The fallout

Some natural disasters change history. Japan’s tsunami could be one

Mar 17th 2011 | from the print edition

THAT “tsunami” is one of the few Japanese words in global use points to the country’s familiarity with natural disaster. But even measured against Japan’s painful history, its plight today is miserable. The magnitude-9 earthquake—the largest ever in the country’s history, equivalent in power to 30,000 Hiroshimas—was followed by a wave which wiped out whole towns. With news dribbling out from stricken coastal communities, the scale of the horror is still sinking in. The surge of icy water shoved the debris of destroyed towns miles inland, killing most of those too old or too slow to scramble to higher ground (see article). The official death toll of 5,429 will certainly rise. In several towns over half the population has drowned or is missing.

In the face of calamity, a decent people has proved extremely resilient: no looting; very little complaining among the tsunami survivors. In Tokyo people queued patiently to meet their tax deadlines. Everywhere there was a calm determination to conjure a little order out of chaos. Volunteers have rushed to help. The country’s Self-Defence Forces, which dithered in response to the Kobe earthquake in 1995, have poured into the stricken area. Naoto Kan, the prime minister, who started the crisis with very low public support, has so far managed to keep a semblance of order in the country, despite a series of calamities that would challenge even the strongest of leaders. The government’s inept handling of the Kobe disaster did much to undermine Japan’s confidence in itself.

The wider concern

The immediate tragedy may be Japan’s; but it also throws up longer-term questions that will eventually affect people all the way round the globe. Stockmarkets stumbled on fears about the impact on the world’s third-biggest economy. Japan’s central bank seems to have stilled talk of financial panic with huge injections of liquidity. Early estimates of the total damage are somewhat higher than the $100 billion that Kobe cost, but not enough to wreck a rich country. Disruption to electricity supplies will damage growth, and some Asian supply chains are already facing problems; but new infrastructure spending will offset some of the earthquake’s drag on growth.

Those calculations could change dramatically if the nuclear crisis worsens. As The Economistwent to press, helicopters were dropping water to douse overheating nuclear fuel stored at the Fukushima Dai-ichi plant, where there have been explosions, fires and releases of radiation greater, it seems, than the Japanese authorities had admitted. The country’s nuclear industry has a long history of cover-ups and incompetence, and—notwithstanding the heroism of individual workers—the handling of the crisis by TEPCO, the nuclear plant’s operator, is sadly in line with its past performance.

Even if the nuclear accident is brought under control swiftly, and the release of radiation turns out not to be large enough to damage public health, this accident will have a huge impact on the nuclear industry, both inside and outside Japan. Germany has already put on hold its politically tricky decision to extend the life of its nuclear plants. America’s faltering steps towards new reactors look sure to be set back, not least because new concerns will mean greater costs.

China has announced a pause in its ambitious plans for nuclear growth. With 27 reactors under construction, more than twice as many as any other country, China accounts for almost half the world’s current nuclear build-out—and it has plans for 50 more reactors. And in the long term the regime looks unlikely to be much deterred from these plans—and certainly not by its public’s opinion, whatever that might be. China has a huge thirst for energy that it will slake from as many wells as it can, with planned big increases in wind power and in gas as well as the nuclear build-out and ever more coal-fired plants.

Thus the great nuclear dilemma. For the best nuclear safety you need not just good planning and good engineering. You need the sort of society that can produce accountability and transparency, one that can build institutions that receive and deserve trust. No nuclear nation has done this as well as one might wish, and Japan’s failings may well become more evident. But democracies are better at building such institutions. At the same time, however, democracy makes it much easier for a substantial and implacable minority to make sure things don’t happen, and that seems likely to be the case with plans for more nuclear power. Thus nuclear power looks much more likely to spread in societies that are unlikely to ground it in the enduring culture of safety that it needs. China’s nearest competitor in the new-build stakes is Russia.

