Oil and our vulnerabilities

We are dependent on oil. Yet oil is unique among commodities. Unlike other goods such as gold and agricultural produce, the oil markets act as an indicator of geopolitical risk. This is partly a quirk of geography and history: the better part of the world's oil reserves lie in the Middle East, thus any instability in the region will send oil prices soaring. The price spike might be due to a fall in production, or caused by people purchasing oil in the expectation of future scarcity. Similar issues surround the Latin American oil producing nations, but their influence on oil prices is limited, commensurate with their relatively minor contribution to world oil supplies.

Although the Middle East is thousands of miles away, events there will still affect us. Direct economic impact would occur through a spike in oil prices. A small island like Singapore is a price-taker for oil imports -- if oil prices go up, we have neither the massive stockpiles, the production capacity, nor the geopolitical influence to change the price. While it is true that our oil refining industry gives us some price-setting ability, it is not the major part of our economy, and would not give us sufficient leverage to be an overall price-setter.

The effect of high oil prices cannot be overestimated. These effects include:

Electricity prices go up. In the short term, this can be buffered by using natural gas to generate electricity, rather than oil. However this is only a short-term cushion. It would not provide adequate price protection against a long-term rise in crude oil prices.

An October 2006 paper (Villar & Joutz, 2006) by the US Energy Information Administration studied the relationship between oil and natural gas prices. They found that a temporary 1-month shock of 20% to oil prices had only a 5% impact on natural gas prices, which dissipated to 2% the following month. However a permanent shock of 20% to oil prices would leave natural gas prices 16% higher even a year later.

In summary, using natural gas as an energy source would protect against temporary shocks on the order of 1 month's duration, but would provide scant security if world oil prices rose permanently.

Transport costs go up. This affects petroleum-dependent transport such as cars, taxis and buses which use the internal combustion engine. Electrical transport such as train systems will also be affected, for the reasons above. International transport is also affected, as the price of jet fuel rises.

Prices of petroleum-derived products may also rise. Singapore is a major hub for oil refining as well as redistribution. Processed products of oil include solvents, lubricants and plastics. A rise in oil prices may affect our own refinery exports, especially if demand for such byproducts falls due to rising prices.

Cost of living and cost of doing business will rise. Homes, offices and factories all require electricity and transport. Workers commute daily, companies require transport to deliver goods, and offices use air conditioning. All these are energy intensive, or dependent on transport systems that in turn rely on oil or electricity. We can see that the cost of an oil shock percolates through the economy, increasing living costs and business costs. Transaction costs also increase, reducing economic efficiency. Hardship and economic slowdown may follow.

The Future: where do we go from here?

While the price per barrel has fallen recently, it is reasonable to assume that oil prices can and will rise again in future -- in the short term due to events in the Middle East, and in the long term as global oil reserves are exhausted. Long-term price rises also may occur if a catastrophic conflict erupts in the Middle East: Israel is the only (albeit undeclared) nuclear power in the region, but Iran will likely succeed in developing a nuclear arsenal as well. The consequences of the ensuing regional nuclear arms race would be unpredictable.

We have several options to ameliorate this energy risk.

Natural gas. Most of Singapore's electricity today is generated by natural gas, which reduces direct dependency on oil. Diversification of sources of natural gas is also a good idea, which presumably is the reason for building a Liquid Natural Gas (LNG) shipping terminal to complement the existing pipelines. This hedges against the pipeline being struck by terrorism and other untoward incidents. Our recent bilateral relations work with Qatar, which has the world's largest reserves of natural gas, may also be part of this strategy.

However natural gas prices are related in the long term to oil prices, for reasons mentioned above. So diversification to include natural gas is just part of the solution.

Biofuel. This is produced by processing biomass, typically agricultural plant matter, to generate energy sources such as diesel oil (biodiesel) or alcohol (ethanol). Biodiesel can be used in diesel vehicles as part of a petrodiesel/biodiesel mix, while ethanol can be used in specially designed engines. Brazil, after some initial teething problems, is transitioning towards a plural energy economy: many new cars there are biofuel-friendly, or hybrids which can use both petroleum and biofuel.

Unlike petroleum diesel, biodiesel is nontoxic and biodegradable. Particulate, carbon dioxide and sulphur dioxide emissions are reduced, although there is some increase in nitrogen oxide production. The odour of its combustion is also less objectionable.

Ethanol burns even more cleanly, yielding only carbon dioxide and water. The net carbon emission is limited, though, as the original plant matter would have been an absorber of carbon dioxide.

