The world and oil: it’s deja vu

The world and oil: it’s deja vu
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First Published: Mon, Aug 18 2008. 12 36 AM IST

Illustration: StockExpert
Illustration: StockExpert
Updated: Mon, Aug 18 2008. 12 36 AM IST
It’s a feeling of déjà vu. I was a graduate student in Dallas, Texas, in 1972 when the first oil shock pushed the world into recession. Oil prices later plunged to nearly $10 per barrel, subsequently rocketed to $150 levels, and of late, seem to be retreating again.
Illustration: StockExpert
The initial oil shock in the early 1970s forced the US economy into recession and also shocked American consumers. A country used to unlimited cheap oil and driving huge oil-guzzling Chevrolets and Cadillacs was not geared for queuing up at gas stations. It was during this period that the Japanese car manufacturers, particularly Honda with its classic Civic with its low gas consumption, started making inroads into the American market.
Overseas, it was not much better. The rest of the world followed the Americans into recession, but adjusted by raising the price of petrol and trying to cut down fuel consumption. They also looked at alternative energy sources. Shale oil and tar sands from Canada held out hope, but the cost of production was still too high to make them economical.
New Zealand was perhaps the most adventurous. One of its “think big” projects was to convert methanol to petrol. In 1979, it decided to go ahead with this. Citicorp arranged the billion dollar financing in 1981 — the largest project financing ever done. A South African firm, Sasol Ltd, perfected the technology to convert coal into petrol (invented in Germany in the 1920s), but because of the country’s racial policies it was not welcomed.
Nuclear technology was initially seen as an alternative. But, the Three Mile Island incident in the US in 1979 and the Chernobyl disaster in the USSR in 1986 stopped new nuclear projects dead in their tracks.
Over the years, with oil production rising, prices crept downward again and several initiatives were abandoned. The Synthetic Fuel Plant was mothballed (it has since been revived in another form) and the enthusiasm for shale oil and tar sands died as the cost of production was too high.
Brazil was perhaps the only country which made a determined effort to find alternatives. With its vast farm lands, sugar cane-based ethanol helped reduce its dependence on oil imports.
Japan is probably the only developed economy that made energy conservation a national goal and its industry found new ways to limit its oil consumption. It limited its annual energy usage to a billion barrels after the 1970s. A decade ago, its companies restructured to be competitive at $4 per gallon oil. It is probably the most successful among the Organisation for Economic Co-operation and Development countries in becoming more energy-efficient through initiatives such as low-emission cars, rooftop gardens, energy-efficient air conditioners and refrigerators, “intelligent machines” from subway fare chargers to building escalators that automatically turn off when not in use, and using plastic pellets from recycled plastic as fuel in their steel mills. It is now looking at selling this technology to other countries.
The supply-demand situation is now quite different from the 1970s and the 1980s, when the US, Japan and Europe were the dominant consumers. Now, the US, China, Russia, Japan, Germany and India account for almost 53% of global consumption. On the supply front, Russia and some Commonwealth of Independent States are beginning to be players in the energy market. Along with them, some African countries such as Angola, Sudan, and gas producers such as Qatar and the United Arab Emirates are stepping up production as well.
For the last 12-24 months, the situation has been paradoxical. It was only when oil touched almost $150 a barrel that the economies started tumbling and the tipping point was the housing market collapse in the US. Until then, the world economy, particularly emerging markets, grew at record rates. There was no incentive for oil producers to reduce prices.
The upside is that other initiatives that were abandoned because of their economics are now being taken up. Oil extraction from shale and tar sands is becoming viable, with Canada as the largest player. Coal-to-petrol plants, with Sasol’s technology, are being set up in Germany, West Asia and the US. Nuclear energy is no longer feared. Other energy alternatives such as wind, hydroelectric, ethanol from sugar cane, corn and other sources are also being actively pursued.
Closer home, Asian markets, including India and China, continue to maintain their growth, albeit at a slower pace. In the US, the sale of the gas guzzlers and sport-utility vehicles has almost stopped, making the already difficult restructuring of the US auto industry even tougher. Tata Motors is on both sides of the fence. Its recent acquisitions of Jaguar and Land Rover are bound to be impacted, but the Tata Nano and the company’s skills and technology in making low-cost cars are drawing attention from car manufacturers globally. Other industries in India should learn from Japan and make minimizing energy usage a top priority.
Unfortunately, people have short memories. If oil prices go back to the $60-80 per barrel levels (which in my opinion is possible within the next 12 months), then the world will go back to its old habits until the next crisis.
Avinder Bindra is CEO of Arx Analytics and Advisory Pvt. Ltd, a financial research and consulting firm. Comments are welcome at otherviews@livemint.com
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First Published: Mon, Aug 18 2008. 12 36 AM IST
More Topics: Oil | Recession | Honda | Chernobyl | Tata Motors |