Yet democracies would be wrong to turn their back on nuclear power. It still has the advantages of offering reliable power, a degree of energy security, and no carbon dioxide emissions beyond those incurred in building and supplying the plants. In terms of lives lost it has also boasted, to date, a reasonably good record. Chernobyl’s death toll is highly uncertain, but may have reached a few thousand people. China’s coal mines certainly kill 2,000-3,000 workers a year, and coal-smogged air there and elsewhere kills many more. It remains a reasonable idea for most rich countries to keep some nuclear power in their portfolio, not least because by maintaining economic and technological stakes in nuclear they will have more standing to insist on high standards for safety and non-proliferation being applied throughout the world. But in the face of panic, of sinister towers of smoke, of invisible and implacable threats, the reasonable course is not an easy one.

Back to Tokyo

No country faces that choice more painfully than Japan, scarred by nuclear energy but also deprived of native alternatives. To abandon nuclear power is to commit the country to massive imports of gas and perhaps coal. To keep it is to face and overcome a national trauma and to accept a small but real risk of another disaster.

Japan’s all too frequent experience of calamity suggests that such events are often followed by great change. After the earthquake of 1923, it turned to militarism. After its defeat in the second world war, and the dropping of the atom bombs, it espoused peaceful growth. The Kobe earthquake reinforced Japan’s recent turning in on itself.

This new catastrophe seems likely to have a similarly huge impact on the nation’s psyche. It may be that the Japanese people’s impressive response to disaster, and the rest of the world’s awe in the face of their stoicism, restores the self-confidence the country so badly needs. It may be that the failings of its secretive system of governance, exemplified by the shoddy management of its nuclear plants, lead to more demands for political reform. As long as Mr Kan can convince the public that the government’s information on radiation is trustworthy, and that it can ease the cold and hunger of tsunami survivors, his hand may be strengthened to further liberalise Japan. Or it may be that things take a darker turn.

The stakes are high. Japan—a despondent country with a dysfunctional political system—badly needs change. It seems just possible that, looking back from a safe distance, Japan’s people will regard this dreadful moment not just as a time of death, grief and mourning, but also as a time of rebirth.

Harvesting Returns

Investing in Agriculture Could Be a Sound Long-Term Strategy to Boost Portfolio Returns, and Help to Solve the Food Crisis

By ANGELA HENSHALL

The recent spikes in the price of food, which have acted as a catalyst to protests across the developing world, are a short-term manifestation of a long-term trend: That of high and rising agricultural commodity prices. But getting investment exposure to this long-term upswing in prices, without falling foul of the inevitable short-term volatility, is a conundrum that is proving hard to unravel.

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Against a backdrop of tightening supply, investors have started to think about agriculture and food-commodity stocks in the same way they once considered energy investments. Jim Rogers, co-founder of the Quantum Fund with George Soros, says the world is on a knife edge. "Some governments have started hoarding stocks which will drive up prices. But will be blaming it on speculators like me," he says.

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Abi Hardwick

Percentage change in value on the UN Food and Agriculture Organization's Food Price Index between 2000 and 2011

Mr. Rogers, who is credited with predicting the start of the global commodities rally in 1999, believes a crisis point will be reached within the next 20 years but that the answer lies in boosting investment to the sector. "If I'm right, agriculture is going to be one of the greatest industries in the next 20 years and longer . . . [it] will become more profitable than it has ever been," he says.

The case for long-term investment is sound. The world's population is expected to grow from 6.7 billion today to 9.1 billion by 2050. To put that into perspective, an extra three mouths will need to be fed every second in 40 years time. The supply problem is compounded yet further by an emerging middle class in China and India whose growing wealth is being reflected in changing dietary habits. Predominantly grain-based diets are being replaced by meat-based diets.

This has huge implications on demand for soft commodities when you consider that it takes 10 kilos of plant protein to produce just one kilo of animal protein. In other words, it is many times more energy intensive to grow a field of cows than a field of barley or maize.

The rising popularity of biofuels as an alternative to fossil fuels is only adding to these supply pressures. More and more land is being taken out of agricultural production and set aside to grow plants that are used to fuel cars, and not to feed people.

