Business Update with Mark Lacter

Japan's earthquake and its effect on the local economy

KPCC business analyst Mark Lacter talks about what Japan's earthquake effects Japan's earthquake will have on local and state economies.

Steve Julian: On Tuesdays we talk about the latest business stories with Mark Lacter. Mark, what affects will Japan’s earthquake have on the our local and state economies?

Mark Lacter: Well, it’s still very early, but keep in mind that Japan has the second-largest amount of cargo coming in and going out of the Los Angeles Customs District (that’s after China). We’re talking about more than $42 billion in 2009 – and that was in the middle of the recession. And so far, we’re already starting to see some effects; several Japanese factories that make semiconductor chips and other electronic components have been damaged and might not be back for weeks, perhaps months (and that’s even assuming they can stabilize the nuclear power plants).

Julian: And those chips are used for computers, smartphones…

Lacter: Lots of things, Steve. Now, the logjam could also mean delays in the manufacturing of certain products here in California – and that’s because companies here often rely on parts that are imported from Japan – either by ship or plane. It could be surgical instruments or optic equipment or aircraft items – stuff that most of us don’t think much about, but which represent important aspects of global trade. Keep in mind that supply chains tend to be very tight. So the loss of even a few days could present a problem; weeks and months could be very tough for some industries.

Julian: I can imagine all the phone calls and emails that manufacturers have been dealing with since Friday.

Lacter: That’s right, they’re trying to come up with alternatives – and those alternatives will be expensive. That could mean lower profits if they can’t pass along those costs and that could lead to cutbacks – perhaps even layoffs. In a global economy things are really interconnected – to the point where an L.A. business could start to feel the effects of an economic slowdown in Japan.

Julian: What are the potential effects on gas prices in L.A. and California?

Lacter: Short-term, there might not be much of an effect. Actually oil prices have fallen somewhat since the earthquake, on the belief that the Japanese economy is likely to slow pretty substantially. That means lower demand, and lower demand means lower prices. Thing is, oil prices are still quite high – they’re up 10 bucks a barrel in just the last few weeks, and of course gasoline prices are not showing any signs of slowing down.

Julian: It’s not easy to find regular under $4 a gallon.

Lacter: Well, an average gallon of regular in the L.A. area is more than 50 cents higher than just four weeks ago. And keep in mind that we’re approaching the summer driving season, when demand picks up and refiners start using that more expensive blend of gasoline that helps reduce pollution. So even before the earthquake, analysts had been expecting gas prices to jump well over 4 bucks a gallon. The concern is that once the Japanese start to rebuild, their demand for energy is likely to pick up – and with a good portion of their nuclear power shut down, perhaps for good, there will be a much greater demand for oil.

Julian: And if that happens?

Lacter: Then refineries in California might find it more lucrative to increase their shipments to Japan. The result would be more limited supply, and higher prices. Frankly, it wouldn’t be surprising to see gas reach $5 a gallon pretty soon – and that might be a tipping point for when people start to change their driving habits and when businesses start to pass on the extra fuel costs to their customers.

Julian: Mark Lacter is a contributing writer for Los Angeles Magazine and writes the business blog at LA Observed.com.


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