Page 1 of 2 Energy reality starts to bite
By Dilip Hiro
(Note: This article was written before Tuesday's fall in the oil price -
the biggest drop in one day in 17 years. Light, sweet crude plunged US$6.44, or
4.4%, to settle at $138.74 a barrel on the New York Mercantile Exchange.)
When will it end, this crushing rise in the price of gasoline, now averaging
US$4.10 a gallon at the pump? The question is uppermost in the minds of
American motorists as they plan vacations or simply review their daily
journeys. The short answer is simple as well: "Not soon."
As yet there is no sign of a reversal in oil's upward price thrust, which has
more than doubled in a year, cresting recently above $146 a barrel. The current
oil shock, the fourth of its kind in the
past three-and-a-half decades, and the deadliest so far, shows every sign of
continuing for a long, long stretch.
The previous oil shocks - in 1973-74, 1980 and 1990-91 - stemmed from specific
interruptions of energy supplies from the Middle East due, respectively, to an
Arab-Israeli war, the Iranian revolution, and Iraq's invasion of Kuwait. Once
peace was restored, a post-revolutionary order established, or the invader
expelled, vital Middle Eastern energy supplies returned to normal. The fourth
oil shock, however, belongs in a different category altogether.
Nothing like it
Unlike in the past, the present price spurt has been caused mainly by global
demand for energy outstripping available supply. Alarmingly, there is no
short-term prospect that supply will match demand. For a commodity like
petroleum that underwrites and permeates every aspect of modern life - from
fuel to fertilizers, paints to plastics, resins to rubber - "balance" requires
a 5% safety factor on the supply side.
At present, however, spare capacity in the oil industry is less than 2%, down
from more than 6% in 2002. As a result, the price of oil responds instantly to
negative news of any sort: a threat against Iran by an Israeli cabinet
minister, a fire on a Norwegian offshore drilling rig, or an attack on an oil
facility by armed rebels in Nigeria.
Behind the present price surge, other factors are also at work. Take the
subprime mortgage crisis in the US. It flared almost a year ago, drastically
lowering the market value of the stocks of banks and allied companies. The
concomitant downturn in other equities led investment fund managers and
speculators to direct their cash into more productive markets, especially
commodities such as gold and oil, driving up their prices. The continued
weakening of the US dollar - the denomination used in oil trading - has also
encouraged investment in commodities as a hedge against this depreciating
currency.
The earlier oil shocks led non-OPEC (Organization of the Petroleum Exporting
Countries) nations to accelerate oil exploration and extraction to increase
supplies. Their collective reserves, however, represent but a third of OPEC's
75% of the global total. By the turn of the century, these countries had pumped
so much crude oil that their collective output went into an irreversible
decline.
A mere glance at the oil production table of the authoritative BP Statistical
Review of World Energy - published annually - shows declines in such non-OPEC
countries as Britain, Brunei, Denmark, Mexico, Norway, Oman, Trinidad and
Yemen. Over the past decade, oil output in the US has declined from 8.27
million barrels per day (bpd) to 6.88 million bpd.
The exploitation of the much-vaunted tar sands of Canada - expected to cover
the global shortfall - only helped to raise that country's output from 3.04
million bpd in 2005 to 3.31 million bpd in 2007, a mere 10% in two years.
In the 1990s, overflowing supplies and cheap oil had led to an overall decline
in oil exploration as well as under-investment in refineries. These two factors
constitute a major hurdle to hiking the supply of petroleum products in the
near future.
In addition, new hydrocarbon fields are increasingly found in deep-water
regions that are arduous to exploit. The paucity of the specialized equipment
needed to extract oil from such new reserves has created a bottleneck in future
offshore production. The world's current fleet of specialized drill ships is
booked until 2013. The price of building such a vessel has taken a five-fold
jump to $500 million in the last year. The cost of crucial materials - such as
steel for rigs and pipelines - has risen sharply. So, too, have salaries for
skilled manpower in the industry. Little wonder then that while, in 2002, it
cost $150,000 a day to hire a deep-water rig, it now costs four times as much.
