The quake and tsunami knocked nuclear plants with 11GW of generating capacity off line, and another 1.1GW nuclear plant was shut for maintenance at the time, leaving 25pc of Japan's nuclear capacity shut after the disaster. Tokyo Electric Power's (Tepco) 4.7GW Fukushima-Daiichi nuclear power station is causing most concern following explosions and radioactive leaks.
Tepco shut an additional 12 thermal generation after the earthquake, including three gas-fired combined cycle units. And utility Tohuko closed nine thermal power generation units because of the quake, including two gas-fired combined cycle units. But it is unclear how badly damaged these units are.
The loss of nuclear units accounts for a high percentage of base-load capacity. This is in addition to widespread damage to other critical power infrastructure such as transmission lines and transformer stations.
Tepco and other utilities have warned customers to expect rolling blackouts of three to four hours every day, a measure that will add to the considerable toll this tragedy has had on Japan's GDP.
Indications about likely outcomes of the nuclear shutdowns can be gleaned from 2002-03, the last time the Japanese power industry was affected by such widespread shutdowns, and 2007-08, when Tepco's 8.2GW Kashiwazaki-Kariwa plant was closed by quake.
Tepco was forced to take 17 nuclear power plants off line by April 2003, after it emerged that the company had falsified safety records. The result of the 2002-03 shut-ins was that demand for fuel oil and crude for burning in power plants rose by 54pc and 33pc year on year, as idle oil-fired power generating units were pressed into service. Fuel oil and burning crude demand rose by almost 300,000 b/d, compared with a year earlier, from mid-2002 until a year later.
The smaller Kashiwazaki-Kariwa nuclear shutdown resulted in a similar spike in oil consumption, averaging over 200,000 b/d, as well as smaller increases in coal and LNG demand.
This time is likely to be no different. Some new gas-fired capacity has been added and existing coal-fired plants can be run at higher utilisation rates, but Japan will be forced to rely once again on older fuel oil and crude-burning generating units in the short and medium term.
Argus estimates that making up for the lost nuclear capacity following the events of 11 March will require additional fuel oil and crude demand of up to 300,000 b/d. But this extra oil demand will be tempered by the damaging effects of the natural disasters on Japan's economy. Lower GDP growth over the next six months would pull down overall oil demand growth, but reconstruction efforts would then kick in, leading to rising demand in the fourth quarter.
Japan faces some problems in securing adequate supplies of LSFO and direct-burn crude. During the last major nuclear crisis, Indonesia was a regular exporter of Japan's preferred grade of fuel oil — low-sulphur waxy residue (LSWR) — as well as burning crudes, such as Minas. But Indonesia is now a net crude importer and rarely exports LSWR or Minas in significant quantities. Indonesian state-owned oil company Pertamina formally asked Argus and other price reporting agencies to stop assessing some grades of LSWR late last year because it was halting exports.
Alternatives to LSWR face environmental hurdles. The Japanese government imposes a 0.5pc limit on sulphur content in fuel oil for burning by power generators, and they tend to use 0.3pc sulphur fuel oil. High-sulphur fuel oil (HSFO) typically contains up to 3.5pc sulphur, far above Japan's anti-pollution limits. Conservative utilities will be reluctant to run HSFO in their boilers without significant and lengthy trials, even if the government relaxed regulations.
Prices of LSFO have already risen as exporters struggle to find suitable qualities for the Japanese market. In addition to strengthening LSFO prices, the increase in demand for oil for power generation from Japan will tend to support heavy crude, from which more fuel oil can be made, especially heavy sweet crude, with low sulphur content.
As a result, oil price rises caused by extra Japanese demand are unlikely to lead to a dramatic widening of premiums for middle distillates to heavier products, or for light crudes to heavy grades. This makes it different from the global price rally of mid-2008, in which diesel at $200/bl reached premiums of $100/bl to fuel oil when benchmark sweet crude prices were at almost $150/bl.
The bottom line is that Japanese demand for crude and fuel oil for generation will add upward pressure to already high oil prices, with the rise spread across many grades of crude and fuel, rather than being led by one particular product.
Added to the uncertainty surrounding the fuels market in Japan are questions about how the private sector will respond to the planned rolling blackouts. Major exporters such as vehicle manufacturer Toyota are expressing concern about the impact of power cuts on their businesses. Japan's power grid and generating base has historically been highly reliable, so these fears should be allayed as soon as extra fuel supplies arrive.
If the power grid fails to recover quickly, and blackouts and power shortages continue for a long time, industry and commerce may revert to back-up generating capacity. This was not the experience in the 2007-08 and 2002-03 nuclear shutdown episodes, but resort to diesel-fired back-up capacity has marked spikes in Chinese demand during power shortages.
In the first stage of Japan's disaster recovery, lower economic activity will cut oil demand levels — especially for transport fuel and naphtha — partly offsetting the rise in fuel oil and crude consumption. But oil demand will rise faster in the second half of this year, as reconstruction efforts boost GDP. In addition to the additional fuel oil and crude demand for power, the economy will need more diesel for construction work and transportation. The increase in transport sector demand is likely to spill over into gasoline and jet fuel consumption.
Damage to Japan's refineries will in some cases take months to repair. Several have been seriously damaged, while others are expected back on stream relatively soon. Countries with excess refining capacity are likely to benefit from Japan's misfortune.
The initial reaction to the quake and tsunami has been a drop in oil prices, as markets concluded that oil demand would be lower in the short term, and perhaps in the longer term because of the economic fallout. But Japan's economic problems over the last 20 years of stagnation have had little knock-on effect on most other economies, so fears about lower global GDP growth rates and oil demand growth may be overstated.
It looks increasingly likely that Japanese demand for fuel oil and crude may push up prices, as utilities struggle to keep the lights on in Japan to help the country recover from this huge disaster.