War in the Persian Gulf means volatility in the global energy market |
Last month’s U.S.-Israeli strike on Iran and the subsequent spike in energy prices serve as a stark reminder that a stable supply of oil and natural gas is essential to economic development, rising living standards and industrial competitiveness. When supply is disrupted, the effects are immediate: Inflation accelerates, growth slows and social stability is tested.
The current conflict in the Persian Gulf has effectively closed the Strait of Hormuz, a vital chokepoint through which about 20% of global oil consumption passes. Governments worldwide, including Japan’s, have been forced to respond under severe time pressure, while media coverage has at times been fragmented and contradictory. As markets absorb these developments, crude prices have swung sharply and equity markets have grown increasingly volatile.
Although Tehran has signaled it may allow “Japanese-related ships” to pass through the strait — a route that carries about 93% of Japan’s crude imports — the situation underscores a broader reality: Energy security is inseparable from national strategy. Crafting effective policy requires understanding the structural transformation of energy security, its drivers and its emerging risks — factors often underestimated by Japanese firms.
Energy prices beyond political control
Energy is ubiquitous, yet extraordinarily difficult to control. In his January 2025 inaugural address, U.S. President Donald Trump pledged to “drill, baby, drill,” signaling a push to lower fuel prices through expanded fossil fuel production. But prices are shaped by a complex interplay of geopolitics, geoeconomics and macroeconomics — including conflict, sanctions, supply chains, exchange rates and investment conditions. Even a hegemonic power cannot dictate outcomes unilaterally.
If oil prices fall too far, shale production becomes uneconomic, tightening supply and triggering a rebound. At the same time, declining renewable energy costs can weaken incentives for fossil fuel expansion. For Japan, which remains heavily dependent on imports, such volatility represents an external constraint beyond domestic control.
Japan’s structural vulnerabilities
Japan’s lack of natural resources has long defined its energy strategy. Since the oil shocks of the 1970s, policymakers have emphasized efficiency, supplier diversification, long-term contracts and strategic stockpiling. Yet rising geopolitical risk — including Russia’s invasion of Ukraine and tensions in the Persian Gulf — has exposed the fragility of this system. Energy remains an instrument of hard power.
Japan’s energy self-sufficiency rate stood at just 16.4% in fiscal 2024. Fossil fuels account for more than 80% of its energy mix and over 90% of crude imports come from the Middle East. Annual fossil fuel imports exceed ¥20 trillion, representing a substantial outflow of national wealth. Even nuclear power, often treated as quasi-domestic, depends on imported uranium — an underappreciated vulnerability.
Energy security is no longer a peripheral issue; it is central to both national strategy and corporate decision-making.
China’s strategic position
Energy security now extends beyond fuel. As decarbonization accelerates, supply chains for renewable equipment, batteries and critical minerals have become equally important. Disruptions can affect not only fuel availability, but also grid reliability and cybersecurity.
China has pursued a state-led strategy that combines domestic resilience with global dominance. Its wind and solar capacity exceeds one terawatt and Chinese firms lead global markets in solar modules, batteries and mineral processing. By strengthening its own autonomy while increasing global dependence on its supply chains, China has aligned energy security with industrial competitiveness.
For Japan, this presents a dual challenge: Decarbonization risks deepening reliance on Chinese supply chains even as competition intensifies. Japanese firms must map dependencies while leveraging strengths in high-efficiency technologies, grid stabilization and power control systems — areas where they retain a competitive edge.
Rising electricity demand
Japan’s 7th Strategic Energy Plan highlights the need for affordable, low-carbon electricity to sustain competitiveness amid digitalization and the green transition. Expanding data centers and semiconductor fabrication — both energy-intensive and strategically important — require stable, high-quality power at globally competitive prices.
Projections by the Organization for Cross-regional Coordination of Transmission Operators indicate electricity demand may begin rising again. With heat waves and cold spells already straining supply, an AI-driven surge could further tighten reserve margins.
The current political environment offers an opportunity. Following the ruling Liberal Democratic Party coalition’s electoral victory, policymakers have a window to translate long-term strategy into concrete action.
Strategic imperatives for Japanese firms
Despite limited domestic resources, Japan has built significant resilience, particularly in fossil fuels. The country maintains roughly 250 days of petroleum reserves across government and industry, providing a buffer even in the event of prolonged disruption in the Strait of Hormuz.
However, aging power-generation and refining infrastructure, along with declining depreciation, suggest weakening capacity for capital renewal. In renewable energy, key systems — including grid reinforcement, storage, balancing capacity and supply chains for critical materials — remain underdeveloped, delaying investment.
In this environment, Japanese firms should adopt a dual strategy. First, strengthen strategic autonomy by diversifying sources of fuel, electricity, equipment and critical minerals. Second, enhance strategic indispensability by investing in technologies — such as renewable integration, energy efficiency, grid stabilization and advanced control systems — that are difficult to replace.
This shift requires viewing energy investment not as a compliance cost, but as a strategic imperative tied to security and competitiveness. Companies must reassess supply chains, update business continuity plans and strengthen governance through scenario analysis.
Japanese firms have long assumed stable energy supplies. With no clear end to tensions in the Persian Gulf — and the risk of further escalation — that assumption is no longer tenable.
Treating resilience investments as optional invites strategic delay. Energy must instead be recognized as a core strategic resource, directly linked to geopolitical risk and industrial competitiveness. How companies integrate procurement, investment, governance and risk management into medium-term planning will increasingly determine their ability to sustain growth in a more volatile global energy landscape.