News and current affairs programmes are focusing on the earthquake, measuring 8.9 on the Richter scale, that occurred on the seabed close to Urayasu and triggered a powerful tsunami that hit the north-eastern part of Japan. This was undoubtedly the biggest earthquake in Japan’s history, with the rupture extending across four segments of the earthquake zone that runs parallel to Japan’s eastern coast. Seismologists both inside and outside Japan said that such a scenario had not been contemplated.
While the effects of the tsunami are significant, shake damage was also considerable, with many reports of collapsed buildings and streets strewn with rubble. It is estimated that about 70 per cent of all residential buildings in the affected areas are constructed of wood and about 25 per cent of concrete. Commercial construction is more than 50 per cent concrete, about 35 per cent steel and other metals and less than 10 per cent wood. Buildings in Tokyo – some 370km away from the epicentre – shook visibly, sending people into the streets. Residential structures in Japan are well constructed and are generally resistant to earthquakes but the devastation is shocking and has badly affected the Japanese nation. It is estimated that so far about three or four million of the 100 million population have been affected directly and may be currently homeless.
Even the price of oil was hit as last week, down $3.37 to $97.82 a barrel in electronic trading on the New York Mercantile Exchange. In London, Brent crude was down $4.58 at $109.09 a barrel as demand from Japan plummeted.
The event also caused serious damage to the Fukushima-Daiichi nuclear plant, to the extent that at the time of writing there have been explosions in three out of the four reactors that were in use and the cooling system has failed. According to Jiji Press, TEPCO (an operator) said a fuel rod meltdown at the plant could not be ruled out as the levels of cooling water had fallen sharply. Naturally, the Japanese authorities have been battling around the clock to contain the damage by trying to cool down the reactors. Last week, a visibly shaken Prime Minister Naoto Kan informed the nation in a television broadcast that the radiation that had spread from four reactors was enough to “impact upon human health” and the risk of more leaks was “very high.” An exclusion zone of 30 kilometres in circumference has been established, and over 150,000 local residents have been advised to stay indoors to avoid the risk of radiation sickness.
Sadly, the massive earthquake has led to untold damage to life and property. Early estimates for the losses to insurers and re-insurers around the globe range from $10 to $50 billion. Another question that arises is how badly has the re-insurance industry – which will surely have to respond to many claims in the near future – been affected. In a short period of six months, it has faced three catastrophes with floods in Australia, an earthquake in New Zealand and now an earthquake and tsunami in Japan; the bill for re-insurers is already looking expensive.
It is, of course, the re-insurance companies, which act as insurers of last resort for general insurers, that will be making up for the majority of losses. These companies usually take up the cost associated with an event when the claim to be settled is high. In fact, the disaster in Japan has sent the stock value of re-insurers plummeting, less than a month after the sector was hit by the deadly earthquake in Christchurch, New Zealand. It will be several months before the final cost is known, but several re-insurance companies have already said it will be “an expensive event”, according to Christian Muschick, an analyst with the private German bank Silvia Quandt. Last week, the re-insurer Munich Re said the earthquake in New Zealand would cost it about one billion Australian dollars (€726 million).
The cost of the latest disaster to Japanese insurers might cause them to quickly repatriate overseas funds, according to Schneider FX analyst Stephen Gallo. This will result in the yen rising higher and in turn further raise the nominal cost of the catastrophe.
Having briefly reviewed media reports on the catastrophe, is it reasonable to conclude that the use of nuclear energy as a substitute for other modes of electricity generation is too risky? It is no exaggeration to say that such an unfolding disaster has sparked a reaction against the use of nuclear energy, which had previously been sold as a clean alternative to coal and fuel. In fact, public distaste for nuclear power generation is to a large extent a reaction to past events. The ghosts of the Chernobyl disaster still haunt us as an unmitigated horror, even considering that it was hardly the perfect example of how nuclear reactors should be built. It was a flawed plant run by poorly-trained technicians, and the crews in charge of the safety checks did not adequately communicate with others.
However, a number of European countries are seriously considering blocking plans for funding nuclear reactors, while in Washington, legislators have called for a slowdown in nuclear development, even though it is well known that President Barack’s declared policy is to increase nuclear power generation as part of a US effort to reduce the nation’s dependence on coal and imported oil. Quoting the US Nuclear Regulatory Commission, 21 American companies are seeking permission to build 35 nuclear power plants, from New York to Florida. In Europe, with the German state elections to be held at the end of this month, it is expected that Chancellor Angela Merkel will be under pressure to decide the date for the eventual closure of a number of reactors. The media reported that more than 60,000 people took to the street in Stuttgart, the capital of Baden-Württemberg, in protest against Merkel’s deal with the energy industry to extend the lifespan of nuclear power plants by an average of 12 years.
So what are the alternatives to nuclear energy, if one wants to generate clean and inexpensive electricity? There are various alternative forms of power generation – wind, solar, fossil fuels and geothermal – but they each have their drawbacks. Wind farms produce adequate energy but take up an enormous amount of space, often in a scenic area, so there is a high ecological cost. Solar panels also take up wide spaces and are reputed to be inefficient on a large scale. Coal and fossil fuel-burning plants are quite commonly used to generate electricity but are high in carbon footprints. Finally, geothermal is a very effective form of power generation but it has a disadvantage: it is also very localised and quite dangerous. To defend the use of nuclear power, one has to admit that it has been called a clean and relatively safe source of energy because the plants do not release carbon dioxide. Critics retort that, as nuclear power plants use uranium for fuel, it is obvious that the process of mining uranium releases high amounts of carbon dioxide into the environment. Sceptics lament that such plants constantly emit low levels of radiation into the environment and there is a difference of opinion among scientists over the effects caused by constant low levels of radiation.
To conclude, it is safe to say that there is no disagreement that clean sources of energy are vital to the environment. The disagreement lies in what type of generation method to use. Supporters of nuclear energy argue that it is an efficient source of energy that is easy to implement and carbon emission free. Critics who recall the damage suffered in the aftermath of the Chernobyl incident prefer alternatives such as the combined use of solar, wind and geothermal energy. It is fair to say that there are still environmental issues with solar, wind and geothermal energy, but they are not as great as the issues over nuclear or fossil fuel plants. Choosing the best option is not easy for politicians and, the debate will doubtless continue.
Finally, let us hope that the Japanese people will find some solace in the number of international rescue and humanitarian teams that are providing assistance to mitigate the pain of such a catastrophe.
George Mangion is a partner in PKFMALTA, an audit and business advisory firm.
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