Investment Potential

For those seeking exposure to the agriculture story in the short-to-medium term there are several products that follow commodity indices. These enable investors to gain exposure to commodities without trading futures or taking physical delivery. The indices themselves closely track spot and futures contracts of agricultural commodities. One of these is the ETFS Agriculture Fund, an exchange traded commodities product designed to track the DJ-UBS Agriculture Sub-Index. Daniel Wills, senior analyst at ETF Securities, says crop failures in Russia in 2009 and 2010 highlighted the potential for short-to-medium term volatility. This sparked investor interest. In 2009, about $1 billion flowed into the ETFS Agriculture fund but by the end of 2010, $500 million had flowed out as investors booked their profits. Mr. Wills expects to see volatility increase and says that 2011 will be a year of depleted exports and stock levels in a number of countries. "There's a lot of pressure on governments this year to rebuild the coffers, and it leaves the market vulnerable to price shocks," he says. Building of strategic stockpiles and hoarding goes to the very heart of food security. Soft commodities in particular are thought to be very vulnerable to price shocks this year.

Strategic reserves will become increasingly important as food inflation bites. China has already released some of its strategic stock pile of soybeans into the market, says Mr. Wills, who believes reserves will increasingly be used to smooth out price spikes in the future. Long-term demand drivers like population growth, changes in dietary habits and the emergence of the biofuels industry all underline a structural pick-up in demand across the board for agricultural products, says Moritz Baumann, a strategic analyst at Banque Julius Baer. "But we have to differentiate between getting exposure to the agriculture theme in the short-term versus the long-term. Short-term exposure can be implemented via investments in commodity futures," he says.

Equity Steaks

However, Mr. Baumann does not believe commodity futures are the right vehicles to access long-term structural themes. This is because futures only offer a limited time horizon -mostly up to two years - and are not easily tradable. Instead, Mr. Baumann believes in building up exposure to agricultural products via equity investments.

For medium-term investors there is a range of options for equity investment in industries directly linked to the agricultural sector. These include: Equipment manufacturers, seed and chemical fertilizers and commodity and agricultural producers. Investment managers tend to keep investments closely tied to the producers who will benefit directly from rising prices.

"To play this theme in the longer term, equity exposure in companies operating within the agricultural sector like fertilizers, crop protection and the seed industry is the most feasible method," Mr. Baumann says.

Cédric Lecamp, co-manager of the agriculture fund at Swiss private bank Pictet, says higher crop prices in China will translate into higher farm incomes. This leaves farmers in a better position to buy fertilizer, farm machinery and crop protection chemicals. As a result, all those companies that service the industry will reap the benefit. "We favor upstream exposure to the agriculture value chain, particularly in companies that have strong pricing power and offer yield enhancing benefits," Mr. Lecamp says.

For investors looking to make a long-term commitment to agriculture investment, private equity could offer the biggest rewards. UK-based asset management firm, Emergent Asset Management, is raising funds to secure food production from a wide range of soft commodities across sub-Saharan Africa.

The firm has joined forces with South African agricultural specialist, GrainVest, to buy agricultural land and managed projects in 14 countries in Africa. The joint venture, known as EmVest, selects large chunks of land that are considered to be prime regional locations for development. It then works with national and local authorities to develop large-scale agriculture on a commercial basis.

Many believe investment in farmland offers a good alternative to investing in futures contracts for soft commodities, where prices have already surged higher. Although values of farmland have risen globally, there is still a huge gap between land prices in Africa and the rest of the world. Statistics support the fact that the availability of agricultural land globally is diminishing. However, David Murrin, chief investment officer at Emergent Asset Management, stresses the difficulties of jumping aboard the African growth story. "It is very hard to take advantage of the tremendous growth in African agriculture and that's why private equity investment is so important, it helps capture some of that growth," he says.

With a minimum investment of €5 million for institutional investors and €500,000 for retail investors this project is not for the light of wallet. Those that are able to invest, however, could be in line for big rewards.

Based on the four-year pilot project, estimated returns to investors could be up to 30% per annum over its five year term. Emergent is confident this performance can be achieved by using modern farming techniques and technologies to increase yields. Agglomerating farms will also increase efficiency and the capital value of the farmland itself is also expected to increase as a result of the development.

