The Political Economy of Substitution Policy: Japan's Response to Lower Oil Prices

Abstract

THE OIL CRISES OF THE 1970s had a significant impact on Japanese energy policy.' As a country with a high reliance on imported oil and a high sensitivity to security matters, Japan commenced a long-term program of using substitutes for oil such as nuclear, coal, LNG and new energy technologies which aimed to reduce the dependence on imported oil and protect Japan against further increases in oil prices and unexpected interruptions in oil supplies. This program was market-conforming but allowed for a significant role for government in longer term planning processes. Japan has been relatively successful in achieving these energy objectives and has been able to increase the share of alternative energy in primary supply. The decline in international oil prices in 1986 brought market and political pressure for change in Japan's energy diversification policy. It exacerbated existing inter-fuel competition in energy markets between oil and non-oil sectors and intensified conflict over short-term economizing and long-term energy security objectives. The oil industry and major industrial users of oil exerted considerable pressure on the Ministry of International Trade and Industry (MITI) to change current energy policy and allow market forces to dictate policy outcomes. MITI and the major alternative energy producers opposed policy modification for fear that a diversion from current policy would impede longer term objectives of reducing dependence on imported oil. The outcome of this conflict was a clear victory for the proponents of alternative energy. Subsequent policy statements have re-affirmed continued diversification as a dominant energy policy objective.