Storm Clouds Over the Horizon

While the drumbeat of Singapore politics has become louder in recent months, I am of the opinion that the focus of the discourse has so far been too parochial. There are some of the storm clouds that I see over the horizon and that could have impact on Singapore within the next 5-10 years, but which has so far not been covered in the discourse.

In this article, I shall outline some of the issues that I think will have major consequences for the long-run viability of our country. Admittedly, since I don’t have the power to predict the future, these points are somewhat speculative, although I have done some homework in all areas.

Peak Oil

Some experts such as Dr. Colin Campbell and Prof. Kenneth Deffeyes have argued that global peak oil production had actually peak in 2005, based on current available data. Production of liquid fuels has kept up with demand so far due to other sources like coal-to-liquids and gas-to-liquids technology. While new ways will be found for extracting oil and gas, the fact that the Brazilians have to drill for oil more than 7 km below the earth's surface for their Tupi field shows that the era of cheap oil is over.

Peak oil will result in very high volatility in the crude oil market, as high oil prices triggers recessions in economies. Such recessions will bring down demand and thus prices for a while until recovery takes places, at which time prices move up again and the cycle repeats.

As high prices take its toll on the global economy, trade will be reconfigured as businesses seek to move their production closer to their customers in order to cut down on the distance over which they have to ship their goods in order to cut transportation costs. A preview of this happened in 2008 when some US manufacturers found that moving production from China back to the US or Mexico made a lot of sense when oil was over US$100 per barrel. Besides this, tourism will be affected as high fuel prices forces airlines to cut routes and ground planes, as had happened in 2008.

Since the Singapore economy is very dependent on trade and tourism, peak oil could have a very large negative impact on our livelihoods.

To make things worse, high fuel prices will definitely lead to higher food prices since we import almost all of our food from abroad, sometimes over long distances.

Resource Scarcity

Due to changes in the weather cycles (not anthropogenic global warming), global food production could consistently fall short of demand. This explains the current ‘land grab’ that many countries are engaging in over in Africa and South America, as previously covered by this blog. Furthermore, the availability of potash and phosphorous could also be constrained, resulting in lower fertiliser production.

In terms of other minerals, peak oil proponents like Richard Heinberg have argued that we will soon experience declines many key industrial commodities.

And let us not forget the issue of water scarcity. As covered by the National Geographic magazine in April 2010, water conflicts are starting to surface, especially in the Tibetan plateau (China and India) and the Nile region.

As resources get scarce, there could well be conflict between countries competing for those limited supplies to satisfy their own economic needs. Global cooperation will decline and the world will become more unstable, again not good for Singapore's economic model.

End of USD as Reserve Currency

If the US Federal Reserve continues current policy of debasing the USD, it could well only be a matter of time before confidence in the currency collapses and the world is forced to move to a new currency regime.

While I don’t claim to know what the likely impact of such a scenario will be for Singapore, the fact that our country is a large holder of US government debt makes the possibility of financial losses quite high should the USD lose its reserve currency status. What this means for us as citizens is that our CPF savings will suffer losses as well.

Besides this, since our independence, we have only had experience with a USD-based global currency system and nothing else. One could even argue that our economic policies were designed to take advantage of the global trade system made possible by the USD’s reserve currency role and the attendant global credit expansion cycle since the early 1970s. Once that changes, we will have to figure out how to adjust our economy to the new global architecture, and whether or not we will be up to the task remains to be seen.

War

That the US is in decline is by now quite obvious, except for people like Stratfor’s George Friedman. As we move toward a multi-polar world, there could actually be more instability, if the Hegemonic Stability Theory is correct. This is especially so as the world faces the reality of resource scarcity and there is heightened competition.

Besides this, based on historical analysis, some cycle theorists and market experts believe that we are now in a Kondratiev Winter, and some believe that major wars have to occur before the next upswing in the global economy. From a generational cycle perspective, John Xenankis of Generational Dynamics predict a war between China and the US.

If the world were to move into a period of conflict, it would again mean that Singapore’s economy will be affected, since we depend on peace for our economic model to work.

Conclusion

Since this article is about threats to Singapore, I have not covered the more optimistic factors that will affect our future (e.g. Asia’s rising economic power etc). What I hope is that more Singaporeans will take a look at these possible threats and make preparations to deal with them in whatever way they can, and of course, pray that they don’t come to pass.