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.)