Emulate Japan to cope with oil
shocks By Dilip Hiro
With the price of oil rocketing to the
unprecedented level of US$130 a barrel and more,
there is a talk of another oil shock. Unlike past
instances, this one is unlikely to subside and may
indeed keep intensifying. The only way out is for
Western nations, the gluttonous users of
petroleum, to cut their consumption and emulate
Japan in its consistent drive for energy
efficiency and alternate sources.
The
present explosion in oil prices, the fourth of its
kind, is different from the previous ones in
1973-74, 1980 and 1990-91. The earlier oil shocks
were caused by interruption of supplies from the
Middle East, respectively due to the war between
the Arabs and Israel, the Iranian revolution, and
Iraq's invasion and occupation of Kuwait. Once
peace returned, the new order
became established or the
invader was expelled, supplies returned to normal.
This time there's an imbalance between
supply and demand, with no short-term prospect of
the two balancing each other.
While
responding to a tight market, oil prices rose
steadily over the past several years, the upward
trend accelerating last summer. In August, the
subprime mortgage crisis hit the financial
markets, drastically reducing the market value of
banks and other allied companies on the stock
exchanges. The concomitant downturn in other
equities led speculators and investment-fund
managers to channel their cash into such
commodities as gold, oil and even food grains.
Another contributory factor for the rise in oil
prices has been the steady decline in the
foreign-exchange value of the US dollar in which
oil is traded.
Over the past decade there
has been under-investment in exploration by the
state-owned companies in oil-bearing nations as
well as Western oil corporations, partly because
the cost of materials, such as steel for rigs and
pipelines, and skilled manpower required for the
purpose has risen sharply.
In the past,
when the Organization of Petroleum Exporting
Countries failed to oblige by raising its output,
non-OPEC nations like Britain, Norway, Mexico and
Russia stepped up their production. Now the output
of non-OPEC states is either static, as in Russia,
or declining, as in Britain, Norway and Mexico.
This widening shortfall cannot be filled by
tapping into tar sands in Canada.
The key
point is that the total petroleum reserves of the
non-OPEC nations are only a third of OPEC's. In
other words, the ultimate source of OPEC's
strength is its possession of three-quarters of
the global oil deposits.No amount of arm-twisting
of OPEC by the Western powers can alter that fact
of nature.
While the supply side remains
static, the demand side shows no sign of tapering
off. The main sources of new demand are China and
India, which together make up two-fifths of the
human race. To maintain their annual expansion
rates of 8% to 11%, to lift tens of millions of
Chinese and Indians out of poverty every year,
they need ample sources of energy, and oil is a
vital part of their energy basket as it has been
in the developed world. An average American uses
34 times more petroleum than an Indian and 12
times more than a Chinese.
Whereas India
has established itself as a leader in software,
half of Indian households still do not have
electricity. Where electric power is available,
outages are commonplace as demand often exceeds
supply. While gasoline and diesel are required for
buses and trucks as well as irrigation pumps,
kerosene is a basic need for the Indian masses as
a source of light and fuel for cooking. So the
government finds it almost mandatory to subsidize
petroleum products to protect the public from high
prices in the international market. This is also
the case in China.
Little wonder then that
these two mega-nations now account for
three-fourths of the annual growth in demand for
petroleum.
Both China and India are on the
threshold of a car revolution. At present there
are only 10 cars for every 1,000 Indians, whereas
there are 778 vehicles for every 1,000 Americans.
To raise India to the level of a mere 100
automobiles per 1,000 Indians would require an
immense jump in petroleum usage.
Since
supply is unlikely to rise appreciably in the near
future, the stress must be laid on curtailing
demand. That can only happen in the Western
nations. As it is, in the face of soaring prices
at gasoline stations, US demand fell by 3% during
the first three months of this year.
It's
worth noting that a similar decrease occurred in
America after the quadrupling of oil prices in
1973-74. That oil shock led to a drive for fuel
efficiency in the United States, West Europe and
Japan. It also gave a boost to developing
renewable sources of energy. But whereas Japan has
followed a consistent, long-range policy, and
reduced its petroleum usage, America has not.
During the presidencies of Gerald Ford and
Jimmy Carter, the United States improved fuel
efficiency for vehicles as required by a federal
law. Carter announced a $100 million federal
spending on solar-power research and development
and set a personal example by installing a
solar-water heater on the White House roof.
Oil prices fell sharply during the Ronald
Reagan presidency, and there was a reversal of the
policies on energy efficiency and conservation,
and developing of renewable sources of energy,
dramatized by Reagan's removal of the solar panel
from the White House roof. In the private sector,
US utilities cut their investments into energy
efficiency by half. President George H W Bush, an
oil man, followed Reagan's lead.
But
Japan's government and private companies stayed on
course. By 2006, Japan produced almost half of the
total global solar power, well ahead of the United
States, where Russell Ohl invented a silicon solar
cell, the building block of solar photovoltaic
panels, which convert sunshine into electricity.
The Japanese companies made their
electrical and electronic consumer items and
factories more energy efficient. Today Japan
produces one ton of steel using 20% less energy
than in the United States, 50% less than in China.
On the whole, the Japanese cars offer
better fuel efficiency than American cars. In
1995, Toyota introduced a "concept" hybrid car,
combining an internal combustion engine with
batteries, and began mass production seven years
later. Now it's another Japanese corporation,
Nissan, that has promised to cut the cost
differential between a standard and a hybrid car
from $5,000 to $2,000.
Starting in 2002,
Toyota leased hydrogen cell cars at $10,000 a
month for 30 months, to government bodies,
research institutions, and energy-related
companies for trial runs. Japan already has 13
state-owned hydrogen fueling stations, most of
them in the Tokyo area, and a few energy-related
companies also have their own fueling facilities.
In 2006, another Japanese company, Mazda,
came up with a hybrid car combining hydrogen cells
and gasoline. In the absence of a hydrogen fueling
station, it runs on gasoline and uses existing
engine parts and production facilities to lower
costs.
Little wonder that the oil usage in
Japan has dropped by 15% over the past dozen
years.
The United States and other Western
nations ought to follow the example of Japan to
bring about savings in oil consumption which can
then satisfy the rising demand in China and India
without causing a price explosion. For the
present, though, there's no quick fix for the
current hike in prices.
Dilip
Hiro is the author of Blood of the Earth:
The Battle for the World's Vanishing Oil
Resources, (Nation Books, New York; Politico's
Publishing, London; and Penguin Books, New
Delhi).
(Copyright 2008 YaleGlobal
Online, a publication of the Yale Center for the
Study of Globalization. Republished from Policy Innovations with kind
permission.)
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