More Losses at Temasek Holdings

Last week, Reuters reported that Temasek Holding's stake in NIB, a Pakistani bank, was estimated to have suffered a paper loss of around USD 400 million, out of a total of USD 540 million invested initially.  This was indeed bad news.  While I am not against Temasek Holdings per se, it is perhaps time to have a fundamental re-look at its mandate and to see if things can be changed so that the company better support the long-term survival of the country.

Firstly, if not already being practised, geopolitical risk analysis should be incorporated into the investment process.  In the case of Pakistan, that it was on its way to being a failed state was evident for a number of years even if we examine publicly-available information sources. As such, while such 'frontier countries' are suitable for private entities with large risk appetites, it may not be suitable for SWFs that are supposed to be trustees of national wealth.

Secondly, instead of focusing only overseas, could there be a possible shift inwards to look at higher risk investments inside Singapore that will help the country's longer term survival?  What I have in mind is the funding of technology projects that have longer payoff periods, such as converting our national energy infrastructure to one that has a significantly larger component for solar energy, as a way to mitigate the risks arising from dependence on imported natural gas for our electrical power generation.  Imagine how much solar capacity could have been added to our HDB estates if the billions lost in recent years were to be redeployed.

Both GIC and Temasek Holdings are institutions designed to prosper in the previous age where financial asses were on the ascendant.  With the impending approach of Round 2 of the Global Financial Crisis, where there is a significant risk of systemic financial collapse, it is likely that there will be a lot more heartache for Singaporeans arising from our SWF investments overseas. In the coming era, where resource scarcity and climate problems could limit economic growth, I feel that it is high time we prepare for a global environment where control of resources becomes much more important.

Importing Electricity

The local media reported that Singapore is looking to import electricity from other countries in the region.  Perhaps this is a prelude to tapping potential new nuclear power capacity that may come online in neighbouring countries, especially in view of the fact that natural gas production in both Indonesia and Malaysia are expecting to fall in the coming years.

But whatever it is, I think it is a step in the wrong direction, since it is moving us towards a greater dependence on imported energy rather than greater resilience through stimulating domestic alternative energy production.  It is disappointing that the government appears not to be willing to prepare us for a future where the holders of energy resources will gain political and economic power, and where importers like Singapore will be increasingly at their mercy unless we take active steps to mitigate the risks.

Indon Natgas Supply Risks

The Jakarta Globe carried a story on Sep 22 where a top minister called for cuts in Indonesia's natural gas exports to Singapore, claiming that such exports were excessive and that the gas was needed for domestic use.

While I have no doubt about the ever-increasing domestic demand for natural gas in Indonesia, it is interesting to note that Singapore has been singled out even though countries such as Japan and South Korea take larger volumes of the country's gas exports in the form of LNG.

What this illustrates is that because Singapore is small, we are naturally taken as being 'easy to bully'.

As I have written repeatedly on this blog, we are moving into an era of resources nationalism, where countries with good resource endowments want to use them to gain leverage over others that are dependent on such imports.  In such an era, Singapore's power relative to its resource rich neighbours will be weakened, and so we can expect more 'bullying' from them in the coming years.

Given the risks to our natural gas imports, which is used to generate electricity, we need a coherent plan to reduce reliance on imports to the greatest extent possible, even though we will always need to import.  But so far, we haven't got a plan.

Oil Supply Disruptions Likely - US Military

Following the Joint Operating Environment 2010 report by the US military warning of supply shortages in the oil market of up to 10 mbpd by 2015, the US Department of Defense's latest Operational Energy Strategy report to Congress has again highlighted the risk of disruptions to global oil supplies.

Page 8 of the report states:

The volatility of oil prices will continue to be a budgetary challenge for the Department, and the realities of global oil markets mean a disruption of oil supplies is plausible and increasingly likely in the coming decades. The Services have already taken steps to certify aircraft, ships, tactical vehicles, and support equipment to use alternative liquid fuels, a prudent insurance policy against future oil supply disruptions and high prices.

The reason why I think we should pay attention to what the US military says is that these people tend to take a hard, long-term view of things when it comes to assessing threats to their country.  For example, more than 20 years ago, they were already warning Congress about American foreign dependence on Rare Earth Elements technology in US weapons system.  Of course, now that risk has come to pass has China effectively controls 97% of the REE market.  Given such a track record of long-term thinking, I tend to take their views seriously.

The full OES report can be found here.

Japan Earthquake, Nuclear Energy and Reality

First off, my thoughts and prayers go out to all the Japanese people affected by Friday's massive earthquake.

Now, from the Twitter-sphere, I see that some Japanese people questioning the need for nuclear power.  We also see the Italians protesting against nuclear power in their own country.

Here's the reality: The current level of comfort that both the Japanese and Italians enjoy would not be possible without nuclear power.  Both countries have almost no indigenous sources of fossil fuel needed to generate the amount of energy consumed.  Renewable energy sources cannot scale up enough to meet those needs either.  Consider the fact that a generator powered by a wind-farm to provide base-load capacity would require either a coal or natgas-buring generator to work as a back-up due to the intermittent nature of winds.  Thus, without nuclear power, both countries would be dependent on the importation of fossil fuels to power their grid.  That, of course, is unacceptable to the Greenies with their claims of anthropogenic climate change due to CO2 emissions from the burning of fossil fuels.

I guess a lot of people who complain against nuclear power do not have enough knowledge of electrical engineering to realise that their advocacy of alternative energy means a return to 17th century living standards.  There's absolutely nothing wrong in desiring a simpler, lower-energy existence.  But it is the height of lunacy to think that one can maintain modern levels of energy consumption without nuclear power or fossil fuels.  But I guess they won't realise this until Facebook or Twitter stops working due to the lack of power to run those massive server farms.

