»Straight from the hip by Jawahir Mulraj

Technology, the double-edged sword
17 AUGUST 2012

Scientists very often clean up the messes made by politicians, providing technological solutions to self created problems.

The world is fast approaching, or, according to some, has already hit, peak oil production. For decades, America and Europe encouraged the growth of their auto industry, which provided lots of jobs both in manufacture and in subsequent servicing, by underpricing gasoline products. They were able to do so thanks to their spheres of influence in the Middle East, a cosy arrangement that lasted until OPEC got together and gave the Western world its first oil shock .

----------------------------------- 100% FREE subscription to The Daily Reckoning -----------------------------------

Now you can read what knowledgeable investors across the globe read every single day - for global market analysis and investment ideas. Yes, we are delighted to bring you The Daily Reckoning, a financial newsletter by Bill Bonner, Publisher and Editor, and three-time New York Times best-selling author.

As one reader put it, Bill "makes more sense in one e-mail than a month of CNBC".

Hurry! Start your free subscription to The Daily Reckoning today!


India is treading the same, foolish, path, of encouraging the growth of the private transport sector, unmindful of the crisis of disappearing fossil fuel resources. India really ought to urgently build efficient and affordable public transportation systems, but does not. Instead it has, only recently, reduced import duties on luxury cars from Europe. The Government also does not have the courage to stand up to the auto lobby and mandate tough fuel efficiency standards with increasing benchmarks every year. Tough fuel efficiency norms were mandated by USA after the first OPEC oil shock over three decades ago, but India does not bother to learn from the lessons this provides.

Consider just how crazy the self created problem is. It starts with the design of the automobile which, as the book "Natural Capitalism" says, is stupidly inefficient. It says, "The contemporary automobile, after a century of engineering, is embarrassingly inefficient: Of the energy in the fuel it consumes, at least 80 percent is lost, mainly in the engine's heat and exhaust, so that at most only 20 percent is actually used to turn the wheels. Of the resulting force, 95 percent moves the car, while only 5 percent moves the driver, in proportion to their respective weights. Five percent of 20 per-cent is one percent not a gratifying result from American cars that burn their own weight in gasoline every year."

So, because of the design of the automobile, and the material used in its construction (steel, which is heavy) as also due to the fact that most cars are driven by single occupants, but are bought, aspiring to size, just 1 % of the energy in oil is used to move the passenger! What a waste.

So scientists are called in to find new, unconventional, sources of energy.

One of these is shale oil, which is extracted by a newly developed process called fracking, short for hydraulic fracturing. As a result of shale gas obtained through fracking, America is getting cheap gas, which, in turn, has geopolitical ramifications, as it is less dependent on Middle Eastern oil and so less dependent on supporting their oligarchies. The rise in jasmine revolutions in Egypt, Libya, and now Syria, is more a consequence of the reduced dependence on their oil than on a rediscovered passion for promoting the rise of democracies.

One of the advantages of cheap gas, thanks to the technology of fracking, is that it reduces the dependence on nuclear energy, which is becoming unviable. Strangely, India is, yet, looking at more nuclear reactors, and not promoting the garnering of shale gas extraction technology. Some companies, such as Reliance Industries Limited (RIL), Oil and Natural Gas Corporation Ltd. (ONGC) and OIL India are garnering such knowledge.

But, like any technology, fracking has its own pitfalls. The process consumes too much water which can curtail higher shale gas production.

The debate of pros and cons of shale gas runs across countries. South Africa, which has large potential reserves of shale gas, is debating whether or not to allow its exploitation in the Karoo region because of the excessive use of water and because of environmental concerns (the region houses the black rhinoceros).

Scientists are working on how to reduce water consumption in the fracking process by using ozone.

Another technology of providing unconventional energy is that of the electric car. In my earlier column I had written about how an Israeli startup, Better Place, is promoting this. The main obstacle for consumers to buy electric vehicles was in the inordinate amount of time it took to recharge an electric battery, as opposed to the few minutes it took to refuel a car with petrol/diesel. The promoters of Better Place solved this by a simple strategy of 'renting' batteries to car owners, who buy the electric car without the battery, which is rented. The owner then drives to a filling station, where his 'rented' battery is replaced by another, fully charged one, in a matter of minutes.

Why does India not explore such an option?

Another non conventional source of energy was ethanol, and the US mandated blending of ethanol, derived from corn, with fuel. But this year's drought situation has sharply reduced the corn crop, and there is a raging debate over ethanol versus the world about whether corn diverted from the food chain into production of ethanol should not be so diverted. The last time this happened, it caused severe famine and deaths in African countries.

Politicians in Russia have killed one of the world's largest lakes, the Aral Sea, once the 4th largest lakes in the world. They did this by building two dams, in order to help cotton farming, unmindful of the environmental crime they were committing. One has no idea how scientists will be able to find a solution to a vanishing lake, and fast depleting sources of water. The Antartica polar cap is melting faster than earlier imagined, as are the Himalayas. These are all potential crises waiting to erupt.

In the capital markets arena, computational technology provided a solution to rising transaction costs. Electronic matching of transactions increased speed and reduced costs, providing the benefits of technology. However, the flip side was revealed a fortnight ago. The same electronic matching system failed at Knight Capital, an NYSE market maker, when a glitch in new software resulted in a loss of $ 440 m. in under an hour, thus wiping out the success of the firm built up over a decade.

Now look at the mess politicians in China are creating, by diverting funds deposited into pension accounts, to other uses, such as building up infrastructure. An article 'Fulfilling Promises' in the Aug 11 issue of the Economist states that of the amount of 2.5 trillion yuan deposited by Chinese people into their pension fund accounts, these accounts actually held on 270 b. yuan of assets. The rest has been diverted to other uses. Now, Chinese society is aging very fast; as compared to over 4 active workers for each retired one now, there will be, by 2050, less than 2 active workers for each retired one. The retirees will claim benefits from the moneys they have deposited, but which have been diverted to other uses. A huge social problem is brewing, which no amount of technology can solve.

Similar problems are being created in India by political leaders. The exodus of North Eastern States' citizens, following attacks on them, is a potential minefield, as it contains the danger of social unrest leading to demands for separation, if not urgently tackled.

Last week the BSE-Sensex rose 133 points to close at 17,691 and the NSE-Nifty gained 45 to end at 5,366. The rally was fuelled by foreign investors who, on Aug 14, were net buyers of some $2 b. of Indian equity. MSCI has increased India's weightage in its index, which will further fuel demand.

foreign Institutional Investors (FIIs) are sitting on a mountain of money with few good opportunities to deploy it. US Treasury bills yield less than 3%. US GDP growth is tepid, and European is limp, providing little excitement for equity investment. China has its own set of problems, including the diversion of pension money stated above, and an anticipated bursting of the real estate bubble. India is still an interesting story, despite the efforts by our political leaders to kill it. The economy grows despite, not because of, the leadership provided. It would fly if leadership was true leadership and clean.

Will they wake up and smell the coffee?

J Mulraj is a stockmarket columnist and observer of long standing. His weekly column on stockmarkets has run for over 17 years. An MBA from IIM Kolkata, he has been a member of the BSE. He is now India Representative for Institutional Investor. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stockmarkets yet being a reader of his columns. His other interests include reading, both fiction and non fiction, bridge, snooker and chess.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The authors, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same.
© Equitymaster Agora Research Private Limited