Soaring electricity prices and surging import costs: Japan’s energy dilemma and reflections amid the U.S.-Israel-Iran conflict

We must strengthen alternative routes for Middle Eastern energy imports. The reserve system is functioning well, but still has room for improvement. Liquefied natural gas (LNG) is not yet a problem—but we must prepare for future emergencies. Asia’s vulnerability has become evident, urgently requiring regional-level cooperation and concerted efforts. 1. Energy security policies have helped Japan cope relatively well with the Iran crisis. Although Japan remains highly dependent on energy imports from the Middle East, the impact of the Iran crisis has thus far been effectively contained. Decades of energy security measures implemented since the first oil crisis in 1973 have played a crucial role. At the time of the attacks, Japan held 254 days’ worth of petroleum reserves—providing precious time to diversify imports of liquefied natural gas (LNG) and liquefied petroleum gas (LPG) from the Middle East, thereby mitigating the shock caused by a potential closure of the Strait of Hormuz. Simultaneously, maintaining domestic refining capacity ensured sufficient supplies of gasoline, diesel, and other petroleum products. 2. Several security vulnerabilities have emerged and must be addressed. Prime Minister Sanae Takaichi has instructed the Japanese government to formulate a policy package by the end of August to enhance the resilience of Japan’s energy system against these vulnerabilities. While the specific contents of this package remain unclear, I would like to share with you the measures expected to be included—and also highlight certain unresolved issues that may not yet be part of the package. 3. Naphtha has been the greatest concern—and concrete action is indeed required. Prior to the Iran crisis, naphtha—serving as a bridge between crude oil and petrochemical products—was known only to a small circle of industry insiders and remained largely unknown to the general public. Today, however, naphtha has entered everyday vocabulary. Concerns over its supply stability have already disrupted supply chains for numerous manufactured goods. In the early phase of the crisis, Japan sourced 40% of its total naphtha consumption from the Middle East, yet no reserve system existed for it at the time. Japan’s leading bathroom-system supplier temporarily suspended order acceptance due to shortages of naphtha-derived chemicals—delaying construction timelines for many homes. Multiple manufacturers and contractors complained about shortages of thinners, essential for applying paints and coatings across various products and construction projects. The most striking change was the shift of packaging for Japan’s best-selling potato chips from colorful designs to black-and-white ones—officially attributed to concerns over paint supply shortages. Through intensive efforts by the Japanese government and industry to secure imports of naphtha and its downstream chemical products, such disruptions were alleviated. Yet awareness of naphtha’s vulnerability has become so acute that naphtha-related measures are inevitably destined to form part of the new policy package. A naphtha reserve system existed until 1993; it was abolished under pressure from the chemical industry, which viewed it as a burden on international competitiveness—and at that time, naphtha was excluded entirely from the scope of energy security. It must now be reintegrated into Japan’s energy security framework, and a naphtha reserve system is highly likely to be reinstated. 4. Diversification of crude oil imports is necessary—but requires supportive policy measures. Japan’s dependence on Middle Eastern crude oil stands at a staggering 94%, an absolutely excessive level. Although there had been slight improvements previously, Russia’s invasion of Ukraine further increased Japan’s reliance on Middle Eastern crude oil.

Distortion of the Middle East benchmark? Asian refiners abandon Dubai pricing and shift to Brent-based pricing for U.S. crude

According to reports, the immediate trigger for the price anomaly was S&P Global Platts’ decision to exclude three out of five crude oil grades linked to the Strait of Hormuz—anticipating a prolonged disruption of this critical shipping route—which sharply reduced the volume of tradable crude available. Meanwhile, robust demand from French energy giant TotalEnergies also provided support to Dubai prices. Currently, Brent crude futures trade at approximately USD 103 per barrel—significantly below the Dubai benchmark—creating a clear economic incentive for Asian buyers to switch to Brent-based pricing. Accelerated benchmark switching by Asian refiners puts pressure on Saudi Aramco According to Reuters, Japanese refiner Taiyo Oil this week procured 2 million barrels of U.S. light crude via tender, with delivery scheduled for July and priced at ICE Brent plus roughly USD 19 per barrel. Taiyo Oil typically benchmarks its WTI purchases to Dubai pricing; this shift marks a symbolic turning point. Citing sources, the report notes that other Japanese refiners have also completed purchases of U.S. crude priced against ICE Brent—transactions concluded through private negotiations, with details remaining undisclosed. Amid volatile market conditions, several Asian refiners have approached Saudi Aramco—the world’s largest crude exporter—requesting a switch of its official selling price (OSP) benchmark from Platts Dubai to ICE Brent. Unusual government intervention: Administrative guidance promotes benchmark switching A document seen by Reuters shows Japan’s Ministry of Economy, Trade and Industry (METI) has requested domestic wholesalers to adopt the Brent benchmark when setting gasoline prices. The document states that, given Brent’s lower price relative to Dubai, switching the pricing benchmark will help cap gasoline price increases—and recommends that wholesalers continue using Brent-based pricing going forward. While such administrative guidance carries no legal binding force, Japanese companies typically comply. This month, Japan’s gasoline price surged past JPY 190 per liter (approximately USD 1.19), hitting a record high and prompting the government to roll out subsidy measures. On the supply side, Japan began drawing down private petroleum stocks on March 16 and activated national strategic reserves—as well as jointly held reserves with three Gulf producers—on March 26. Prime Minister Sanae Takaichi met with International Energy Agency (IEA) Executive Director Fatih Birol in Tokyo this week to discuss additional coordinated releases of emergency oil stocks. Supply crisis spreads across Asia; multiple countries seek Japan’s support The same document indicates the supply crisis has broadly impacted Asia, with Vietnam, Indonesia, and India having successively sought assistance from Japan.

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