Plane truths

FRUSTRATING as air travel might be for the average punter, there is no let-up in demand. By 2014 the number of journeys made by individual passengers is expected to reach 3.3 billion, from 2.5 billion in 2009. In part, this is a consequence of the falling cost of flying: ticket prices have dropped by 60%, in real terms, over the past 40 years. But keeping prices low and finding more aircraft to cram all these people into is not the only thing the airline industry has to worry about. It must also clean up its act. Aviation is a small but growing contributor to global warming, responsible for 12% of the carbon dioxide emitted by means of transport. And even were that not so, fuel is one of airlines’ biggest costs, so there is a strong incentive to burn less of it. In the case of fuel economy, then, virtue really is its own reward.

Not surprisingly, aircraft are already a lot more efficient than they used to be. The first Boeing 737 was launched in 1967 and could carry about 100 passengers 2,775km (1,725 miles). A modern version, the B737-800, can carry nearly twice as many passengers twice the distance, while burning 23% less fuel (48% less on a per-seat basis). More efficient turbofan engines, lighter structures, various aerodynamic tweaks and the development of sophisticated flight-management systems have brought about this improvement. The aircraft themselves, however, still look much like they always have done: a cigar-shaped fuselage with a big tail, powered by pod-like engines hanging from a pair of protruding wings. Some aircraft designers now believe that just about all the efficiency gains available have been wrung from this traditional shape, and that for a further big cut in fuel consumption a new type of airliner is needed.

Over the years, a number of radical redesigns have been proposed, but none has taken off. Aircraft shaped like giant flying wings, for instance, would be more efficient, but do not mesh with the realities of running an airline. Banks of seating as wide as those in cinemas would strand most passengers a long way from a window—or a door. Safety legislation requires that everyone can be evacuated in under 90 seconds from half the available exits. That would be tough in a flying wing. Moreover, aircraft design has co-evolved with airport infrastructure. Existing passenger gates, baggage-handling and aircraft-servicing arrangements are not well adapted to such novelty. And, on the level of pure comfort, a steep, banking turn in such a plane would give passengers at the edge of the aircraft an experience associated more with the fairground than with commercial aviation.

Reality check-in

Despite all these restrictions, two groups working on the future of aircraft have come up with designs that could meet the practical needs of the industry and still cut fuel consumption by half. These researchers, at the Massachusetts Institute of Technology (MIT) and Imperial College, London, rely largely on existing technologies for many of their designs.

If a B737-800 was morphed into the shape of one of the D-series of aircraft on which Mark Drela is experimenting in MIT’s wind tunnel, then it would be about the same size, could fly the same routes and would carry a similar number of passengers. But the D8.1 version (which could be built conventionally, from aluminium) would use 49% less fuel. The D8.5 (similar, but constructed from composite materials expected to be available by 2035) would burn 71% less.

Dr Drela’s D-series aircraft differ from existing ones in a number of ways. Instead of having a single, cylindrical fuselage they employ two partial cylinders joined together (see above). This provides additional lift. The nose of the aircraft slants upwards, bringing still further lift. This means the wings can be thinner, saving weight. The three engines are mounted at the rear, flush with the fuselage. Placing the engines here has a number of benefits, says Dr Drela—most notably, allowing the tail to be smaller. One reason for the tall, vertical tail on an airliner is to allow the pilot to compensate with the rudder for the yaw created when a wing-mounted engine fails. Mounting the engines at the back (a design popularised in the 1950s by Sud Aviation’s Caravelle, but subsequently abandoned on large aircraft) means that yaw is much reduced, and with it the need for a large tail. The D-series’s twin tails are, in total, 70% lighter than a 737’s single one.

The rear of the fuselage is also sculpted to sweep air into the engines using a process known as boundary-layer ingestion. Frictional drag means the air closest to the surface of the fuselage moves more slowly than the rest. Ingesting this slower air allows an engine to burn its fuel more efficiently while generating the same amount of thrust. However, employing boundary-layer ingestion means the airflow into the engine is not uniform. The farther the air is from the fuselage, the faster it moves. That can produce undesirable stress on an engine’s components.

Pratt & Whitney, an aircraft-engine maker involved in the MIT project, is trying to overcome that problem by redesigning and strengthening the components in a jet engine. The other approach is to fly more slowly, and thus put less strain on the components in the first place. As a consequence, the D8.1 would cruise at Mach 0.72 (seven-tenths of the speed of sound) and the D8.5 at Mach 0.74, compared with about Mach 0.79 for a B737-800. But Dr Drela says the D-series’s wider fuselage would compensate for that. It permits an extra aisle, which makes boarding and alighting much faster than on a single-aisle B737. On short-haul routes the D-series would still have a faster gate-to-gate journey time than a 737.

