http://www.atimes.com/atimes/Global_Economy/GD14Dj01.html
Apr 14, 2005 The invisible hand preventing an energy crisis By Chietigj Bajpaee As oil prices race toward US$60 per barrel it may seem paradoxical to say that we are not heading for an energy crisis. Undoubtedly for the short to medium term oil consumption will increase, which will continue to put pressure on oil prices and global growth. However, energy shortages as seen by the queues at gasoline stations in the 1970s are unlikely. To understand this one needs to look at the fundamentals of demand and supply and the drivers of rising oil prices. The drivers of rising oil prices The drivers of rising oil prices can be grouped into short-, medium- and long-term factors. The short-term factors are generally political-security-related supply-side shocks, such as labor strikes in Venezuela and Nigeria, terrorist attacks in Saudi Arabia and Iraq (the so-called terror premium), and the fall of Yukos in Russia. In Nigeria, Africa's biggest crude-oil producer and the fifth-largest supplier to the United States, sporadic attacks on oil infrastructure by the Niger Delta People's Volunteer Force, ethnic fighting and oil strikes have put pressure on oil prices. Venezuelan President Hugo Chavez' Bolivarian Revolution, coupled with oil strikes, a coup and counter-coup against his regime, fueled instabilities in Venezuela, the world's fifth-largest oil exporter, which provides the US with 15% of its oil-consumption needs. The slow progress in Iraq toward reaching, let alone exceeding, its prewar oil production because of continued attacks on energy infrastructure, coupled with sporadic attacks on foreign oil workers in Saudi Arabia, the world's leading oil exporter, have contributed to the terror premium on oil prices. Russia, the world's No 2 oil and leading gas exporter, has contributed to oil-price volatility with the arrest of Mikhail Khordorkovsky on fraud and tax-evasion charges and the liquidation and re-nationalization of his company Yukos, which had once produced 20% of Russia's oil output. The fact that the US failed to tap into its 700-million-barrel-capacity Strategic Petroleum Reserve once oil prices passed the $35-per-barrel mark after the political instabilities in Venezuela in 2002-03 also sparked rising oil prices. Added to these political-security supply-side shocks are a number of cyclical weather-related shocks, such as rising heating-fuel demand during the winter, rising gasoline demand during the summer when Americans hit the road, and disruptions caused by adverse weather conditions, such as the effects of Hurricane Ivan on refineries in the Gulf of Mexico in late 2004. Oil prices have also been under momentary pressure from a series of accidents, including disruptions on North Sea platforms, an explosion at a BP refinery in Texas in March, and an accident at a nuclear facility in Japan's Fukui prefecture last August, which temporarily increased Japan's reliance on oil. Day-to-day speculative price jumps are fueled by these factors, most of which are unpredictable but short-term in nature. The medium-term factors are bottlenecks in the supply chain, such as dilapidated energy infrastructure in Iraq, and a lack of pipeline and refinery capacity in Russia. Oil prices are also under pressure from an overstretched tanker fleet with a lack of VLCCs (very large crude carriers), double-hulled carriers that meet environmental and safety regulations, and vessels that meet tightening security regulations, such as the International Ship and Port Facility Security Code that took effect from July 1, 2004. These factors have placed pressure on tanker charter rates and maritime-insurance premiums. However, rising oil prices have given oil companies both the funds and the sense of urgency to address these supply-chain factors with investments and upgrades in pipeline, refinery, shipping and port infrastructure. For example, oil giants such as ExxonMobil, Saudi Aramco and Total have pledged more than $11 billion for refinery upgrades and expansions. A lack of spare crude capacity, half of which is located in Saudi Arabia, is also a concern for oil prices. The issue of whether we are approaching, have reached or have passed the "Hubbert's peak" when total cumulative oil usage exceeds the remaining global supply of oil is one of much debate and controversy. While reserves have been rising, production has been declining in recent years. Rising production of heavy sour crude, which is harder to refine relative to light sweet crude, is also putting pressure on oil prices. However, rising oil prices have increased the incentive for oil companies to step up exploration activities in new regions such as Central Asia, Africa and the East and South China seas, as well as invest in technologies that increase the return on already-established sources such as Canada's tar sands. However, the most important contributor to a long-term increase in oil prices is increasing demand from Asia, most notably China and India, as a result of their burgeoning growth rates. China, which has been a net oil importer since 1993, is the world's No 2 oil consumer after the US and has accounted for 40% of the world's crude-oil-demand growth since 2000. India, as the world's No 6 energy consumer, imports two-thirds of its crude-oil consumption, while China imports a third of its oil-consumption needs. The Asian influence on oil prices is not limited to price hikes - for example, the drop in oil prices to $10 per barrel in 1998 was partially a result of the Organization of Petroleum Exporting Countries (OPEC) raising production just before the Asian financial crisis, which created excess capacity on the market. The invisible hand However, in addressing mounting oil demand we have the invisible hand of the market to step in and adjust consumer preferences as prices rise and supply falls. For example, after the oil shocks of the 1970s, industrialized countries reduced their reliance