Japan Crude Cocktail

This Petroleum Association of Japan (PAJ) was established in 1955,[6] around the time of the JCC development. The PAJ consists of 11 refiners and primary distributors in Japan.[7] They are responsible for providing central information on the petroleum industry for the public, as well as advocating, researching and enhancing communication among the public and oil companies.

The 11 refiners and primary distributors of the PAJ are Idemitsu Kosan, Cosmo Oil Marketing, TOA Oil, ENEOS, KASHIMA Oil, Kygnus Sekiyu, Taiyo Oil Company, Showa Yokkaichi Sekiyu, Fuji Oil Company, Seibu Oil and Cosmo Oil Company.[8]

The PAJ publish a range of oil statistics monthly on their website, including the JCC.

Liquified Natural Gas (LNG) contracts are legal agreements for the sale and purchase of LNG between sellers and buyers[9] LNG is an energy commodity, just like crude oil, allowing for a price relationship between the two.[10]

LNG contract pricing has been based on the JCC index since the 1970s.[11] LNG was initially introduced in Japan as an energy substitute to reduce the country’s high dependence on oil.[12] In turn, this guaranteed that gas could remain competitive with oil by having similar pricing. The JCC is used as the pricing index in LNG contracts mainly in Asia Pacific (APAC) and Europe, the Middle East and Africa (EMEA).[2] For example, the index is heavily used in China, South Korea, India, Taiwan.[3]

The JCC pricing index is based on the average price of customs-cleared crude oil imports into Japan. The Ministry of Finance sector within the Japanese government publishes the data used to calculate the JCC each month.

$${\displaystyle JCC={\frac {\$X}{Y}}}$$

$X = The total value of customs cleared crude oil imports

Y= The total volume of customs cleared crude oil imports

The JCC figure is then used to generate the price of LNG contracts using the following formula.[13]

$${\displaystyle PLNG=a\times JCC+b}$$

P_LNG = The Cost, Insurance and Freight (CIF) price of LNG

a = The extent to which the P_LNG changes in response to changes in the JCC, also known as the ‘slope’

b= The additional freight charges, discounts or premiums incurred. This constant term is determined through contract negotiations.

The Yom Kippur War between Israel and Arab nation resulted in the first oil crisis internationally. In October 1973, the Organisation of Petroleum Exporting Countries’ (OPEC) started an oil embargo, targeted at nations thought to be supporting Israel during the conflict. The countries primarily targeted were Japan, US, Canada, UK and the Netherlands. Originally, oil exports from Arab nations were to be reduced by 5% monthly until Israel met the demands of the Arab nations.[15] However, in December, a full embargo was put in place, restricting all trade of oil. Following the events of this first oil crisis, Japan became more aware to their vulnerability to external oil prices and began focusing on increasing their self-dependence on their own natural resources and energy sources. Their whole oil industry was redesigned.

The first oil crisis resulted in recession, inflation and a trade deficit in Japan as all purchasing power was removed from Japan and given to the Arab oil producing nations.[16] In regard to the JCC, the ban on supply heavily increased import prices. Crude oil import prices rose by 300% globally. In 1970, almost 85% of Japan’s crude oil imports came from the Middle East.[17]

The Global Financial Crisis 2007-2008 (GFC) was one of the greatest periods of extreme economic stress since the 1930s. Thousands of businesses suffered heavy losses and/or bankruptcy, with millions of people losing their jobs. The intense period of recession’s influential impact on the JCC is highly notable, observed in the first spike seen in 'Crude oil import Prices in Japan 1980-2019' graph.

Worldwide, oil demand heavily relies upon income rather than market demand.[18] When Gross Domestic Product (GDP) is in elevated periods, disposable income is greater, allowing for increased purchase of goods. This creates dependent relationship oil consumption growth rates have with GDP growth rates. It can be observed that in periods of high GDP growth rate, oil consumption growth rates soon also increase. The same can be said for decreases in GDP grow rates.

The period of 2008-2009 saw a decline in both GDP growth rate and oil consumption growth rate in Japan. JCC spiked in 2008 at $100.98 USD/bbl before dramatically declining in 2009 to $61.29. This aligns with the economic concepts of recession. In times of recession, demand dramatically reduces, driving down prices for suppliers

In the recent years leading to the GFC, China’s crude oil imports exponentially increased. With greater economic resources, China began to dominate the consumption of crude oil, reducing crude oil supply available and thus consumption for other nations. From 2005-2007, Japan’s crude oil consumption per day reduced by 318,000 barrels.[18] Limited supply, drives prices up, reflected in the 2005-2007 JCC increased from $51.57 USD/bbl to $70.09 USD/bbl.

Fukushima Disaster 2011 at Nuclear Power Plant

In March 2011, the Tohoku earthquake and tsunami hit the east coast of Japan. The generators at the Fukushima Nuclear Power plant nearby shut down automatically after detecting the earthquake. [19]The shortly followed tsunami flooded the nuclear power plants, destroying the reactors and releasing radiation. This destruction of the nuclear plant is known as the Fukushima Daiichi Nuclear Disaster.[20]

All 50 reactors were recorded as offline by 2012. One fifth of Japan’s energy generating capacity was lost as a result.[21] The loss of domestic energy sources created immense pressure on the Japanese economy as demand for LNG imports rose substantially.[22] In the initial years and immediately after the disaster, LNG imports accounted for 40% of Japan’s power.[4] The sudden steep incline in demand rapidly drove prices. From 2010-2012, JCC rose from $79.43 USD/bbl to $114.75 USD/bbl.

It wasn’t until 2015 when some of Japan’s nuclear plants were restarted, that JCC prices to return to a lower price.

In 2020, the COVID 19 exponentially infected all parts of the globe, creating an international health outbreak and pandemic. Many nations were sent into lockdown as a result of the health risks. The World Bank stated that the "global economic shock of the COVID-19 pandemic has driven most commodity prices down and is expected to result in substantially lower prices over 2020".[23] This is due to the mass mandatory quarantine that restricted any movement of people, domestically and internationally. Lockdown created a halt in economic activity as people were unable to leave home to attend jobs or to support the economy (e.g. tourism, travel, shopping),[24][1] affecting both supply and demand. Inability for movement impacted the oil industry heavily as travel restrictions correlate to a cut in demand for jet fuel.[25] The closure of factories and reduced commute amid the crisis further reduced need for fuels.

In Japan, crude oil imports dropped by 25% in 2020, with only 2.28 million barrels per day imported in May 2020.[26] This figure is the lowest it has been in 53 years. This is a direct result of the abrupt freeze of production and supply amid the pandemic. Price of the JCC during the pandemic can be observed in the table generated below.[27] Prices fell to $24.55 USD/bb in June 2020 as demand for crude oil in Japan dramatically declined.