Tail away

At Imperial College, Varnavas Serghides has come up with a number of designs for lighter planes with less drag that therefore need smaller engines that burn less fuel. One of these designs has a pair of jet engines mounted aft, but positioned over and above the wing. This aircraft has no tail fins at all (see below).

In the past doing without tail fins would have created an aircraft that is difficult to fly. But things have now changed. Mechanical systems have been replaced with electrically activated fly-by-wire controls that use computers to interpret the pilot’s commands in the safest and most efficient way. Many military jets would now be impossible to fly if pilots had to rely on mechanical controls alone. So, as Dr Serghides explains, doing without the horizontal stabiliser and vertical tail is not such a radical step. Aircraft-control systems that use computers are capable of mixing the signals required to make the ailerons, flaps and other control surfaces on the wing act together to produce the same effects as the rudder and elevators on the tail would. Dr Serghides has flown his design in a simulator and says it handles well.

Improving airflow over the wings is also crucial. Laminar (in other words, smooth) flow is preferable to turbulent flow, since turbulence creates drag. An aerodynamically perfect wing would have laminar flow from its leading edge all the way to the rear. But wings are not perfect, and at some stage the air turns turbulent. As a result, roughly half the fuel required to maintain a level cruise is being burned to overcome the drag imposed by a turbulent boundary layer.

Understanding what causes the transition from laminar to turbulent flow requires massive mathematical and computing power. But if Dr Serghides’s colleague Philip Hall and his team can work out the details, they should be able to design wings whose shape maintains laminar flow from front to back, and thus lowers fuel consumption.

Another engineer at Imperial, Dominic von Terzi, proposes to go even further than that. Instead of just redesigning the shapes of wings, he dreams of making them more active. This could be done with surfaces that change shape, or by using a system of holes and slots that can be opened and closed as appropriate to create suction that maintains laminar flow. Moreover, in some cases a pilot might wish to do the opposite and promote turbulent flow—for example, when slowing down. That might allow aircraft to do away with flaps altogether, saving yet more weight.

In an industry as regulated and risk-averse as aircraft building, introducing these changes will prove an uphill struggle. The gains in efficiency, though, make that struggle worth pursuing. Flying wings may never come to pass. But tailless, flapless, podless planes will probably land eventually at an airport near you.

U.S. Nuclear Industry Faces New Uncertainty

By JOHN M. BRODER

WASHINGTON — The fragile bipartisan consensus that nuclear power offers a big piece of the answer to America’s energy and global warming challenges may have evaporated as quickly as confidence in Japan’s crippled nuclear reactors.

Until this weekend, President Obama, mainstream environmental groups and large numbers of Republicans and Democrats in Congress agreed that nuclear power offered a steady energy source and part of the solution to climate change, even as they disagreed on virtually every other aspect of energy policy. Mr. Obama is seeking tens of billions of dollars in government insurance for new nuclear construction, and the nuclear industry in the United States, all but paralyzed for decades after the Three Mile Island accident in 1979, was poised for a comeback.

Now, that is all in question as the world watches the unfolding crisis in Japan’s nuclear reactors and the widespread terror it has spawned.

“I think it calls on us here in the U.S., naturally, not to stop building nuclear power plants but to put the brakes on right now until we understand the ramifications of what’s happened in Japan,” Senator Joseph I. Lieberman, independent of Connecticut and one of the Senate’s leading voices on energy, said on CBS’s “Face the Nation.”

Nuclear power, which still suffers from huge economic uncertainties and local concerns about safety, had been growing in acceptance as what appeared to many to be a relatively benign, proven and (if safe and permanent storage for wastes could be arranged) nonpolluting source of energy for the United States’ future growth.

But even staunch supporters of nuclear power are now advocating a pause in licensing and building new reactors in the United States to make sure that proper safety and evacuation measures are in place. Environmental groups are reassessing their willingness to see nuclear power as a linchpin of any future climate change legislation. Mr. Obama still sees nuclear power as a major element of future American energy policy, but he is injecting a new tone of caution into his endorsement.