on oil relative to other energy sources, such as natural gas, nuclear power and renewables, and improved on energy conservation and efficiency through the use of new technologies and practices such as better insulation in the homes (micro-conservation) and shifting away from heavy industries that rely on high levels of energy consumption (macro-conservation). Japan, for instance, continues to rely on imports for almost all of its oil consumption, although oil as a percentage of total energy consumption has dropped from more than 75% before the oil shocks of the 1970s to less than 50% after. Japan's desire to cut its dependence on imported oil coupled with its obligations to cut greenhouse-gas emissions as part of the Kyoto Protocol have made it a leader in energy conservation and efficiency. For example, Japan uses 130 grams of crude oil for every $1 of nominal gross domestic product, against 230 grams in the US and 800 grams for China. Obviously countries do backtrack - the US remains obsessed with a culture of gas-guzzling vehicles. Several Asian countries are also sheltered from rising oil prices by fuel subsidies, which have been implemented to limit inflationary pressures and contain political backlashes. For example, under the guidance of the International Monetary Fund, then Indonesian president Suharto cut fuel subsidies in 1998, sparking protests that eventually led to his downfall. However, these are temporary barriers to adjustment. The recent reduction of fuel subsidies in Thailand, Malaysia and Indonesia and the growing popularity of environmentally friendly hybrid and compact cars in the US are evidence that perceptions and trends do change as a result of rising prices and falling supply. It should also be noted that the present oil-price hikes are not as significant as the oil shocks of 1973-74 and 1979-80, when prices are viewed in real terms (taking account of inflation) and given that rising oil prices have been accompanied by a falling US dollar, in which oil prices are denominated. China and India: Adapting in their own way While developing countries such as China and India are experiencing unprecedented levels of growth, they lack energy-efficient technologies and still rely on energy-heavy industries for their development. They are also adjusting to rising oil prices in their own way. In terms of energy conservation, China has delayed several construction projects and cut loans and investments into energy-hungry industries, such as steel and cement manufacturing. Major industrial centers are rationing power and even Shanghai's famous Bund is conserving power, with the lights of several famous attractions being shut off in the evenings. In November, the Chinese State Development and Reform Commission introduced a strategic energy program in a report titled "Outline of Medium-Long-Term Energy Development Planning" in which it aims to increase energy efficiency by 40% by 2020. China and India are also actively pursing alternative energy resources, such as natural gas and nuclear and hydroelectric power. A number of hydroelectric-power construction projects are on the table, such as China's mammoth Three Gorges Dam project due to be completed in 2009. China also plans to increase its nuclear power-generating capacity fivefold within the next 15 years with an additional 27 nuclear power plants, while India intends to build an additional 31 reactors by 2020. China also plans to utilize further its vast coal deposits that account for 12% of the world's reserves. Meanwhile, India emerged as one of the world's fastest-growing users of wind power in 2004, being the fifth-largest producer globally and the leading producer in Asia. To limit the environmental effects of its increasing energy needs, China is also encouraging investment into environmentally friendly energy technologies such as coal gasification (coal-bed methane, or CBM, gas-to-liquid, coal-to-liquid technologies), fuel-cell technologies and slurry pipeline transportation projects. While China only possesses 1% of the world's natural-gas supplies, it is believed to possess the third-largest reserves of CBM at 31 trillion cubic meters. The Chinese government is also drafting the first "Renewable Energy Development Use Promotion Law", which proposes that 10% of China's energy come from clean technologies. In the security sphere, both states are also stepping up efforts to improve energy security by securing sea lanes and transport routes that are vital for oil shipments, diversifying beyond the volatile Middle East to find energy resources in other regions such as Africa, the Caspian, Russia and the East and South China seas and stepping up exploration activities within their own borders. China and India have also joined the US and Japan in developing Strategic Petroleum Reserves, with India pushing for the creation of 15-45 days of emergency reserves in Rajkot, Mangalore and Vishakapatnam, while China is creating 75 days of emergency reserves in four locations in Zhejiang, Shandong and Liaoning provinces. Two steps forward, one step back Obviously, China and India still require further adjustment. Growing car ownership in China and the growing popularity of gas-guzzling sport-utility vehicles and multi-purpose vehicles in both China and India are placing strains on both of their energy needs. Sporadic power shortages and blackouts have also continued as a result of inefficiencies by the state-run power sector and power being stolen, or in the case of India siphoned for votes. China and India have also attempted to limit the inflationary impact of rising oil prices, with India cutting customs and excise duties on imported fuel products and offering fuel subsidies, while China regulates refined-oil prices, neither of which is fiscally sustainable over the long term and both of which delay the inevitable adjustments in energy-consumption patterns. Pressure is also being placed on alternative energy resources as both