Could Japan Spark a New Asian War?

Marin Katusa, Chief Energy Investment Strategist

Last Sunday in Japan, the Liberal Democratic Party (LDP) completely crushed its main competition in the elections, defeating the ruling Democratic Party of Japan. The LDP took 294 of the 480 seats that were available, handing Prime Minister Yoshihiko Noda an absolute shellacking. The leader of the LDP, former Prime Minister Shinzo Abe, returns to power after a five-year hiatus.

To most people outside of Asia, this may not seem to be important news, but a major LDP victory in Japan could have global economic and political consequences.

Shinzo Abe and his allies now have a super-majority in the lower house of parliament. And Shinzo Abe is known to be tough on China. That attitude could be very dangerous when Sino-Japanese tensions are already at an all-time high.

China and Japan are currently embroiled in one of the most serious disputes in East Asia of the past few decades: the fight over the uninhabited Senkaku (Diaoyu) Islands in the East China Sea (we have previously written about the issue). The fight is not just for the islands themselves, but for national pride and fishing rights... as well as the trillions of cubic feet of natural gas that is said to be underneath the islands.

During one of Abe's first broadcasts after being assured of victory, he declared that "China is challenging the fact that [the islands] are Japan's inherent territory and our objective is to stop that challenge." Them's fighting words.

Abe seeks to not talk the talk but also walk the walk: he is seeking to revise the current war-renouncing Constitution of Japan in order to bolster Japan's military capabilities and be able to exercise the right to collective self-defense. If he is successful in this regard, he could cite this right in order to send out actual armed forces to the Senkaku Islands, which will surely elicit a response from the Chinese.

And what is to say that something cannot go wrong during this back-and-forth between the Japanese and the Chinese, leading to a full-scale confrontation?

The ongoing drama over the Senkaku Islands and the potential Sino-Japanese conflict is just one of a few "black swan" events that could happen:

  • Egypt is on the brink of civil war
  • Saudi Arabia's leader is nearly 90 years old and its succession rules practically beg for trouble
  • Putin is seeking to increase his energy dominance not only in Europe, but the rest of the world (in fact, we are discussing how investors could profit from this "Putinization" in the upcoming Casey Energy Report)

As less and less easily accessed oil needs to be used by more and more people, the price of oil has nowhere to go but up.

These global geopolitical black swans will only make the jump even more dramatic.

So with all that is going on in the world, shouldn't you do your portfolio a favor and place your money in energy?


Additional Links and Reads

In Iraq, Exxon Oil Deal Foments Talk of Civil War (Washington Post)

Tensions between the Kurds and Iraq escalate with supermajor Exxon right in the middle. It is no secret that Exxon has chosen its side, publicly expressing its interest in leaving the Iraqi West Qurna-1 project while preparing to drill in Kurdistan. Iraq has made it clear that any drilling will be met with force. It will be very interesting to see the United States' response, because this issue is no longer company-specific.

Libya to Sweeten Terms for Foreign Oil Companies (Reuters)

With Muammar Gaddafi removed, Libya is now prepared to open its doors wider to attract foreign investment. During Gaddafi's reign, Libyan production decreased due to the withdrawal of capital and employees by Western companies because of the fear of nationalization and unprofitable operations. Libya must make its fiscal system more attractive to compensate for the lingering political risk and to entice the major players of the world to come back.

Investment in Canada's Natural-Gas Sector Set to Rival the Oil Sands (Financial Post)

It is no secret that there is currently a glut of natural-gas supply in North America; however, people fail to realize how important natural gas is to bitumen producers in northern Alberta. Moreover, the Canadian government's approval of the acquisition of Progress Energy by Petronas implies that there is full support for exporting liquefied natural gas out of British Columbia. This news, accompanied by the market catching up to production cuts and inventory declines, means that another interesting year for natural gas in North America is ahead.

Dec 18, 2012