"Nothing is Ever Completely Safe"

Sydney M. Williams

Thought of the Day

“Nothing is Ever Completely Safe”

March 15, 2011

Listening to and reading the news, it is almost impossible to discern facts from myriad opinions being tossed out, as they apply to the catastrophe at Japan’s nuclear facilities at Fukushima. The press, for obvious reason, has an incentive to sensationalize the events, while governments have an incentive to underplay bad news. As a result, investors are left stumbling in the dark, both figuratively and literally (in Japan.)

A piece I read yesterday by Dr. Josef Oehmen, a professor of mechanical engineering at M.I.T. and an expert on nuclear technology detailed the events dispassionately. He calmed my fears, minimizing concerns regarding the spread of radiation and suggesting the biggest problem will be a prolonged power shortage. However, since he wrote the piece (on Saturday) two additional plants in Okuma (there are a total of six) exploded and a third is on fire. However, comparisons to Chernobyl seem unwarranted in that, as I understand it, the facility in Russia did not have the containment systems of those in Fukushima. Nevertheless, the vacuum of reliable information is disconcerting.

Twenty percent of all electricity in the United States is generated by 104 nuclear power plants located in 31 states. There are three new plants under construction and twenty—seven in the planning stage. Most operating nuclear plants in the U.S. are Generation II reactors (similar to those in Fukushima,) in which the cooling water is circulated by electric pumps – and it was the shut down of electric power to the plants that failed in Japan causing the problems. Generation III reactors, as explained by William Tucker, author of “Terrestrial Energy: How Nuclear Power Will Lead the Green Revolution and End America’s Energy Odyssey”, in yesterday’s Wall Street Journal, use what is called a “passive” cooling system where the water circulates by natural convection with no pumping required. One would assume that existing nuclear plants will be upgraded to the new cooling systems.

It seems obvious that Senator Joseph Lieberman is correct when he says that the United States will “quietly put the brakes on,” as regards future plants. The administration and the opposition appeared in unison, in suggesting that nuclear will remain a part of our longer-term energy plans. I would guess that they are right, though one should expect coal and natural gas will benefit over the near term.

There is little question that the economic impact on Japan will be meaningful. The Kobe earthquake (6.8 on the Richter scale) was estimated to have cost Japan about one percent of its GDP. The cost of rebuilding amounted to about two and a half percent of their GDP. The current situation will be more costly and have a bigger impact. The Richter scale is logarithmic, suggesting that this one was stronger than Kobe by a factor of more than a hundred. Today, Japan’s GDP is slightly over $5 trillion. Approximately 30% of Japan’s power generation comes from nuclear. With a number of plants shut down, or being upgraded, one can assume that power shortages will be in effect for some time. That will affect industry. According to Bloomberg, for example, about 25% of the world’s technology products are produced in Japan and they manufacture about 15% of U.S. auto component parts. From what I can tell, radiation issuing from these plants, dissipates over time and should not represent a severe problem to the people in Tokyo, a city of 13 million 130 miles to the south. But I am no expert and accurate information is impossible to access. The problem, though, will be economic.

In today’s Wall Street Journal, George Melloan quotes Frederic Bastiat He was a nineteenth century economist who taught the parable of “the broken window,” which holds that GDP growth that comes from reconstruction brings no net gain in society’s wealth. “Destruction is not profitable,” he wrote. And rebuilding Japan will take time, as they well know.

Fifty percent of our electricity generation comes from coal, twenty percent nuclear, eighteen percent from natural gas, seven percent from hydro and five percent from “other.” All carry risks. Last April an accident at Massey Energy’s Upper Big Branch mine in West Virginia killed 29 of the 31 workers in the mine. Later that month the explosion of BP’s Deepwater Horizon Well killed 11, inundated coastal waters and marshes with oil and stopped all drilling for almost a year. Japan’s misfortune is our fortune, in that the lessons learned will be applied to our nuclear program.

Government and industry have a self interest in minimizing accidents (and over time they have done a good job,) but there is no way to eliminate all risks from our lives, a condition well known to portfolio managers.