I’m deeply saddened by the scenes of devastation emerging from Japan in the wake of last week’s magnitude 8.9 earthquake and subsequent tsunamis. The human toll is truly horrifying, with nearly 1,600 confirmed dead, more than 10,000 missing and as many as 500,000 displaced indefinitely from their homes. I can only hope that relief and recovery efforts aren’t further hampered by the severe aftershocks and smaller tsunamis reported in the days since the quake. Although it might seem crass in the wake of such a tragedy, as investors we must consider the implications for the global economy and their portfolios.

Uranium and nuclear power stocks, a group I discussed at great length in the most recent issue of The Energy Strategist, are the most directly impacted by events in Japan over the past few days. On Friday the group showed no significant reaction to the quake; however, at that time the full extent of the damage to several of Japan’s nuclear reactors was unknown.

Overnight in Asia, most stocks leveraged to the industry have been hit hard. Japan’s Toshiba Corp (Tokyo: 6502, OTC: TOSBF), the majority owner of Westinghouse, one of the world’s largest builders and designers of nuclear plants, is trading lower by about 16 percent as of this writing. Australia-listed Paladin Energy (ASX: PDN, TSX: PDN), a uranium mining firm with operations in Africa, is off roughly 16 percent, while Energy Resources of Australia, owner of the giant Ranger mine in Australia is off around 12 percent. Cameco Corp (TSX: CCO, NYSE: CCJ), a recommendation in The Energy Strategist’s Fresh Money Buys list, opened significantly lower in sympathy with the group.

Before I delve into specifics, here’s my advice: This isn’t the time to sell any of my recommended uranium plays. Investors looking for a roadmap of what’s likely to transpire over the next few weeks should recall the Macondo Oil spill in the Gulf of Mexico in late April 2010. In the immediate aftermath of the spill any stock leveraged to the Macondo well, or even vaguely tied to deepwater drilling, got slammed as investors panicked and sold indiscriminately.

Anyone who was invested in energy stocks a year ago will recall how many pundits showed up on television talking about the worst environmental disaster in US history, the death of the Gulf fishing industry, the Gulf Loop current and the end of deepwater drilling as we know it. No stock could swim against those headlines.

Over time, even as the well continued to gush, cooler heads began to prevail. Investors came to realize that the industry wasn’t going away and that the world still needed deepwater oil production. Months later, evidence mounted suggesting the environmental impact was far lower than the early fear-mongering doomsayers had projected. Deepwater drilling activity in the US will take time to recover in the wake of the moratorium, but the height of the panic proved an epic buying opportunity for energy stocks, especially those leveraged to offshore spending.

There were plenty of negative headlines about nuclear power over the weekend and the supposed end to the global nuclear renaissance that’s been underway in recent years. Most of this talk is mindless sensationalism, and some of the most alarmist sound bites I’ve heard are coming from individuals or organizations that have long been opposed to nuclear power.

The bad news: As was the case after the Gulf spill, the panic will take time to recede, these stocks will be volatile for some time to come, and I can’t rule out more near-term downside. The good news: The doomsayers are blowing the environmental risks way out of proportion with reality, the long-term growth story is intact, and this will ultimately prove an outstanding buying opportunity.  

While we probably won’t have a complete picture of all of the events that happened surrounding Japan’s nuclear plants in the wake of the earthquake for weeks to come, it’s worth stepping back and taking a realistic, dispassionate view of the most likely scenario.

Nuclear energy is crucial to Japan. As of Mar. 1, before the earthquake, Japan had 55 operating nuclear reactors with a total capacity of 47,348 megawatts. In total, these reactors normally supply just less than 30 percent of the country’s total electricity requirements.

Japan is located in one of the most seismically active regions of the world, and plants are designed to shut off automatically when the ground moves to a certain degree. Despite the fact that this was likely the single largest earthquake in recorded Japanese history, all of Japan’s power plants appear to have shut down correctly at the onset of seismic activity.

Shutting down a nuclear plant involves inserting control rods into the core that stop the nuclear reaction. This process isn’t like flipping a switch, and some elements produced in the core of the reactor continue to degrade and give off heat; residual heat from the nuclear reaction takes time to dissipate.

Cooling a nuclear plant involves circulating water around the core, requiring electricity. When the earthquake knocked out power from the grid, the plants backup diesel generators kicked in to produce power to run the circulating pumps, as they’re designed to do in such instances. The problem was that the tsunamis generated by the earthquake were so huge they appear to have wiped out the backup generators, forcing the plant onto emergency battery power. Of course, batteries have a finite lifespan, and eventually power to one particular group of three reactors, the Fukushima Daiichi reactors 1, 2 and 3, failed.

When the core can’t be cooled properly there’s risk of a so-called meltdown, where the entire core of the plant literally begins to melt, something that happens at temperatures north of 2,000 degrees Celsius (3,632 degrees Fahrenheit).

The very term “meltdown” sounds like a total disaster. But it’s important to note that what happened isn’t an explosion, like a nuclear weapon, and a meltdown doesn’t mean that radiation is spewed into the atmosphere in some sort of toxic cloud. Rather, if the core melts down in a plant of this nature radiation would be contained by the shell around the reactor known as a containment vessel. During the Three Mile Island incident in the US in 1979 the core experienced almost a complete meltdown, but the actual release of radiation from the plant was negligible, as the containment vessel worked as designed.

Comparisons to the 1986 Chernobyl disaster in what’s now the Ukraine are even more ludicrous. In that instance the control rods that stop the nuclear fission weren’t inserted into the core; the plant didn’t have the safety mechanisms to do this automatically, as is the case with the Fukushima reactors. The core never shut down, and the reaction continued in uncontrolled fashion. In addition, the Chernobyl plant didn’t have a containment vessel that could seal the core once it melted down. Once the meltdown began there was no way to prevent nuclear material from escaping into the atmosphere.