Static supply, rising demand
While the oil supply remains essentially static, worldwide demand shows no
signs of tapering off. The only way to cool the energy market at the moment
would be to reduce consumption. Luckily - from the environmentalist's viewpoint
- soaring gasoline and diesel prices have begun lowering consumption in North
America and Western Europe. Gasoline consumption in the United States dropped
3% in the first quarter of 2008, when compared to the previous year.
When it comes to energy conservation, there is a far greater opportunity for
saving in the affluent societies of the West than anywhere else in the world.
An average American uses twice as much oil as a Briton, a Briton twice as much
as a Russian, and a Russian eight times as much as an Indian. It was therefore
perverse of US Energy Secretary Sam Bodman to focus on the way the Chinese and
Indian governments subsidize oil products to provide relief to their citizens -
and to urge their energy ministers to cut those subsidies to "reduce demand".
It is true that China and India, which together account for two-fifths of the
human race, are now major contributors to the growth in global oil demand. But
it's an indisputable fact that only by increasing per capita energy consumption
from current abysmally low levels can the Chinese and Indian governments hope
to lift hundreds of millions of people out of grinding poverty.
In a country like India, for instance, half of all households lack electricity,
so hurricane lanterns, fueled by kerosene, are a basic necessity. Subsidized
kerosene, also used for cooking stoves, helps hundreds of millions of poor
Indians. To cut or eliminate the subsidy on kerosene would only intensify
poverty.
In truth, when it comes to energy conservation, the main focus at the moment
should be on the 30-member Organization for Economic Cooperation and
Development (OECD), a group of the globe's richest nations which cumulatively
consumes nearly three out of every five barrels of oil used anywhere. Among
OECD members, Japan provides a model to be emulated.
Japan's exemplary performance
When it comes to energy conservation, Japan provides a glaring counterpoint to
the United States. Consider what has happened in both countries since the first
oil shock of the mid-1970s when prices quadrupled.
That price hike initially led to a drive for fuel efficiency in the US, Western
Europe and Japan. It also gave a boost to the idea of developing renewable
sources of energy. Ever since, Japan has followed a consistent, long-range
policy of reduction in petroleum usage, while the US first wavered and then
fell back dramatically.
Under the presidencies of Gerald Ford and Jimmy Carter, the US modestly
improved the fuel efficiency of its vehicles, as stipulated by a federal law.
Carter also announced a $100 million federal research and development program
focused on solar power and symbolically had a solar water heater installed on
the White House roof.
During the subsequent presidency of Ronald Reagan, when oil prices fell
sharply, energy efficiency and conservation policies went with them, as did the
idea of developing renewable sources of energy. This was dramatized when Reagan
ordered the removal of that solar panel from the White House.
In the private sector, utilities promptly slashed by half their investments in
energy efficiency. President George H W Bush, an oil man, followed Reagan's
lead. And his son, George W (along with Vice President Dick Cheney, former
chief executive of energy services giant Halliburton) has done absolutely
nothing to wean Americans away from their much talked about "addiction to oil".
Even now, instead of urging Americans to cut oil usage (and putting a little
legislative heft behind those urgings), politicians of both parties are blaming
soaring gas and diesel prices on "speculators", conveniently ignoring how thin
a line divides "speculators" from "investors".
In Japan, on the other hand, the government and private companies have stayed
on course since the first oil shock. Despite the doubling of Japan's gross
domestic product during the 1970s and 1980s, its annual overall levels of
energy consumption have remained unchanged. Today, Japan uses only half as much
energy for every dollar's worth of economic activity as the European Union or
the United States. In addition, national and local authorities have continually
enforced strict energy-conservation standards for new buildings.
It is, again, Japan that has made significant progress when it comes to
renewable sources of energy. By 2006, for instance, it was responsible for
producing almost half of total global solar power, well ahead of the US, even
though it was an American, Russell Ohl, who invented the silicon solar cell,
the building block of solar photovoltaic panels, which convert sunshine into
electricity.
What to do: Medium-term solutions
Worldwide, over half of all oil is used for transport. Though we instantly
associate a car or truck with an internal combustion
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