SUBMISSION BY 

ACT PEAK OIL  

to the 

ENERGY GREEN PAPER

Summary 

Australia has a fragile dependency on oil, and is ill-prepared for future possible oil challenges.

Purposeful government action is needed to head off three threats in relation to oil.

�	We are ill-prepared for possible  immediate disruption to oil supplies, lacking emergency stocks.

–	In the longer term Australia needs to reduce its greenhouse emissions greatly, and oil must play its part in this.

–	Australia also needs to respond to the likely growing global scarcity of oil, and the consequent higher global price of oil. This submission focusses on this particular problem.

Despite the recent fall in oil prices, due to temporary factors such as the tight oil boom in the US, there is a strong liklihood in years to come of high oil prices, in the face of the relentless fall in the production of conventional (low-cost, on-shore) oil.

 There is also a strong liklihood of continuing unstable oil prices. Instability in oil prices tends to undermine both investment in oil,  and greater efficiency in oil use. It is therefore a factor in higher oil prices over time. 

High oil prices will come at a cost to the Australian economy, and society. Low-income groups are often relatively more dependent on oil than higher income groups. 

There is a huge scope for greater efficiency in oil use, and its displacement in time by other sources of energy, such as renewable electricity.

 In sum, we need to lower oil consumption for reasons of national security, global sustainability, social equity and a more efficient economy.

 A particular reason for lessening dependency, and using oil more wisely, is because of the vital role that oil will continue to play for some time, in essential services such as the production and distribution of food and pharmaceuticals. 

There is a range of actions that the Commonwealth Government can take, to work towards lower oil dependency and increasing efficiency of oil use.

These actions include direct fiscal and regulatory measures, working with the States, and seeking international cooperation.

 No such measures are set out in the Green Paper. A passive,  unrealistic approach is taken, based it seems on the assumption that markets will solve problems and that Australia will always be able to buy its way out of oil scarcity/price problems. This is risky and inadequate. 
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Introduction

 The use of petroleum is pervasive, and essential, to the functioning of the Australian economy and society, but there are three main reasons why change is needed in the way we use oil. This change  must be addressed in any national energy policy.

 The first is the need to have plans for a breakdown in supplies of fuel from overseas, and measures to handle such a national emergency, an emergency that could be catastrophic given just-in-time supply arrangements for the essentials of life. Necessary measures include an adequate stock of fuel on hand, at least in accordance with  levels set in international agreements. This urgent need has been discussed widely, including in a recent study sponsored by the NRMA ('Australia's Liquid Fuel Security' by John Blackburn, NRMA, 2013). 

The second is the need to lower greenhouse emissions over coming decades to a fraction of what they are now, for instance in line with the British Government's legally mandated target of an 80% reduction by 2050, to be reached by progressive mandated steps, and Germany's similar target for 2050. Oil, as a major fossil fuel, must play its part in this reduction. This is the most important long-term issue facing the world, and Australia must play its part, across all fossil fuels.

 However, the main focus of this submission is the third reason for change to oil policies: the liklihood of increasing global oil  scarcity and high prices in the future, in relation to Australia's ability to pay, and the the liklihood of wildly unstable global prices, with the instability this brings to national and global economies. Such high and unstable prices will be costly to the Australian economy and society, unless we change direction.

 These three challenges call for policies on oil which are designed to take full advantage of greater efficiency in oil use, and use of alternative sources of energy where possible,  to lower consumption, for reasons of national security, global sustainability, social equity and a more efficient economy.

 Unfortunately the Green Paper basically does not recommend measures to seriously address these challenges. Its basic approach is to assume that markets in current forms can be left as they are, that Australia will always be able to buy its way out of trouble on oil supplies or prices, that the rest of the world will have to do the heavy lifting on, for instance, climate change, and that no additional measures to purposively address these problems are needed.   This is inadequate.   

Global oil prices

 The recent history of global oil prices is a guide to what could very well happen in the future. It is now clear from IEA information that the peak of production of 'conventional' oil (low-cost, onshore,  which still provides most oil production) arrived in about 2005. It needs to be remembered that until about 2002 the price of crude oil hovered in the US$20s, or lower, a barrel. It then began to rise, as the peak for conventional oil approached, while global economic growth surged. This led to a price of about $140 in 2008, but this price collapsed with the GFC, falling to about $40 in 2009. It then rose gradually and for the last three years has hovered around $110. 

 In recent months however it has drifted downwards to around $85. This trend has been attributed in part to sluggish economic growth in the developed economies of Europe, Japan and North America, but also to a recent pressing need in a number of oil exporting countries to maintain revenues, in order to maintain governments in power, in countries such as Venezuela, Russia and Saudi Arabia. This illustrates the unstable basis for oil prices and that, when prices can fall so quickly, they can also rise quickly.

 It is clear that the steep rise in prices to 2008 helped trigger the GFC, because low-income US residents who had taken out sub-prime mortgages in car-dependent suburbs were suddenly thousands of dollars worse off. More generally, economies that are significant net importers of oil will have lower economic growth with a rise in oil prices, because of the need to pay net oil exporters.  

 This recent history shows the unstable relationship between oil prices and levels of economic activity, globally.  With the passing of the conventional oil peak, with oil production no longer amenable to ready increase, the world faces an instability cycle: strong economic growth leads to rising prices, which in turn leads to dampening of growth in most economies, which leads to falling prices, which in time encourages growth in most economies, so leading to high prices again, and so on. Countries heavily dependent on oil imports will be particularly caught up in this cycle of instability.

