At the beginning of this year, most experts in energy economics believed that a reasonable price for oil was between US$31 and US$32 per barrel. When the oil spot price recently exceeded US$35 a barrel, however, many people began to worry about the possibility of a third oil crisis.
There is a background to the recent rises in crude oil prices. First and foremost, the surplus capacity that can serve as a buffer to soften market adjustments has decreased markedly in recent years, from approximately 20 percent of total production to roughly 5 percent. The oil-producing countries with surplus capacities are, moreover, mostly situated in the politically unstable Middle East. Second, since commercial considerations already outweigh arguments for so-called strategic stockpiles in Europe and America, most western oil companies in the market operate on the principle of keeping minimal stock on hand. For example, in 1996, the US sold off a portion of the oil from its national stockpile (approximately 28 million barrels), and in 1997 Germany also sold off 14 million barrels in order to comply with the currency unification requirements of the EU.
Would an oil crisis be beneficial to the Organization of Petroleum Exporting Countries (OPEC)? OPEC did not benefit economically from the previous two oil crises that it caused. In fact OPEC itself came under severe attack. Overly inflated oil prices caused stagflation in the world economy and prompted oil consuming nations to seek non-OPEC sources of oil supply as well as alternative energy sources. This was detrimental to the OPEC countries financially, and an explosive rise in the price of oil certainly does not match the long-term economic interests of OPEC. This is reflected in OPEC's decision to increase daily production by 800,000 barrels of crude oil, starting in October, in order to hold down oil prices. Objectively speaking, the supply side of today's international oil market is no longer monopolized by OPEC, and the increase in demand for oil on the part of industrialized countries is extremely limited. The probability of another oil crisis of the type we have seen before is very low.
At present, Taiwan imports 97 percent of its energy resources. In the face of changes in international oil prices, what strategy should we adopt? Having served for many years as chairman of APEC's energy experts group, and on the basis of the experience of countries like the US, Japan, Australia, and Canada, I recommend that we adopt a strategy of increasing the nation's overall competitiveness. This includes energy and industrial policy as well as environmental protection standards, and so on. In other words, we need to ask first what kind of industry is necessary for the continued development of our nation's economy. What energy resources will satisfy the demands for increased competitiveness in these industries? What kind of environmental protection standards will raise the overall quality of life for the people? We can't protect the environment for the sake of protecting the environment, nor can we diversify energy resources for the sake of diversifying energy resources because the greatest safeguard of the people's welfare is the continued development of the nation's economy.
Let us take climate change as an example. The approach of restricting emissions of carbon dioxide is somewhat biased because climatic treaties cover many different types of greenhouse gases. We have a good record in the management of greenhouse gases like fluorocarbons and methane, and solely restricting carbon dioxide emissions will have a direct impact on industry. Such a strategy would fail fully to address the whole issue. In the same way, support for construction of the Fourth Nuclear Power Plant which rests on the notion that nuclear power does not emit carbon dioxide as a byproduct is also flawed. At present, many people habitually categorize industries as traditional industries or high-tech industries. Some people also talk about high-energy-intensive industries or low-energy-intensive industries. In fact, such categorization is inappropriate in terms of lifting the nation's overall competitive strength.
There are no sunset industries in the market today, just sunset products. By the same token, if the steel products we manufacture employ new methods and new production techniques with lower costs and lower pollution than those of other countries, then the industry that is producing this kind of product can't be called a high-energy-intensive industry. In fact, such industries are the basis for our competitive advantage in manufacturing.
Today many of our industries face difficulties. Energy costs are certainly one of these. On the other hand, technological research and development has also made many new breakthroughs. Much of the call for energy can now be satisfied with only about half the energy that would have been required in the past, but the habits of consumption change less quickly. The vast majority of refrigerators now in use, for example, cost about the same as newly developed models, but differences in terms of energy efficiency are as high as 30 percent. If these new models were in widespread use, the energy conservation benefits would be apparent on a national scale.
The problem is how to get people to throw out refrigerators with many years of use left in them and exchange them for new ones, despite the fact that the cost of the new refrigerators would be offset within four to five years by the benefits of improved energy efficiency. Another example is new light-emitting diode (LED) traffic signals, which use 90 percent less energy.
Today if the government were willing to address these difficulties, we could in fact adopt successful technologies employed by developed countries on the demand side. Japanese industrial furnaces, for example, use "pre-heated air" technologies to improve energy efficiency by over 30 percent. The Japanese government provides subsidies to achieve dual benefits -- on the one hand increasing the energy efficiency of those industries that use industrial furnaces, and on the other hand expanding the market for the makers of industrial furnaces. This method of subsidy does not amount simply to throwing money away.
Taiwan also currently has many energy-saving techniques and products developed successfully with government support and awaiting government subsidy for their widespread promotion.
Facing imminent entry into the WTO and the opening of all markets to competition, the new government should advance our nation's important products by means of appropriate governmental measures, including measures which promote high energy efficiency and those which enforce environmental protection standards. In this way, we can resist the dumping of inferior products at cut-rate prices on the Taiwan market and raise Taiwan's overall competitiveness at the same time. The new government should whole-heartedly pursue this approach.
Fang Liang-jyi is Deputy General Director of the Energy Research Laboratory at the Industrial Technology Research Institute.
Translated by Ethan Harkness
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