A strategy for biofuel use in Singapore might include:

Tax breaks to encourage transition. Diversifying the domestic energy profile involves managing what economists call externalities. If biofuel-friendly vehicles cost more and are less convenient to use, then the average driver will not want to purchase one, whatever the broader benefits to the environment or the economy. There have been tax breaks for 'green' cars in the past. If not already the case, these tax breaks should be extended to biofuel vehicles.

Furthermore, prior to 1 Jan 2006, diesel passenger cars were charged a 6-fold premium on road tax. This has been reduced to a 4-fold premium, but more can be done -- biodiesel vehicles should be taxed at the same rate as petroleum vehicles, if not lower. The same should apply to ethanol-driven cars.

Government vehicles. A proportion of police, ambulance and military vehicles should be biofuel-compatible hybrids. This will act as additional insurance in the event of a fuel crisis.

Cultivating agricultural nations and biofuel exporters. If biofuels gain prominence in the world energy market, agricultural-rich nations will have increased influence. While continuing our links with the Middle East, we should also maintain good bilateral relations with these biofuel producers. We can build a second level of protection against dependency, by obtaining biofuel from multiple sources, spread across more than one geographical region. The two largest producers of biofuel today are Brazil and the United States, both having domestic agriculture as a source of raw material. Closer to home, Thailand is a world-class exporter of sugar (used in ethanol production), and Malaysia is a major producer of palm oil (used to produce biodiesel).

Research. Biofuels are biotechnology-intensive in their production. Enzymes are required to prepare the raw material biomass, followed by fermentation and processing. Some of our massive R&D investment should go towards biofuel research.

Biofuel hub. Singapore can start a biofuel hub, specialising in efficient conversion of raw material to fuel. This would dovetail nicely with an ongoing research programme, and generate more employment for life science graduates. Raw palm oil could be obtained from Malaysia or Indonesia to make biodiesel. Ethanol could be produced using sugar from Thailand. There would undoubtedly be competition as other regional players try to join the bandwagon (Malaysia has mentioned becoming a biodiesel hub), but this is not very different from setting up an oil hub, which we have successfully done.

Solar and wind energy have historically been land-intensive, at least at the scale required to sustain national-level energy supplies. This may not be a feasible solution for land-scarce Singapore. However increases in efficiency of photoelectric cells may make solar power a viable option. Singapore may benefit from having an ongoing research programme here, perhaps as part of existing nanotechnology research.

The Nuclear Option. In the Singapore context, nuclear power is a "hot potato" topic (or is that "radioactive potato"?) which could easily occupy an entire article of its own. Briefly exploring the issue:

Relative independence. So long as nuclear fissile material is supplied, and a nuclear waste disposal facility provided, there is energy independence for the lifetime of the nuclear fuel shipment. This compares to oil, natural gas and biofuel, which are supplied and utilised in continuous fashion.

Emission-free. Nuclear power plants do not produce carbon dioxide or other greenhouse gases during normal operation. (Abnormal operation is a totally different matter!)

Geopolitical baggage. Nuclear energy is perhaps the one energy source with potentially more geopolitical complications than oil, in no small part due to its potential for weaponisation. Many countries have used nuclear power as a stepping stone to a nuclear arsenal: North Korea is a recent example. Even if a hypothetical Singapore nuclear power plant were certified by the International Atomic Energy Agency (IAEA) as completely and transparently peaceful, suspicions might remain among the paranoid, or those who have a political interest in fanning the flames of paranoia.

Fallout risk. Even the Japanese, with their history of engineering excellence, have suffered an accident at a nuclear power plant. Singapore, being a small island, would have no safe haven in the event of a meltdown or leak. Such an accident need not be due to incompetence: a well-executed terrorist strike could achieve the same outcome.

Second mover advantage? Indonesia has mooted the possibility of nuclear power. One possibility would be to purchase electricity from Indonesia thereafter. Furthermore, if Indonesia built a reactor first, it would dilute the opprobium against Singapore building one as well. And one might argue that if the risk of nuclear fallout haze exists (e.g. accident, terrorist strike, earthquake), one might as well have a nuclear plant on domestic soil anyway.

On balance, I think that nuclear energy is too much of a hot potato for Singapore to consider at this point in time, especially with biofuels on the ascendant. However we should not exclude it as an option, especially if energy pressures mount, or if other ASEAN nations start building nuclear power plants.

In summary, I believe that Singapore should diversify its energy portfolio to include biofuel. This would also reduce pollution and, if a biofuel hub is successful, create many jobs and expand our biotech sector. Nuclear power should remain a last resort for now, although we should re-evaluate its feasibility as circumstances change.