“The president believes that meeting our energy needs means relying on a diverse set of energy sources that includes renewables like wind and solar, natural gas, clean coal and nuclear power,” said Clark Stevens, a White House spokesman. “Information is still coming in about the events unfolding in Japan, but the administration is committed to learning from them and ensuring that nuclear energy is produced safely and responsibly here in the U.S.”

Three of the world’s chief sources of large-scale energy production — coal, oil and nuclear power — have all experienced eye-popping accidents in just the past year. The Upper Big Branch coal mine explosion in West Virginia, the Deepwater Horizon blowout and oil spill in the Gulf of Mexico and the unfolding nuclear crisis in Japan have dramatized the dangers of conventional power generation at a time when the world has no workable alternatives able to operate at sufficient scale.

The policy implications for the United States are vexing. “It’s not possible to achieve a climate solution based on existing technology without a significant reliance on nuclear power,” said Jason Grumet, president of the Bipartisan Policy Center in Washington and an energy and climate change adviser to the 2008 Obama campaign. “It’s early to reach many conclusions about what happened in Japan and the relevance of what happened to the United States. But the safety of nuclear power will certainly be high on the list of questions for the next several months.”

“The world is fundamentally a set of relative risks,” Mr. Grumet added, noting the confluence of disasters in coal mining, oil drilling and nuclear plant operations. “The accident certainly has diminished what had been a growing impetus in the environmental community to support nuclear power as part of a broad bargain on energy and climate policy.”

Mitch McConnell of Kentucky, the Senate Republican leader, said that the United States should not overreact to the Japanese nuclear crisis by clamping down on the domestic industry indefinitely. Republicans have loudly complained that the Obama administration did just that after the BP oil spill last spring when it imposed a moratorium on deepwater oil drilling until new safety and environmental rules were written.

“I don’t think right after a major environmental catastrophe is a very good time to be making American domestic policy,” Mr. McConnell said on “Fox News Sunday.”

He said that the American public and politicians had recoiled after Three Mile Island, rejecting permits for the construction of dozens of nuclear plants on the “not in my backyard” impulse.

“My thought about it is, we ought not to make American and domestic policy based upon an event that happened in Japan,” Mr. McConnell said.

Mr. Obama has been as supportive of nuclear power as any recent president as he has tried to devise a political and technical strategy for ensuring energy supplies and reducing greenhouse gas emissions. Nuclear power, along with expanded offshore oil drilling, “clean coal” development and extensive support for renewable energy, are part of his “all-of-the-above energy strategy,” an approach and terminology borrowed from Republicans. But his support for coal and oil as part of a grand compromise on energy were set back by last year’s mining and drilling disasters, and today’s problems with nuclear in Japan cannot help.

Concerns about earthquakes and nuclear power have been around for a long time; new questions might also be raised now about tsunamis and coastal reactors.

In Mr. Obama’s State of the Union address and in his budget, he proposed an expansion of nuclear energy technology and $36 billion in Department of Energy loan guarantees for the construction of as many as 20 new nuclear plants.

That policy will be on the table at a hearing of the Energy and Commerce Committee on Wednesday, when Steven Chu, the energy secretary, and Gregory B. Jaczko, chairman of the Nuclear Regulatory Commission, are scheduled to testify.

“We will use that opportunity to explore what is known in the early aftermath of the damage to Japanese nuclear facilities,” said Representative Fred Upton, Republican of Michigan, the committee chairman, “as well as to reiterate our unwavering commitment to the safety of U.S. nuclear sites.”

Representative Edward J. Markey, Democrat of Massachusetts and a skeptic of nuclear power who nonetheless supported expansion of nuclear power as part of the House energy and climate legislation he co-sponsored, said the United States needed tougher standards for siting and operating nuclear plants.

He said regulators should consider a moratorium on locating nuclear plants in seismically active areas, require stronger containment vessels in earthquake-prone regions and thoroughly review the 31 plants in the United States that use similar technology to the crippled Japanese reactors. “The unfolding disaster in Japan must produce a seismic shift in how we address nuclear safety here in America,” Mr. Markey said.