The Third Oil Shoc=
k Pummels
the World
There ar= e several new books out on oil and geo-politics – and more will surely be hitti= ng the stands. Nothing like crude at $140 per barrel to make books on oil, sel= l faster than hot cakes. Who would not like to know which particular set of villains have left us so much poorer and our vaunted economies and societies looking= ever so vulnerable. There is a large menagerie of putative villains to choose fr= om: Oil exporters, Wall Street and like-oriented financial speculators, a loose mon= ey policy in the US that has facilitated this speculation, Asian economies like China and India and their alleged growing appetite for oil, excessive restrictions on drilling and exploratory work in the USA, short-sighted and weak-kneed politicians: In other words, plenty of choice. Pity the same can= not be said about energy resources.
Everybod= y knows that oil is a limited geological resource; that much of it is located in bi= ts of real estate – the Middle East, North Africa, West Africa, Central America, the Caucasus and Russia – that are geo-political hotspots or= not quite subject to market economics or both. In fact, the very nature of oil – lots of money for no effort – often directly contributes to t= he creation of such conditions. Look at it from another point of view. The wor= ld needs oil and its availability is concentrated in a few pockets of the worl= d. Would that not make oil a natural geo-political asset? Of course it would – and so it has.
Knowing = is however not sufficient to device a strategy that reduces the power of this particul= ar geo-political asset. Being hit by two oil shocks in 1973 and 1979 was not enough. The power of complacence is tragcially so often more powerful than = that of prudence. For once, we knew that (a) oil was limited in its supply and (= b) a price surge had the potential to disrupt our economies, the simple course of action would be to chart out a path where we got our energy from somewhere else.
There ar= e only these many options. Coal is not going to last us for much longer than oil. = This is truer for natural gas. Renewable sources – hydro, wind and geo-the= rmal – could not support base-load demand and they could at best be expect= ed to provide 10% to 15% of total electricity needs. The technology to (econom= ically) convert solar radiation and nuclear fusion to electricity have both got a w= ay to go – may be in the next century. Which basically leaves us with fission based power generation – uranium and later thorium – in= the twenty first and perhaps part of the twenty second century.
However,= that was not the way that the global response to energy went after the first two oil shocks. Initially, there was a vigorous initiative to move to more energy efficient technologies – evident in better fuel efficiency in automob= iles, heating and elsewhere. Recognizing that the best incentive for fuel efficie= ncy is higher price, Europe and some other developed countries imposed high tax= es on automotive fuels, while at the same time strengthening mass transit. That yielded results. Between 1973 and 2007, oil consumption in the UK, Germany, France and Italy put together fell steadily from 10.35 million barrels per = day (mb/d) to 7.85 mb/d in 2007. Lower prices encourage consumption, as is evid= ent from the case of another developed country – the USA, where after dropping= off from nearly 19 mb/d in 1978 to under 17 mb/d in 1991, saw consumption rise steadily to over 20 mb/d by 2003.
Oil pric= es, largely on account of this change in demand and new off-shore supplies, did= not increase much in nominal terms through the eighties and early nineties and = then fell to record lows of $11 per barrel in 1998 after the Asian Currency Cris= is. This resulted in the energy initiative from being merely pushed to the side= of the table, to being ejected from the agenda altogether. Other preoccupations seized the attention of the world’s policy makers – the ozone l= ayer in the eighties and nineties and greenhouse gases and CO2 emissions since. = The accident in the Three Mile Island nuclear reactor prompted President Jimmy Carter to defer the construction of any new nuclear power plant in the USA,= an order that apparently remains in force. The said order also suspended the reprocessing of spent fuel, creating first a disposal problem and secondly forestalled development of facilities that could convert the waste into much more energy. More than 100 times of the uranium consumed in a conventional fission reactor goes into the waste, but can be fully used in breeder react= ors after reprocessing of the fuel. The disaster in Chernobyl dealt a further b= low to development of nuclear power reactors in the West.
The worl= d largest breeder reactor was built in France. The 3,400 MW Superphénix was sh= ut down in June 1997 by the newly elected Prime Minister Lionel Jospin, respon= ding to bitter opposition from green groups. In fact in the early years of its construction the site had been bombed by “eco-pacifist” group u= sing Russian made rocket launchers. Sustained opposition from greens and other radical groups, the discomfort with malfunctions and accidents amongst poli= cy makers, combined with the beguiling influence of subdued oil prices thus effectively stalled movement on the development of nuclear energy technology and facilities.
After 20= 00, in the US and some years later in the EU, moves were made to take the wraps off the nuclear energy option. Expectedly there was opposition from environmentalist groups who refused to accept nuclear power as a non-CO2 emitting technology= and resuscitating a moth-balled programme is never easy. The consequence of this decades long policy stasis – as policy makers and environmental lobby= ists played a pretend game that hard choices on energy were permanently deferrab= le – has led to $140 per barrel oil and sky high costs for natural gas, = coal and food grain. The last from the naïve expectation that diverting farm land to grow corn and other crops to turn into ethanol and other bio-fuel w= as a realistic solution to meeting energy needs and would have no linkages to fo= od prices and their availability. How tragic the actions of naïve do-goode= rs can be, is eminently visible from the food riots in a host of developing countries and wheat, rice and edible oil prices at unbelievable multiples of their historical levels.
The lead= ers of the Free World find themselves with little leverage to calm oil prices. They ha= ve supplicated Saudi Arabia to produce a bit more – and it will oblige e= nough to be polite and save the face of these leaders, in the media glare of an “Oil Summit”. However, impotent they may seem today, the develo= ped economies of the West will move rapidly ahead with new energy technologies, especially the nuclear one, in the years to come. This they will be able to= do with massive public support and the greens will be able to do little to stop it.
Which br= ings us home: what will we do? We sit on little oil, a bit more gas and some coal. = Even if we stop making polite noises about CO2 emissions and aggressively burn whatever carbon we are bestowed with, there is not going to be enough energ= y to fuel our growth in the decades to come. And we have very little uranium = 211; not even enough to meet the needs of our tiny nuclear energy industry. The prospects of developing the significant uranium deposits in Meghalaya conti= nue to be blocked by NGOs who have told the local population horror stories of = what would happen to their health if the mining project was allowed to be taken = up. Our chance of keeping our nuclear weapons and buying uranium from the rest of t= he world is blocked by the Left. The prognosis is not a happy one.
(The =
author is
Economic Advisor, ICRA)
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Number o= f words: 1,293
Publi=
shed in
Mail Today, Friday, 20 June 2008
Saumitra Chaudhuri
ICRA Limited
2F, Bldg 8, Tower A
June 18, 2008