Sunday, March 20, 2011

Japan's nuclear crisis and global energy

In 2004, i had chance to visit Japan and was there briefly. This was my first trip outside India and into the outside world. I remember the first time i walked out of the airport in the middle of the night and had a glimpse of this modern country i have always heard about, my first instinct was i saw lights everywhere and no people. There were no dark spots anywhere. The country was lit as though it was my house. It just took me off base for a moment. Then i learned later that the bright environment (powered by electricity) is true in all modern world. Then we took a bus from one part of the country to another, and the highway was flushed with lights for miles and miles. The first question that came to my mind at that time, was how can they afford it, and how do they generate all those electricity. So last week event kinds of answers those questions partly.

A significant portion of Japan's energy needs, come from nuclear power. There was a massive earthquake that rattled Japan of magnitude at least 8.9, that shook the north-east part of the country (Sendai) and a massive tsunami followed. Even though the nuclear reactors are designed to handle huge earth quakes, they were no answer to nature's fury of a huge earth quake followed by a huge tsunami all at the same time. The nuclear reactors were shut down, and the cooling process began. However the lack of electricity to channel the cooling was lost, and hence they had to resort to primitive means, like pouring water, and other chemicals (like borine) on the reactor to avoid a meltdown. Thousands of people have died in the tragedy and the country has lost valuables lives. In some cases, whole villages vanished. The relief effort has been complicated by radiation leaks from the nuclear reactors, and the situation is really bad. It is going to be years and years for Japanese to overcome the effects of this disaster and re-live normal lives. On a nuclear scale, the tragedy is given 6 out of 7 (Chernobyl was 7) and with the situation still unfolding, we will know more as the days progress. As a result of this nuclear accident, China has suspended its plans to build new nuclear plants in China. The whole nuclear energy generation and its safety is back in lime light throughout the world. Can the world really afford these accidents. There is a possibility that radiation might reach other neighboring countries. Even thought the nature's tragedy of earth quake and tsunami have come and gone, the man-made tragedy of the radiation leak is here to stay for a long long time.

There is a huge economic cost because of the tragedy. The global economic picture can get complicated and can re-balance global interest which can turn out to be economic aftershocks. Japan now has a herculean task of re-building the nation. The presence of radioactive elements in the atmosphere / food, have made it worse. Whether the regions are inhabitable any more is itself questionable. Japan makes a lot of money from tourism, and its going to miss that for years to come. Who would want to visit a nation, which has a possibility of radioactive materials present in atmosphere. Who would want to start a business there, or make an investment. The process of clean-up is going to cost the Japanese government a lot of money (in Yens) and it explains the recent rally of the Yen against all major currencies. Japan had its AAA ratings cut just couple of weeks prior to the tragedy. Its debt to GDP ratio is somewhere around 220%. So the borrowing cost of Japan is going to be high (interest), if it goes to the market for rebuilding money. At the same time, they hold US treasury bonds worth $900 Billion dollars. It is an asset, it can use. Countries have foreign exchanges reserves for a rainy day, and now its pouring outside. For now, Japan has stated it won't dilute its treasury reserves to calm the US bond market, but that will be short lived. It does not make sense to borrow money from the market at more interest rather than to sell the US treasury bonds and use it in reconstruction effect. If Japan is not going to use those now, when is the right time? This will create a new problem for United States. The T-bills available in the market by a Japanese sell-off is going to drive the price of T-bills down. The United States is borrowing money for low interest as of now through their t-bills. If there are no buyers, the US FED has to buy them which is most likely the case. This is usually new money supply, that will increase the inflation in the US and the world around. Even if this doesn't happen, at the rate at which the US FED is buying T-bills now, it will be the largest holder of T-bills in one year. So there is a possibility of a cascading effect in world economy because of this tragedy in Japan. We need to wait it out to watch.

The Japan nuclear tragedy has once again brought to light the hunger for energy for economical activity. The energy that everyone needs to sustain the current growth and improve their economy. But as the tragedy indicates, everything comes at a COST. There is too much energy consumption around the world, and humans are finding new ways to generate energy, and things go wrong because not everything works as we expect. The concept of fossil fuels like coal, oil are running out, and countries adopt off-shore drilling of them. The recent oil spill in the US gulf is the same problem in different format. The current rate of consumption of energy like oil is completely unsustainable. The assumption that nuclear energy is going to solve the energy needs have also come under the scanner., and looks it might even blow up the whole world. So basically, the world is running out of options on energy needs. It must be true, that oil and coal are running out, nuclear is not safe, wind and solar energy can supplement the supply and cannot be main sources of energy and still mankind needs energy for everything. The consumption driven model of economy needs a re-visit and new technology may address this issue in future may be. I strongly encourage readers to look for the concept of "peak oil" in the internet. It is worth a read.

As any other country, India too needs energy to fuel its growth. A bulk of its oil is imported. After the nuclear tragedy, questions are being raised on the safety of its own reactors. Plans to set-up new nuclear reactors all over the country with the help of other nuclear donor nations (as a result of civil nuclear agreement with the USA) will come under scrutiny. There are going to be more regulations, that are going to postpone implementations of projects. India also needs to modernize its Railways. India needs to encourage mass transport. Indian Railways are integral part of the development. It is impossible to provide a billion people with oil, if everybody has a car. We cannot sustain it with imports. Believe me, we cannot sustain even with "small" cars... its still needs imported oil. Only Railways can solve this problem. The recent Railway budget is just a election promise, and has no forward looking plans. It is just a bunch of jokers coming up with the same useless document year after year, and the media just has a talking point about it when the parliament is on. Not anything is changing and it doesn't needs any attention i think, it is just a yearly ritual. How about a budget that says, its is putting infrastructure in a year, for connecting the four big cities of South India - Chennai, Bangalore, Hyderabad and Bombay with dedicated rail lines. A passenger or a cargo train leaves every three hours from one destination to another round the clock. This is what is going to move Indians around cheaper. You could get rid of all oil dependent buses, cars from the roads. The Indian Railways can make more money in the process with quality service. This is what will bring economic success to India in the long term. It is really pathetic to see the Railways has not evolved much since Independence. The trains still resemble the ones we see on pre-independence black&white videos. The rail infrastructure has not made significant marks so far and as of now compared to its counter parts in Europe, Indian Railways can only be looked upon with sympathy. Lets hope the metro rail projects in major cities ignite expectation from public to demand equal quality service/facility for long distance travel. India needs a long term plan on its energy needs, and the current annual railway budget is a tool for the government for political publicity as of now.

Unlike other natural disasters, the crisis in Japan is going to have long term consequences because of the nuclear disaster. The revolutions in middle east and the bombing of Libya starting yesterday by western nations to enforce a no-fly zone, they are all consequence of the same problem of "satisfying ones energy needs". Governments around the world plan for innovative ways to solve their regional problems with the well being of local population in mind, the conflicts can be controlled or tolerated. Or it could get out of control anytime.