states increase their usage of coal, nuclear, hydroelectric power and natural gas. Uranium prices are under increasing pressure as China, India and Russia increase their reliance on nuclear power. Neighboring countries such as Japan are also worried about China's increasing use of nuclear power, given its poor industrial safety record, as witnessed by the number of coal-mining accidents in 2004. With the increasing use of nuclear power there also comes the fear of nuclear materials falling into the hands of rogue states or terrorist organizations. Both India and China are still heavily reliant on environmentally unfriendly coal burning for their energy needs, which has contributed to haze and pollution across their major cities, thus undermining their reputations as emerging global business and financial centers. China, the world's No 1 coal producer and consumer, still burns coal for 67% of its energy needs. Furthermore, according to the Chinese State Department and Reform Commission, China will be a net importer of coal by 2020. China and India have also tabled a number of plans for damming and rerouting several river systems for the creation of hydroelectric power and addressing water shortages. In many cases these plans have been made without full consideration of their environmental impact and without consulting upstream and downstream countries, such as those in the Mekong River delta in the case of China, and Bangladesh, Nepal and Pakistan in the case of India. Finally, the quest for energy security presents its own set of problems as highlighted in previous Asia Times Online articles, India, China locked in energy game <http://www.atimes.com/atimes/Asian_Economy/GC17Dk01.html> (March 17) and China <http://www.atimes.com/atimes/China/GC02Ad07.html> fuels energy cold war (March 2). The energy crunch is an Asian concern not limited to China and India. For example, in Thailand the government has ordered supermarkets and petrol stations to close early to conserve fuel. Indonesia, the only Asian member of OPEC, became a net importer of oil and liquefied natural gas in 2004 to fulfill contractual agreements. Malaysia and Brunei are the only other major oil exporters in Asia. A slowdown in the Chinese, US and Indian economies as a result of rising oil prices would further slow the economies of countries that rely on export revenues from these countries including South Korea, Japan and the Association of Southeast Asian Nations (ASEAN) states. To tackle these problems will require further multilateral cooperation on securing energy transport corridors, including pipelines and sea lanes, addressing energy safety issues with respect to the use of nuclear power, promoting energy efficiency, conservation and the use of clean energy resources, creating regional strategic petroleum reserves, diversifying beyond the Middle East to meet oil and gas import needs, engaging in joint exploration and development of energy resources in the neighborhood, such as the East and South China sea region, and collective bargaining to address the "Asian premium" on imported oil. Limited initiatives so far include ASEAN's Petroleum Security Agreement, the ASEAN + 3 Ministers of Energy Meetings and the APEC (Asia-Pacific Economic Cooperation) Energy Security Initiative Workshop. A meeting of regional energy ministers in Osaka in December 2002 also resulted in Japan's Ministry of Economy, Trade and Industry creating a proposal for the creation of an "Asian Energy partnership". Most recently, on January 6, major Asian oil buyers China, India, South Korea and Japan met with major suppliers Kuwait, Saudi Arabia, Qatar, Oman, the United Arab Emirates and Malaysia in New Delhi to discuss the establishment of long-term supply contracts as well as a joint emergency response to supply disruptions in Asia. Not a crisis but a period of adjustment These actions are unlikely to stop the trend toward rising oil prices. OPEC's original band of $22-28 per barrel has become increasingly irrelevant, as have its attempts to contain oil prices by augmenting production capacity, which is only having a short-term influence on oil prices. Nor are industries that are heavily reliant on oil, such as the automotive and aviation sectors, going to receive much respite in the near future. Nevertheless, while oil prices are unlikely to fall, a growing number of states are adapting to this reality by reducing their reliance on oil for their energy needs. Fast-developing countries such as China and India, while facing numerous challenges to meeting their growing energy needs, are nevertheless making active attempts to adapt to rising oil prices. Thus we do not have a crisis but rather a period of adjustment. Of course, if we ignore the signs and fail to adapt, then we are headed for a crisis. Adapt or perish. It may be harsh, but it works. Chietigj Bajpaee is a researcher for Civic Exchange, a Hong Kong-based public-policy think-tank. He has been a researcher for the London-based International Institute for Strategic Studies and a risk analyst for a New York-based risk management company. He has a graduate degree in international relations from the London School of Economics and an undergraduate degree in economics and government from Wesleyan and Oxford Universities. His areas of interest include energy security and political, economic and security developments in the Asia Pacific region. The views expressed here are his own. He can be contacted at [EMAIL PROTECTED] [Non-text portions of this message have been removed] ------------------------ Yahoo! Groups Sponsor --------------------~--> Give underprivileged students the materials they need to learn. Bring education to life by funding a specific classroom project. http://us.click.yahoo.com/FHLuJD/_WnJAA/cUmLAA/TySplB/TM --------------------------------------------------------------------~-> -------------------------- Want to discuss this topic? 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