background to consider matters that way.

Oil Resources Will Run Out Without Fail

F. The third factor underlying the oil crisis in the 80's relates directly to Japan. Although Japan boasts of being one of the world's major economic powers, this is a plain illusion. Without any oil field exploitation projects nor plans 10 search for substitute energies, Japan hardly holds power. For instance, even though Japan boasts of being the world's leading maker of iron and steel products, the products are the equivalent of, say, the cheapest instant noodles sold in the supermarkets. Other advanced nations never use Japanese steel in oil field projects. Japanese products may be good for the making of cans or for lining purposes in the manufacture of automobiles or tankers but are never suited for purposes that require a high degree of specification. Steel products for such sophisticated requirements are bought from either Sweden or Germany. If the quality level is about the same, therefore, they would prefer using South Korean steel products which are less expensive. I believe it won't be long before the Korean steel industry will catch up with Japan, which is symbolic of the weak structure of the Japanese economy.

K. 1 remember Mr. Sakaiya saying there are two factors underlying the oil crisis in the '80s. One is the possibility of war in the oil-producing countries. What is the other?

S. Though not as dramatic as described in the "oil cut-back situation that will develop without fail is the depletion of international oil resources. The Free World's global oil resources, that is, proved oil reserves, are about 560 billion barrels- As the annual output is 16 billion barrels, the RP coefficiency (number of years assured for oil drilling) is approximately 35, suggesting that consumption runs ahead of new deposits being discovered, and so there is a gradual depletion of oil resources. Consumption of oil, though it slightly dwindled immediately after the post-oil shock, has returned to normal levels and is now expected to rise at the annual rate of 3.5% hereafter. Progressive upward consumption of oil will proportionately lower the RP coefficiency which, when it drops under the level of RP 15, will mean that no further increase in oil resources is expectable, according to past experiences.
A good example is the United States which carried out a series of policies to boost the production of oil in the days of the Nixon administration. Oil output dwindled rather than going up. The reason for this is the balance between oil reserves in the country and its consumption, whose RP efficiency hovers at a low 8. The coefficiency denotes that at the present rate of consumption, U.S. resources of oil will be depleted within the next eight years. Obviously, it is impossible to expect increased production in such circumstances.

F. U.S. consumption of oil will carry an important weight in the future world supply-demand picture. Crude oil imported by the United Slates at present is about 5 million barrels daily but it imports oil in the form of light oil, kerosene and jet fuel from Venezuela and Trinidad. So even though its imports when confined to crude oil alone are about the same as Japan, the total amount is two times that of Japan. Against the daily output of 10 million barrels, the United States consumes 20 million barrels each day which means the U.S. while its population is about one-seventeenth of the world population, accounts for about one-third of the world's total consumption, a fact that casts a dark shadow not only on the United Slates but on the free world as a whole. Apparently, President Jimmy Carter's energy policy, based on this cognizance, looks forward to alleviating the pessimistic outlook by cutting back consumption by the American people.
It is practically impossible however, to cut back consumption of oil by 40% as desired by President Carter. The most that can be expected in my opinion is around 10%, meaning the United States will be urged to increase imports even more with the result that the current supply of oil which appears abundant will become extremely tight from the early pan of the '8s. A fierce struggle to secure oil in those years should cause incressant rise in the oil price which Japan may no longer be able to withstand. Such a consequence is the fourth factor underlying the oil crisis.

S. Another point which I feel will bear an important weight is gold. The world's RP coefficiency of gold at present is 17. The price of gold which used to stay at S35 per ounce in the years of the Nixon shock ran up by five times since then while its production remained at the same level with practically no change.
Since the same pattern will occur in the case of oil. the output will start falling as soon it approaches the RP coefficiency of 15. Theoretically, this should happen in the latter part of '80s as deduced from the pace at which new oil resources are discovered and the rate of consumption, but I think that actually this will take place much earlier than generally expected.
The reason for this, though not many people are aware of it in Japan, is the severance of the relationship between the dollar and gold. The dollar to the raw materials exporting countries was valuable because the dollar could be exchanged for gold at will in times of emergency. Most typical of such countries is Nauru which used to save dollars by exporting raw materials and either collecting the interest that accrued from the dollars saved or having it exchanged into gold as the situation demanded.
This relationship disappeared following the Nixon shock when the dollar broke away from gold and world trade now for the first time in its history is being operated with a currency that is backed with nothing whatsoever.

