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August 2004 Newsletter

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Oil: Why we must do more with less

OPEC oil supply constraints, instability in the Middle East and questionable renationalisation practices in Russia have raised the spectre of another 'oil shock' similar to those that occurred in the 1970s. Global oil prices have pushed through the psychological US$40-a-barrel barrier, and this has translated to retail petrol prices regularly above $1 a litre.

Numerous factors have contributed to the squeeze on oil prices, including the onset of the annual 'driving season' in the US, speculation on futures markets, the war in Iraq and OPEC production quotas. But a large factor is the uncertainty hanging over future oil supplies. Saudi Arabia has promised to increase the rate at which it is pumping oil, to help bring the price down. But it is the only major producer left that still claims it is capable of doing so. Even this is questionable, as their spare capacity appears to mostly be heavy sour crude, which requires significant additional refinery capacity and equipment to convert to petroleum.

Further, in recent weeks, it appears that the Russian Government is attempting to reassert control over former USSR oil fields now controlled by YUKOS. On 29 July, a mere threat from a Russian court that YUKOS may be barred from selling oil pushed prices above US$43-a-barrel, the highest price since the Iranian supply crisis of 1981.

The world is still a long way from running out of oil, but this is not the chief concern, nor was it ever really a serious one. The world will never actually run out of petroleum. The problem we face is that the cheap oil looks set to run out sometime between now and 2020, and we will all have to make do with a lot less.

The reason for this is that oil wells don't produce oil at the same rate through their whole lives. The extraction rate peaks when the well is about 50 percent used up, then declines. Apply this across all the world's oil fields, and the result is that oil production will peak and then decline, long before the remaining reserves appear to be running low.

We have already seen this effect (known as 'peak oil' or the 'Hubbert Peak') for specific regions of the world that have been major oil producers in the past. Production from the 'lower 48' states of the US peaked in the early 1970s; the UK sector of the North Sea peaked in 1999 and is now in steep decline. Australian production peaked in 2000 and is also in steep decline. European scientists have established a group to study the phenomenon, which has a website at www.peakoil.net. Their latest estimate has the global oil peak occurring in 2008. Estimates tend to move earlier and earlier due to the ongoing escalation in the demand for oil. And of course the closer we get to the peak, the greater the threat posed by instability in major oil-producing regions like the Middle East and Former Soviet Union.

Australia is no longer self-sufficient in oil; we import petrol from South-East Asia, and heavy crude for diesel from the Middle East. Federal Transport and Primary Industries Minister John Anderson himself admitted in the Sunday Age on 30 May that global oil production will peak "in the next 20 to 30 years" and that "at some stage in the next few years we may reach the point where we don't see petrol prices come down".

Governments can act now to pre-empt a global economic collapse when the oil peak does eventually arrive. With judicious application of thought and action the transition need not, at least locally, be quite as painful as the more pessimistic commentators would have it.

For the last half-century our entire economy has been built around cheap oil, from agriculture to freight transport to plastics manufacturing. The changes necessary to wean our various industries off cheap oil will be slow and difficult, and leave us vulnerable in the meantime. We should instead be trying to reduce demand in the area where we use by far the most oil, and have the most discretion to use less; private car transport in urban areas.

Melbourne is potentially in a quite enviable position when it comes to withstanding an oil shock. We already have most of the infrastructure necessary to provide most of the population with a convenient alternative to car transport that is much less reliant on cheap oil supplies. All that is lacking is the government action necessary to fill the remaining gaps in the rail network and oversee the competent provision of fast, frequent, full-time public transport services throughout Melbourne. In regional cities, much can be done simply by installing frequent, comprehensive and easy-to-understand town bus networks.

Victorians should not have to wait until they are paying $1.50 a litre for petrol before they are given an alternative to car dependence. It's time to divert that freeway money to fixing public transport; our future selves will thank us for it.

Last Modified: 13 January 2005