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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 (March
17) and China 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 c.bajpaee-alumni@lse.ac.uk.
(Copyright 2005 Asia Times Online Ltd. All
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on sales, syndication and republishing.) |
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