F. It won't be exaggerating to say that the world trade today operates on an oil standard in lieu of gold.

S. Apparently no country will want to save dollars whose value is incessantly deteriorating, especially at the risk of depleting its precious natural resources. For certain, a war to cut back production of raw materials will start, beginning with countries whose raw materials are on the verge of depletion. And I think that this will start in the early half of '80s.

"Snowslide" Phenomenon in Production Cutback

K. Does it include Saudi Arabia? Oil reserves are relatively abundant with that country and there seems no worry at the moment for an imminent depletion of their oil resources.

S. In the case of Saudi Arabia, its relationship with Iran which is already in a precarious state as pointed out by Mr. Fujiwara comes to carry an important weight. If Saudi Arabia in coordination with other oil-producing countries resorts to cutbacks in production, the oil price will spiral upward with the consequence of inviting a grave confrontation between countries wanting to cut back output and countries wanting to raise it.

K. Let me put it this way. Since the world oil resources are limited and the supply will deteriorate sooner or later, the oil-producing countries one day will be compelled to cut back their production. Kuwait for one which used to pump 3 million barrels of oil daily has dropped the daily output to 2 million barrels since the October 1973 war. Obviously, what forced Kuwait to cut back its output was the finding that the actual amount of oil reserves was smaller than officially estimated before. The same tendency may spread to other oil-producing countries. The result could be a "snowslide" phenomenon for decreasing production, say around the early half of the '80s.....

S. In addition to this, another problem will arise among the oil-producing countries around 1980 - that is, they will be facing a deadlock in their industrialization projects. Then oil-producing countries, to maintain their economic level, will be forced to devise measures to extend their oil resources. Furthermore, as there will be no need to continue investments for industrialization, the necessity for earning dollars by increasing the oil output will also diminish. With the reasons for cutting back output overlapping in the early '80s, the oil-producing countries will resort to any means possible to reduce oil output. The result will be that the price of oil should spiral upward uninterrupted. As the price advance will keep the earnings of the oil-producing nations unchanged, they will not bother to lower the output of their oil further; this vicious cycle on the part of oil-importing countries is also expected to take shape in the early '80s.

F. And still another thing - in the '80s the oil-producing nations will not be able to pump oil at the pace of today. Up to the present, oil could be obtained by the primary process or by the well's own jet power. Saudi Arabia may still be able to depend on the primary self-spout drilling method for its oil but not so with Iran and other oil producers who will be forced to depend on a secondary method which consists of pouring water or gas into the wells to push up the oil. The energy required for this process equals 30-40% of the oil pumped up as compared to 5-10% in the case of primary drilling. What's more. in the United States even a tertiary method is being considered. This is an extremely difficult oil drilling technology which aims at pushing up oil with the help of chemicals and kerosene, This process leads to a dilemma that mankind will be required to pour more and more energy into acquiring t the source of energy it will so desperately need.

K. Supposing that a warlike competition for cutting back oil output takes shape in the early half of '80s, what do you figure will be the amount securable by Japan?

S. James Akins, former U.S. ambassador to Saudi Arabia, once predicted that oil will be supplied on a quota system in the considerably early part of '80s, each country receiving its percentage quota in accordance with an international agreement. How pessimistic the prospects of oil as an energy source actually are is best told by the ambassador's remarks. The only quota system which mankind agreed on from a global scale was for the catching of fur seals and whales whose extinction has been feared. When the oil supply becomes that tight, there will be a ceiling for energy supply which in turn will fix the scale of the world economy at a certain limit. No nation in that event may be able to expand the size of its economy.

