Several reasons, some bogus and some real, have been advanced for the rise in prices of oil and gas since 2003. These include the Iraq war, constrained OPEC production, falling non-OPEC production, speculation by hedge funds, and China’s fast-rising consumption. Now a new factor has come to light that may be even more important: a change in the hurricane cycle in the Gulf of Mexico.
When this column was written, Hurricane Rita, a category 5 hurricane, was about to hit the Texas coast. This was less than a month after another category 5 hurricane, Katrina, swamped Louisiana and Mississippi, flooding New Orleans. These two hurricanes between them will shut down 73% of offshore oil and 47% of natural gas production in the US. Oil refineries shut down by the two hurricanes represent nearly 23% of total US refining capacity. No wonder oil, gas and petrol prices have reached new highs.
Now, these shut-downs are temporary, and full production will resume in due course. But since global supplies are stretched to the limit, even the smallest drop in production sends prices soaring. The bad news is that recurring hurricanes may cause more such production disruptions. US meteorologists warn that the world has shifted gear into a cycle of increased hurricane activity that may last 20 years.
The hurricane season in the Gulf of Mexico is not even half-way through: it runs from June to November. In the 1960s, the Gulf witnessed a marked reduction of hurricane intensity, which lulled people into thinking it was permanent.
We now know better. In 2004, four major hurricanes (Charley, Ivan, Jeanne and Frances) hit the southern US coast. Of these, Ivan caused major mudslides in the ocean floor that devastated oil and gas pipelines, and reduced oil production by a whopping 45 million barrels over six months.
Now the 2005 hurricane season looks set to break all disaster records. Category 4 Hurricane Dennis struck in July, hurting mainly the Caribbean islands. Then came Hurricane Emily, also Category 4, which hit mainly Cuba and Mexico. These have been followed by two category 5 hurricanes, Katrina and Rita.
Environmental groups claim, implausibly, that global warming is responsible. But changes in the weather cycle are common even without global warming. Meteorologists fear that a high-intensity hurricane phase has begun in the Gulf of Mexico, and may last two decades.
Readers may not be familiar with hurricane intensities, rated from 1 to 5 on the Saffir-Simpson scale. Many cyclones or tropical storms of sub-hurricane intensity regularly hit the coasts of India, China and the southern US. When wind speeds rise to the range 119-153 km/hour, a storm is called a category 1 hurricane. Higher wind speeds represent higher categories, with 250 km/hour representing category 5, the worst of all. Each category represents a ten-fold increase in strength. Thus, a category 5 hurricane is 10,000 times stronger than category 1 hurricane.
This explains why the impact of hurricanes on oil and gas production has gone from marginal to massive. Category 4 hurricanes used to be rare in the Gulf of Mexico, but 2005 has already witnessed two Category 4 and two category 5 hurricanes, with half the season yet to go.
What are the implications for India? First, we must gird our loins for a protracted period of high oil and gas prices. Even if high prices curb demand, hurricanes may intermittently curb supply, so that prices stay high.
Second, we must re-think our energy policy. The price of natural gas has doubled over the last year, so gas-based electricity looks prohibitively costly. Plans to import massive quantities of gas for power production need to be put on hold till State Electricity Boards demonstrate their willingness to raise tariffs in tandem. Today, most states are going in the opposite direction (Punjab is the latest to decree free power for farmers).
Third, India must shift massively to coal for power production. The mindless public sector monopoly on coal must go, and the private sector must be given a free hand to mine and sell coal. Parts of the south and west find it cheaper to import high-calorie coal than to transport low-calorie coal from Orissa and Jharkand. Importing coal will be far cheaper than importing gas.
Finally, we need to consider a massive programme to gasify coal. This can substitute imported gas. SASOL and Shell are willing to sell the technology, but the public sector has shown no interest, and the private sector has not been let in so far.
In a conventional thermal power plant, only 35% of the coal’s energy is converted into electricity. But if the coal is first gasified and then used in a combined cycle power plant, the efficiency of energy conversion can rise to 40-45%. The same coal will yield far more electricity. That is the path India needs to take.