Cut energy demand to meet shortage
Between April last year and March this year, the world was struck by three Black Swan events that 'everyone' knew would happen, yet, strangely, seemed unprepared for when they did.
The Gulf of Mexico oil leak, the political upheavals in the Middle East and North Africa (Mena) region and the earthquake-tsunami-nuclear tragedy in Japan are already inflicting history-altering impacts, not the least, because they have significantly and immediately reduced the world's supply of cheap energy.
Yet, their occurrences should not have surprised anyone as experts including geophysicists, engineers, political scientists, economists, nuclear scientists, environmentalists and regulators have been warning for years that deepwater drilling carries high operational risks, that the Mena countries were ripe for revolution and that any of Japan's 54 nuclear plants could leak radiation if struck by a massive earthquake.
Tougher regulations and the increased costs of deepwater operations following the Gulf of Mexico disaster have already slowed down offshore developments that could reduce up to one million barrels per day (bpd) in new oil flows.
War has removed the bulk of Libya's 1.6 million bpd of production while the spreading unrest is threatening further supply losses in the other Mena countries.
The March 11 earthquake-tsunami disaster has permanently shut down the giant Fukushima nuclear power complex, forcing Japan to compete with other countries for oil, coal and natural gas supplies.
The direct and imputed loss of anything from two to four million bpd of crude supply or 2.5 per cent to 3.5 per cent of global consumption within such a short time has reduced the world's surplus oil capacity just as demand is surging to record high levels of over 88 million bpd today.
The world's spare crude oil reserves of around four million bpd could soon vanish as demand - the economic recession in the West notwithstanding - is still growing. The world will have the impossible task of finding and producing a minimum nine to 12 million bpd of new oil by 2020. At the same time, oil companies must arrest the rapid 8.3 per cent annual decline of maturing fields.
Economist Jeff Rubin put it starkly last year: 'You have to run faster to stand still - about four million bpd faster every year just to offset what we lose to depletion globally.'
Gulf of Mexico oil leak
As its memory fades, some might wonder what the fuss was all about when a BP-chartered oil rig blew up in the Gulf of Mexico on April 20, 2010. Along with the death of 11 workers, the rig sank to the bottom of the ocean and ruptured the Macondo well. By the time the holes were plugged on Sept 19, the US government said more than 4.9 million barrels of crude oil and an unknown amount of methane had been released into the Gulf.
To this deadly concoction, US government agencies, BP and its partners poured tonnes of chemical dispersants to counter the spill. Parts of the seabed have become dead zones while workers, researchers and residents in the coastal areas are suffering from various health problems.
While the tragedy's human and ecological impacts have faded from the headlines, its impact on the world's oil supply will be impossible to ignore.
Governments have begun imposing tougher regulations and ordered more inspections of offshore oil projects. Insurance costs have risen sharply while oil companies must invest heavily to improve their technological, technical and management capabilities to work in deepwater areas.
According to consultant IHS CERA, deepwater oil provided just under 10 per cent of total world supply in 2010, up from around 2 per cent in 2000. Oil companies counting on deepwater supplies to continue to make up for depleting onshore fields will have to rework their numbers.
The speed of uprising and civil wars sweeping the Mena region since last December is threatening the world economy as the Middle East alone supplies more than 30 per cent of its oil, and holds more than 56 per cent of its oil reserves and 45 per cent of its natural gas.
Encouraged by the overthrow of the Tunisian and Egyptian presidents, protests have spread to Saudi Arabia, Bahrain, Kuwait, Oman, Jordan and Qatar, while Yemen, Syria and Sudan could follow Libya into civil war.
The West and Asia's energy-dependent giants, China, Japan, India and South Korea, are panicking as they had largely entrusted the region's monarchies and military to keep the oil flowing.
Increasingly, even the pro-Western regimes of Saudi Arabia, Kuwait, Oman, Qatar and Bahrain need high oil prices to pay for their massive new welfare programmes to keep their citizens from rebelling. The rest of the world will end up paying for these programmes through higher oil prices.
Japan's economic collapse
Japan could be the first major modern economy to collapse from mismanaging its energy policy.
Mired in an economic slump for over two decades, Japan Inc is shrivelling from the impact of the March 11 tragedy. More than 26,000 people died following the 9-Richter-scale quake which set off a tsunami that damaged or destroyed towns and villages, farmland, infrastructure, refineries and nuclear power plants.
While it quickly rebuilt after the 1995 Kobe earthquake, Japan is unlikely to fully recover from the Fukushima disaster given the long-term radiation damage to an area that accounted for 8 per cent of the national gross domestic product.
Comprising six reactors generating 4.7-gigawatt of electricity, the Fukushima 1 complex represented nearly 10 per cent of Japan's total nuclear capacity.
Amid mounting public anger over owner Tokyo Electric Power Company's cover-up and Tokyo's inept handling of the disaster, the Japanese people are turning against nuclear power, which supplied 29 per cent of their electricity last year. Capitulating to public pressure, the Trade Ministry has agreed to consider shutting down all of Japan's 54 nuclear plants by next April. If it becomes nuclear-free, Japan would have to spend an additional three trillion yen (S$45.5 billion) to import oil, gas and coal to generate its electricity.
The world felt the impact of Japan's added demand for fossil fuels in the weeks after the disaster. Liquefied natural gas demand surged, pushing Asian prices up at least 30 per cent to more than US$14 per million BTU.
Energy austerity, not security
While the world might have a case for pleading 'bad luck' to the occurrence of three Black Swan events in less than a year, it will have little excuse to not prepare for what lies ahead.
While the West remains in recession and the Middle East burns, Asia, flushed by its economic success, is consuming growing amounts of oil, gas and coal as if they will always be cheaply available.
Renewable energy sources will not be able to fill the roles of fossil fuels and nuclear power, while neither coal nor natural gas supplies, whether from conventional or fracking sources, will flow fast enough to meet the region's insatiable energy demand.
There will not be enough cheap energy supply to meet the world's rising demand. The only serious option left would be a conscious and organised effort to reduce demand and to start culling activities and sectors that cannot be sustained when oil rises to US$150 a barrel and higher.
Japan's sudden enforced energy austerity, as symbolised by the darkened skyline over Ginza and the slow death of its pachinko industry, points to a real possible future for Asia.
Help build resilience. DONATE NOW