F. That possibility is very high.

S. The extent to which substitute energies may be employed will become the basic problem facing the economy in that event. Conditions surrounding Japan in that respect are extremely discouraging.

K. There is an optimistic view that natural gas will be considerably exploited as a substitute for petroleum. What is your opinion?

F. The use of natural gas has been actively promoted from as early as the '60s in the United States, particularly in connection with the pollution issue since natural gas is very clean. The first intermediary, substitute energy to be considered will be natural gas, relieved and followed then in the order of coal, liquefied coal and hydrogen gas. Nuclear energy led by high speed breeders should then take over as the world enters the 21st century.

S. But the conditions surrounding natural gas are entirely different in the United States and in Japan. And, it is said, if output of natural gas continues to rise at the present rate, no increase in output is foreseeable in the early half of '80s. Natural gas holds only short-range possibilities as an energy resources. Reserves will last for only 10 years after all oil has been depleted.
The second drawback for natural gas is the extreme difficulty in storage. That is, it requires being frozen to minus 160 degrees centigrade for liquefaction. The cost for storage consequently becomes extremely expensive. This energy, therefore, may suit nations such as the United States which abound in natural gas resources but not with countries such as Japan whose resources of natural gas is practically nil. For instance, if the use and dependence on natural gas as city gas were set at more than 30%, a disastrous state would result when disturbances spread throughout the Middle East. The risk of a crisis as the kind resulting from oil-cutback exists constantly with natural gas. The use of natural gas will continue to rise in quantity no doubt, but I believe its use will be kept within a certain ratio in the country's energy policy.

Second Thoughts on the Use of Coal

K. Then what do you think is the energy that will supersede natural gas as substitute energy?

S. Coal is the source of energy on which all countries of the world place the greatest expectation. However, its rate to the overall consumption of electricity generated averages a low 40% on a global scale, or only 30% in the case of Japan. The other 70% in the case of Japan is secured through a system which uses liquid energy for generating electricity. As it is extremely difficult to convert or return to the system using solid type energy, coal must be either gasified or liquefied before actual use. These processes cost a great deal which boosts the price of energy thus obtained to $20 per barrel in terms of crude oil.

F. I figure that the price will be even higher, probably three times that of North Sea oil.

S. Prices of North Sea oil range widely depending on the site of wells, from $6 per barrel to $12.

K. What do you think will be the price of crude oil in the early '80s?

S. That's a difficult question to answer. However, as it is said, the price of any commodity is determined by the cost of the last supplier. Compared to the cost of 12 cents per barrel with oil that was drilled in the Kauar and Furgun oil fields, the oil price of that drilled in North Sea's B2 area, which is the last supplier in the case of petroleum, is $12 per barrel at present. When it becomes necessary to drill underneath thick layers of ice or much deeper into the sea bottom, the price of North Sea oil should rise further. I have the feeling that the price of oil spirals upward at a speed several percentage points faster than for general commodities.

F. The oil majors seem to anticipate that the price of crude oil around 1982-1983 will be three times higher than at present. 3

K. Which means $36 per barrel?

F. That is the majors' prediction. I myself figure the prices will be higher by five times.

S. With me, I figure that the price will be $20 per barrel on the premise that the prices of other commodities remain the same. Apparently, the price of oil will go up if the prices of other commodities soar upward.

K. Which means around $30 per barrel?

S. About that. I feel.

K. At any rate, a grave oil crisis is ahead of the country according to the views of you two. If the advent of such a crisis is inevitable, what do you think will be the influences on Japanese society?

F. Plainly speaking, some sort of social uneasiness will prevail to be sure. Against such a background, it may happen that some natural disaster, say a great earthquake or a raging fire, will befall the nation's economic setup and provide a chance for the Self-Defense Forces to carry out a coup d'etat and suspend the Constitution and eventually establish a highly totalitarian administration. I have the hunch that the flow of Japan's postwar history is heading toward such an eventuality.

S. Impossible. Mr. Fujiwara's assumption is fantastic and I think you are going too far (laughter).

(continued in next issue)



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