Also blown out of proportion are the explosions at reactors 1 and 3 at the Fukushima reactors. Some have suggested that these were nuclear explosions, or that the top of a containment vessel had been blown off. The reality is that both appear to have been caused by hydrogen gas vented out of the plant. What exploded was simply the outer housing and roofing of the plant. This is totally different that the containment vessel–a thick structure of metal, concrete and other materials–that actually contains the radioactive core itself in the event of a meltdown. That containment layer hasn’t been damaged, despite the explosions.

To give an idea of the strength of these vessels, tests were performed on containment vessels in the wake of the Sept. 11, 2001, terror attacks to simulate crashing a major jetliner directly into a nuclear facility. Even after such an intense and direct impact, only the outer few inches of the containment building were affected, and the structure remained intact.

The latest news is that at least two of the reactors–units 1 and 3–are being flooded with seawater to cool the core. In all likelihood this means these reactors can never be used again, so it clearly wouldn’t have been the first option for operators to use. But it’s not some sort of desperate effort, either; operators are apparently using seawater rather than purified water because it’s more readily available at the site right now.

Finally, it’s only natural that people are desperately afraid of the word “radiation,” perhaps as a byproduct of all of those nuclear disaster films we watched during the Cold War. Nonetheless, the amounts and types of radiation vented from the plant to date aren’t dangerous; the highest release recorded right on the reactor site was about 156 millerems, not far above the 100 to 125 millerems most people receive normally each year. And that would dissipate rapidly the further you move away from the plant and as time passes; the radioactive elements released have extremely short half-lives.

The even better news: The more time passes, the less of a problem this all becomes. Since the fuel rods inserted into the core would have stopped the main fission reaction on Friday, heat would already be dissipating from the core and will continue to do so over time.

The bottom line: It appears that one or two of the Fukushima reactors have partly melted down, but there has been little radiation released, and any effects would be local. Even if there is a complete meltdown, the containment vessels on these facilities will be sufficient to contain any dangerous radioactive materials, but the seawater cooling strategy is likely to prevent that from happening. Over the next few days I expect Japanese authorities to get these plants under control and the immediate crisis and panic to subside. That should stabilize stocks leveraged to nuclear power.

As I noted earlier, just because the immediate crisis subsides doesn’t mean it’s an all-clear for stocks leveraged to uranium and nuclear power. The opponents of nuclear energy will undoubtedly try to use this incident to illustrate that nuclear power is unsafe, just as opponents of offshore drilling took advantage of the news about the Macondo spill last year. Others fear that, like Three Mile Island, this incident will be enough to derail the US industry’s growth prospects. 

Politicians will have to respond to this, even if it’s just lip-service. Over the weekend several lawmakers in the US as well as officials in both China and India indicated that they plan to examine their nuclear programs in light of the lessons learned in Japan.

The US is more likely to switch direction on nuclear than emerging markets like China and India. In fact, Chinese officials also stated Monday that they plan to maintain their commitment to the power source; they have little choice, as there’s no other way for them to meet their rapid growth in demand for power while meeting targets to reduce emissions. And the reaction of the US and other developed nations is largely irrelevant: The US has one plant under construction and nine being planned, compared to 27 under construction in China and 50 in the planning stages.

The worst-case scenario: a modest delay to plans for some new plants, primarily in the developed world. Delays to plants in developed countries are nothing new, and the nuclear renaissance has been proceeding at a snail’s pace in the US even before the Japanese reactor cooling failure.

The hit to Cameco today will be painful, and you can expect more volatility over the next few weeks. But leaning against a media-fueled panic situation is the best move.

Buy Cameco Corp up to 42. My advice on Paladin Energy, a buy up to CAD6, and Uranium One (TSX: UUU), a buy up to CAD7.50, is unchanged. Both stocks are components in The Energy Strategist’s Uranium Field Bet.

Apart from the uranium industry, the main effect of the Japanese earthquake will be to place modest upside pressure on global energy prices. About 10 percent of Japan’s total electricity network is offline such that Tokyo Electric Power is imposing rolling three-hour blackouts across much of the nation, including manufacturing facilities and Tokyo.

To offset this, I expect the Japanese power company to fire up natural gas plants normally aimed at handling peak loads, loads at times of peak demand. They may also temporarily use additional diesel generators to feed power to the grid and supplement their remaining nuclear, coal and gas-fired baseload plants. Because Japan has next to zero domestic energy resources, this will mean higher imports of natural gas and oil.

The early strength in alternative energy stocks like First Solar (NSDQ: FSLR) is nonsensical. Wind and solar can’t be ramped up to replace baseload power generation from the damaged nuclear facilities in either the short or long term. I expect this strength to fade quickly, just as it did after the Macondo spill last spring. 

More broadly, this is clearly a major blow to the Japanese economy. The country’s benchmark Nikkei 225 index sank about 6.5 percent overnight to reflect that. The Bank of Japan has flooded the local market with liquidity and may take extraordinary steps such as additional quantitative easing in an effort to weaken the yen and support Japan’s massive exporters. Meanwhile, the government is planning a supplemental budget measure to fund the rebuilding effort, just as it did in the wake of the Kobe earthquake in 1995. There are legitimate concerns about Japan’s massive debt burden of around 200 percent of GDP, and the need to spend on rebuilding efforts certainly won’t help Tokyo cut spending.

In the long term that’s a huge problem. However, more than 90 percent of Japan’s debt is owned by Japanese, so as long as domestic investors have confidence the fiscal situation should remain viable. The disaster also appears to be uniting the usually fractious Japanese political scene behind a rebuilding effort.