This price scenario, of instability and unpredictability, has costs. It tends to undermine investment in oil production and refining, but also to undermine measures to increase efficiency of oil use, because from time to time, during the falling price stage, the cry goes out from interested parties that 'there's no oil shortage problem'. This has been the case lately, in particular with the tight oil boom in the US.

US tight oil boom

Since the peak of conventional oil in 2005, IEA figures show that total oil supplies have not fallen, but have plateaued or risen very slightly, responding to historically high prices combined with weak global economic growth. The relentless fall in conventional oil that has occurred in recent years has been more-or-less offset in effect by the rise in production of expensive non-conventional oil, particularly off-shore, tar sands and tight oil from the fracking of shale in the US. The major increase to fill the gap has been tight oil.

 Tight oil has been used as the main argument that there's no long term oil supply problem, but this is highly unlikely, because this 'boom' gives every sign of being temporary and unique to the US. To be viable it has depended on some unique factors,  including: the discovery of a few shale 'sweet spots' in the US that have since not been replicated, the unique drilling industry of the US, and the presence of large local water supplies to allow fracking. A feature is the rapid fall-off of production per drilling which means with limited 'sweet spots' that more and more drilling must be carried out to maintain current levels of production.

 More and more tight oil drilling is thus crucial, but this depends on more and more financing. In fact, historically unique cheap finance from Wall Street has been the life-blood of tight oil. However, this highly unusual circumstance is likely to cease, as 'quantitative easing' ceases in the US and interest rates inevitably rise. In fact the tight oil boom is as much a temporary financial as a technical or geological phenomenon. It is generally recognised that tight oil even now needs an oil price of at least $80 a barrel to survive on its present scale, and a much higher price if it is to ward off the relentless fall in conventional oil production.

 Discussion of US tight oil has been dominated by parties interested in promoting a boom psychology, or keen to play up the long term prospects, for many reasons. However, a recent exhaustive, expert study of this industry and its forecasts, based on detailed technical data, by J David Hughes, concludes that US tight oil production will peak before 2020, and that it amounts to a short-term reprieve from inexorable decline in US oil production.  ('Drilling Deeper – A Reality Check on US Government Forecasts for a Lasting Tight Oil and Shale Gas Boom'' by J David Hughes, the Post-Carbon Institute, 2014 (www.postcarbon.org/uploads/2014/10/Drilling-DeeperFULL.pdf).  

The emergence of the tight oil industry does not invalidate the peak oil thesis, but rather validates it, because tight oil would be totally uneconomic without historically high oil prices brought on by limits in conventional production, that is, the arrival of peak oil.

Rising oil prices in the future

 The world therefore faces the probability of a long-term rising oil price, particularly if world economic growth picks up and more and more emerging and developing countries  grow economically.This rising price will be a burden on the Australian economy if we maintain growth in oil consumption, especially if the Australian dollar falls to nearer its longer-term average level of 75 cents US. 

 As measures are taken on limiting greenhouse gas emissions,  oil supplies will have to be constrained, adding to price levels. No less a figure than Mark Carney, Govenor of the Bank of England, speaking from the viewpoint of prudent investment and management of national economies, recently said that 80% of oil reserves, like other fossil fuels, must remain in the ground.   

Without measures to address Australia's current fragile dependency on oil, a high price for oil will also have adverse social effects, because many of Australia's low-income groups, especially in outer suburbs and regional areas, have a very high dependency on oil and drive inefficient vehicles, and oil thus takes a large part of their incomes. Oil costs from road  transport are built into the cost of daily essentials, such as food. On present trends many on low incomes are likely to be thousands of dollars worse off a year.

Government actions

 Clearly purposeful action is needed by governments to lessen Australia's dangerous and unsustainable short and long-term dependency on high levels of oil consumption. The Energy White Paper should outline a suite of actions to address this, including aspirational targets to lower consumption. A benefit of this would mean that in time, when we are forced to use less oil, we will be in a better position to ensure that in those areas where use of oil is of the highest priority, such as in the production and distribution of food and pharmaceuticals, oil will be available. Actions which governments should take include:  

�	Increase excise on petroleum in real terms to stimulate a steady move towards a more fuel-efficient economy. Money raised can be returned as cash to consumers or used to fund infrastructure that will reduce reliance on oil.

�	Establish a strategic oil reserve to protect Australian consumers against short term disruptions to oil supply.

�	Work with the States, to encourage greater use of cycling and public transport.
�	Use tax and funding powers to get the States to link car registration fees to fuel-efficiency, so as to provide a significant incentive to the purchase of more efficient vehicles. Stamp duty on car sales should be amended in the same way, the changes to be revenue neutral.
�	Use various Commonwealth powers to work with the States to encourage the upgrading of Australia’s vehicle fleet from fuel inefficient to fuel efficient, including giving the greatest encouragement to electric cars and other vehicles, to take advantage of the energy revolution going on in private transport. More generally, work towards electrification of transport wherever feasible as renewable electricity expands. 
�	Tax aviation fuel, currently 3.5 cents per litre, at the same rate as automotive fuel.
�	 Advocate international oil depletion protocols, which essentially require that countries reduce consumption at the same rate as conventional (low-cost) oil production declines, and as part of climate change mitigation, thereby making the rise in oil prices steadier and more manageable as well as reducing the possibility of conflict over declining supplies.
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ACT Peak Oil Incorporated

4 November 2014