Beware of Another Oil Shock

Earthquakes, bank runs, riots and choppy markets.  What a week!

With the messy situation in the Middle East, more market participants are expecting sharply higher oil prices in the near term.  The latest people to put out a bullish forecast for oil is Nomura.  As reported by the UK Telegraph, Nomura has stated that should Algeria's production be shut down together with Libya's, then oil prices could hit US$220 per barrel.

To me, if oil were to hit that level, it would be a quick spike up that would kill the global economy.  I doubt it will be a slow climb because if the world economy could not withstand a price of US$147 per barrel back in 2008, it will definitely not be able to withstand that price today given that it is in a far weaker shape today, let alone US$220.

That said, what was more interesting in the Telegraph report was the following quote:

Jeremy Leggett, a leader of the UK industry task force on peak oil and energy security, said the Mid-East crisis "shows the extreme fragility of the global system. People don't realise how close we are to a potential precipice if this unrest reaches critical mass in enough OPEC countries. Governments need to draw up emergency plans and get cracking on proactive measures while we still have time," he said.

While some Singaporeans rightly fear the spectre of a worsening inflationary situation, there could be worse to come.  At the community, family and individual levels, we need to think of ways to deal with these challenges with minimal reliance on the government.  This is not the time to complain about the inadequacy of the budget handouts, nor boast about the popularity of your political website vis-a-vis the PAP, nor fight amongst yourselves to see who gets to be the boss.  And no, the real danger to the country is not when the PAP implodes, as some  have suggested.  There are far bigger storms out there.

Future Growth Amidst Resource Scarcity

It appears to be axiomatic amongst our policy makers that the future of Singapore depends on raising the productivity and knowledge intensity of our economic activities. While this strategy is undoubtedly important insofar as it helps to reduce our dependence on foreign labour, as someone who subscribes to the global resource scarcity thesis, I sometimes wonder how far we can go as a country given the fact that we have little control over the most fundamental aspects of all human economic survival - food, energy and water. (As an aside, our ability to produce Newater has merely transformed our water problem into an energy problem, since Newater production is energy-intensive.)

Two days ago, I came across an analysis by John Taylor, Chief Investment Officer of FX Concepts, a forex research company. He argued that with the Internet and the proliferation of knowledge, it has become less scarce a commodity:

Countries that control more of the factors of production will be dominant. Today, the tables seem to be turning on the West. As education has become almost universal, knowledge, intellectual expertise, and competent labor have become less expensive and less valuable as a result.
[...]
Because the playing field has become level for the first time in history, we would argue that, at this time in history, the battle has shifted to raw materials. If we assume that today's critical resources are gas, oil, agricultural output, and rare earths, Europe is totally out in the cold and the US is supported only by its strength in food production. Although commodities have played a diminishing role in economic history and, thanks to scientific advances, should continue this long-term trend, the scramble for scarce resources should impact economic cycles and growth in the decades ahead.

Given that knowledge is intangible and it's production is not directly constrained by the physical reality of limited resources, his argument certainly has some merit, in my view. And if he is correct in his assessment, there will be very important and serious implications for Singapore's economic future. This is an issue which neither the government nor the opposition parties has addressed publicly.

Food for thought as we savour Chinese New Year delicacies.

Powering HDB flats with Solar Panels

Channel Newsasia has reported on the success of HDB's solar trial in several housing estates in Singapore, resulting in energy savings. It also reported that the HDB had express hope that the common-area electrical power needs of HDB flats could be 100% covered by solar energy. This is definitely a move in the right direction, despite the fact that the cost of electricity from solar panels is current higher than from natural gas.

With improving efficiency for PV cells, and better conservation, I think it is highly possible that the 100% target can be achieved. The only thing that I think can be done better is perhaps that HDB could hasten to expand the programme to as many areas of Singapore as possible.

Another Peak Oil Report from the U.S. Military

After the United States Joint Forces Command published its Joint Operating Environment 2010 report in February this year in which the issue of peak oil was mentioned, the US military has one again dealt with the issue in a new report entitled Fueling the Future Force: Preparing the Department of Defense for a Post-Petroleum Environment.

While the report has made some unrealistic assessments about biofuels, it does make an important point, namely that we are currently in a period of relatively cheap oil prices and living under the misconception that there are ample supplies, resulting in prices not reflecting the true value of oil and a lack of incentives to move away from this source of energy. This sentiment is similar to the one expressed by the late Matthew Simmons, who said that oil was too precious to be burnt away in cars as transportation fuel.

The point regarding the lack of incentives is particularly pertinent to Singapore, as one of the reasons for the slow pace of deploying solar energy systems is that they are not economical at current oil and natural gas prices. Whether or not we will be able to make the transition in time towards using more solar energy systems in the future when oil prices are sufficiently high is at present a matter of speculation. That said, from an energy security perspective, it would appear to me to be prudent to start working on the transition now even when it does not make short-term economic sense, since we do not know when supplies will become unavailable even if we are willing to pay the higher prices that will definitely be demanded for the remaining precious supply of oil.

Peak oil now mainstream in UK?

It would appear that the issue of peak oil is coming into the mainstream consciousness in the UK as Energy Secretary Chris Huhne has now asked his ministry to look at the likely impact that 70's style spikes in oil prices would have on the UK economy, as reported by The Telegraph.

I think it is commendable that the UK is paying attention to the issue of energy security despite the problems that their economy and financial system are facing. In 2010, government, industry and academia in the UK have all published studies on the impact of peak oil on the UK economy. As such, they are much further ahead than Singapore is terms of generating awareness of the issue amongst the public.

In terms of mitigation steps, after implementing the largest offshore wind-farm in the world, the UK government is now willing to work on a compromise deal that will promote the use of nuclear energy, another low-carbon energy source.

Now, what can we do here?