Time for an energy policy

Klaus Rehaag, head of the oil markets group at the International Energy Agency, in a recent presentation asked: "Is the world facing a third oil shock?"

The first such shock occurred in 1973 and 1974, when the Organisation for Petroleum Exporting Countries quadrupled the world price of oil, contributing to nearly a decade of stagflation in the global economy.

The second oil shock occurred in 1979 and 1980, when Islamic militants overthrew the brutal dictatorship of the Shah of Iran, resulting in a doubling of the world oil price, which contributed to a serious recession in much of the world and to the subsequent Third World debt crisis.

With oil prices edging over $50 a barrel this week (though still lower in inflation-adjusted terms than the peak in the early 1980s), and growing concerns over threats to supplies from the Middle East and Russia in a world where there's little spare capacity, there is talk of a third oil shock.

An oil shock means reduced economic growth, increased inflation and higher unemployment as more hard-earned dollars are needed to pay for energy, leaving fewer dollars to be spent or invested elsewhere. The effect can be seen in everything from higher personal driving costs and bigger airline fares to higher transport costs for manufacturers and bigger bills for school busing. The higher oil price is equivalent to a tax increase.

Prime Minister Lawrence Gonzi has already warned that if prices remained high his government would be forced to take unspecified "measures". In his usual blunt way, Public Investments Minister Austin Gatt declared that "it is obvious what decisions we have to take", that Enemalta could not absorb the huge price hikes and that the difference has to come "either from the people's taxes or from the power tariffs". That, however, still leaves consumers in the dark as to the dent higher power prices, or even higher water rates, may make in their pockets.

Minister Gatt could not resist taking a dig at what the short-lived Sant government did with water and electricity rates in 1998 and implied that the Nationalist government would protect small consumers. Fair enough. But there's a limit to the political mileage he can make out of this particular saga, considering that the loss of Lm11-12 million Enemalta is expected to make this year is in no small measure due to his government's decision to prohibit Enemalta from hedging its fuel purchases. Enemalta's additional Lm7 million loss will still somehow come out of the people's pockets and that easily rivals Dr Sant's much-maligned "lack of social conscience".

In a paper earlier this year, the IEA estimated that a $10 increase in the price of a barrel of oil would cost the global economy $255 billion in lost output in the first year alone. Oil prices are more than $10 higher than they were two or three years ago.

Yet the real issue is not that the world is suddenly running out of oil - it isn't - but that demand is growing faster than supply because of a decade-long under-investment in bringing on new supplies, tanker fleet and pipeline capacity and refining capacity.

The IEA estimates world oil consumption at 82.2 million barrels a day, with this forecast to raise to 100 million barrels a day by 2020 and 120 million barrels a day by 2030. Much of this growth will come from China, India and other major emerging market economies.

So the real issue is how the world squares demand and supply. Clearly, as Mr Rehaag argues, one challenge is to mobilise investment dollars and gain access to potential oil-producing regions in order to increase supply. The other focal point in this effort to match supply and demand, though, is the potential to reduce demand, such as through stringent fuel-efficiency standards.

The coincident need to reduce greenhouse gas emissions that are accelerating climate change should - with the desirability of also reducing the need for high-carbon fuels such as oil - lead to a demand strategy that focuses on fuel efficiency; new technologies to reduce the need for oil such as the move to hybrid vehicles and to hydrogen-based fuel cells; and to investment in smarter urban planning and public transportation.

We don't have an energy crisis in Malta today. But we could have one if we fail to make major new investments, running into dozens of millions of liri, in energy conservation and efficiency, new energy supply and new forms of energy, from wind power to fuel cells. That is why we need an energy strategy in Malta. We don't have one today.

Resources Minister Ninu Zammit recently said in Parliament that a draft energy policy based on EU requirements is in an "advanced" stage. Is this part of the renewable energy document promised by his predecessor and the Malta Resources Authority (MRA) as long ago as May 2002 and which has never seen the light of day? Yours truly cannot enlighten you on this. In the typical passing-the-buck which so many civil services reforms were supposed to have consigned to the dustbin, my various questions to Mr Zammit's ministry were referred to the MRA and remain unanswered. As far as Enemalta is concerned, I was told they do have a plan, but it is confidential. So, all those economic operators who need to be able to count on a steady and reliable supply of electricity have no right to know how our monopoly energy supplier proposes to meet their needs!

At the same time that we need to ensure adequate energy supplies, we also need to start a radical reconfiguration of our energy systems and how we consume energy. The strategy should be based on certain assumptions about the future, such as the need to achieve much higher levels of energy efficiency to help ensure sustainability of the global biosphere and the need to shift to a low-carbon society. The strategy should be as much demand-focused as supply-focused and should be a joint enterprise of the energy and environment ministers.

Electricity may pose the biggest challenge. Electricity in Malta is generated by the two power stations at Marsa and Delimara which between them have a total nominal generating capacity of 576 megawatts. The total electricity generated by the stations rose significantly by 8.2 per cent but the increase in demand severely taxed the generating plant.

Last year demand for electricity escalated beyond all projections and Enemalta had to pull out all the stops in an effort to avoid undesired outages and disruption of electricity supply. The peak load registered last winter reached 395 megawatts (an increase of 26 megawatts over the previous winter's peak demand) while the maximum demand in summer reached 397 megawatts (an increase of 30 megawatts over the previous summer peak).

During the summer months, the open gas turbines had to be run for extended periods to meet demand. This clearly indicates that additional generating plant should be installed to maintain a reliable supply.