Fuel crisis raises questions over the security of energy

ITS been quite a fortnight. I wrote two weeks ago in The Scotsman we couldnt expect the Saudis to turn up the oil taps and that OPEC was pinning the blame for high petrol prices on onerous tax takes by Western governments.

While making conciliatory noises, the Saudis have fallen in with the OPEC consensus and agreed only to a modest output increase. On taxes, OPEC has been winning the PR battle hands down.

There are many political lessons to be digested from this sudden eruption of discontent, which has been triggered by, but doubtless goes beyond, petrol prices, but the critical one is how vulnerable the UK and other industrial societies are to disruptions in energy supplies.

As can be seen from the graph, there have been large swings in the real oil price over the past three decades and we are currently in an upswing phase. The "real oil price" I have used adjusts crude oil prices in US$ by the export prices of industrial countries.

It shows how much industrial countries have to give up for a barrel of oil.

Here, OPEC has been doing very well. Export prices of industrial countries have been falling while crude oil prices have been rising, giving a double benefit to oil exporters.

This year, the OPEC countries will have an extra $100 billion to spend from higher oil revenues than in1999 and canny entrepreneurs will be setting out their stalls as fast as possible.

However, while there are ample reserves of oil, gas and coal to support economic growth for years ahead, there are two major issues to face.

The first is whether policy actions to curb carbon emissions under the Kyoto Protocol, in order to avert global warming, will prove costly in terms of economic growth.

And the second issue is of supply security. In fact, there is a link between the two issues.

Global warming is a big subject and I cannot go too far into it here.

But I should note that the science is more controversial than UK government policy implies. As an example, back in 1988 a leading and influential US scientist, James Hansen, was vociferous in urging action to curb carbon dioxide emissions.

A decade later, he watered down his opinions in a paper to the US National Academy of Sciences, proposing that solar influences might be more important in climate change. And in a publication last August he suggested that global warming might have been caused mainly by greenhouse gases other than carbon dioxide.

This rethink has received little publicity. It was reported this week that Australian livestock account for 14 per cent of the countrys greenhouse gas emissions. But if policy is to reduce the use of coal and oil in favour of natural gas, we are likely to become more vulnerable to supply disruption by reducing diversity of supply.

As shown in the table, the member countries of the International Energy Agency (IEA) - essentially Western Europe, North America, Australasia and Japan - have seen a large increase in nuclear energy supply since the first oil crisis . From 1 per cent of total primary energy supply in1973, nuclear energy now accounts for 11 per cent of total energy supply in the IEA economies. This has allowed reduced dependence on oil.

Although use of natural gas and hydroelectricity has increased, it is nuclear energy which has filled the gap, and the chance of increases in nuclear energy supply are limited. European countries, apart from France, are planning to phase out nuclear energy rather than raise output and even France may well face problems associated with the reprocessing and storage of nuclear waste.

The favoured energy now is natural gas, there is a lot of it - potentially - and it is less polluting. IEA countries generally, as the table shows, have been switching to natural gas with the notable exception of the US, which has raised the shares of cheap coal and nuclear energy in total energy use.

But here, again, supply security is uncertain. OPEC accounts for over 40 per cent of world natural gas reserves and, currently, Algeria, an OPEC member, supplies Europe with nearly a quarter of its gas while Russia supplies around a third. Both are countries with high internal political tensions.

Not shown in the figures is the significant contribution of technology in making energy use more efficient, helping to sharply reduce the amount of energy used in relation to GDP.

However, that does not make us any less vulnerable to physical disruption in supply. If technology allows a car to do 20 miles to the litre instead of ten there is an environmental and economic gain. But if that litre is not there, the car does not move. As we have seen recently, the economy quickly grinds to a halt when physical supply is cut off.

It was that great free-marketeer Adam Smith who wrote about defence being more important than opulence. He was writing in the context of military capability to defend a society and the correctness of subsidies to achieve this. The principle of buying insurance, of sacrifice, to preserve what is held to be of value, operates as much in the context of energy security as military security.

If all goes well and market forces are allowed to operate, OPEC will undercut its long- term position by keeping prices up and, while that lasts, the West suffers economically but gains from the downswing in prices as an over-supply emerges.

But if politics or insurrection disrupts physical supply, and the risk of this in the Middle East is high, the economic consequences for us are dire.

It is imperative that action to ensure the security of energy supplies is taken. This will involve both a high strategic reserve of oil and subsidy to promote renewable energy. That is the real lesson to be drawn from the events of the past fortnight.

http://www.business.scotsman.com/cfm/home/headlines_specific.cfm?section=OE&headlineid=2239

-- Martin Thompson (mthom1927@aol.com), September 16, 2000