Oils Ain't Spoils


Having built our prosperity on cheap energy from fossil fuels, particularly oil, it is perhaps understandable that they cannot bring themselves to admit that business-as-usual is over as cheap energy disappears – firstly due to the need to address global warming, and secondly due to the peaking of global oil supply which will probably have even greater impact than global warming in the short term.

Peak Oil takes its name from the bell-shaped curve which typifies the production profile of any oilfield. Once an oilfield is discovered, oilwells are drilled and production rises until drilling saturation is reached, whereupon production levels-off at the peak. Production then drops, along the declining segment of the bell-shape, until the reservoir is exhausted. This production profile applies to an individual oilfield, to all oilfields in a region and now to the globe, although it may get distorted, for example, by geopolitics.

At the peak, oil does not run out, as roughly half of the ultimately available oil remains to be produced. However, it is the point, globally, at which further expansion of oil production becomes impossible because production from new oilfields is more than offset by the decline of production from existing oilfields. It may be a sharp peak if, for example, some of the giant fields start to decline rapidly, or it may be an undulating plateau spread over a number of years if, for example, oil demand is destroyed as a result of recession, or developing countries are no longer able to afford high oil prices.

Once demand begins to exceed supply, oil prices rise, as they have been doing over the last few years – the bigger the gap, the higher the price.

The official view, until recently, was that we had abundant oil resources available from both conventional and unconventional sources, which would meet rapidly expanding global demand as China and subsequently India became large consumers. The economists took comfort as the oil price rose, on the grounds that higher prices would stimulate additional production so that supply eventually balanced demand.

However, it is one thing to have oil resources in the ground; it is quite another to convert those resources into oil flows to the market. It now seems that there are unexpected problems in converting resources to oil flows, to the extent that we probably are approaching the peak of global supply. We may have already passed the peak, or it may be some years ahead, but the exact date is less important than accepting the principle and taking action to prepare for it.

The reasons supply is not expanding are: first, we are not discovering new oilfields quickly enough; second, data on existing fields is suspect, particularly in the Middle East, so we may not have as much oil as we thought; third, production from many existing oilfields is declining as part of the natural process often more quickly than admitted officially; fourth, unconventional oil resources, such as deep water and tar sands, are proving more difficult to develop, technically and economically, even with higher oil prices – they also have major environmental problems such as high carbon emissions and high demand for water and energy, to the point where almost as much energy is needed to produce the oil as is ultimately recovered; fifth, oil producing countries are using more oil domestically and are less prepared to export it.

Passing the peak raises the question of who gets the available oil? At the moment it is determined by who can pay the higher prices, but that is not sustainable – it is already causing major societal unrest around the world, let alone in Australia, as witnessed by current protests in Europe. Some form of allocation system will become necessary, as occurred in the first oil shock in the 1970s.

Given the absolute dependence of modern societies on oil and gas, supply shortages will be traumatic. Australia is particularly vulnerable but the issue was completely ignored by the Howard government and even now is barely acknowledged politically.

There are solutions, but they take time to implement, typically at least a decade, and we should have been planning for this years ago. We did not do so and we are now facing the consequences.

Some obvious solutions – for example increased coal consumption, or coal conversion to liquids as Resources Minister Martin Ferguson recently proposed – are carbon emission-intensive and, in the absence of carbon capture and storage, which is still unproven for large scale application, would be extremely detrimental. The two issues are inextricably linked and need to be treated with consistent and holistic policy.

The oil peak will fundamentally alter society as we know it. There is no "silver bullet", rather we have much "silver buckshot" to address the problem. For example, energy efficiency and conservation, renewable energy, shift from private to public transport, urban re-design, pricing/taxation reform, high-speed broadband, alternative but more expensive fuel sources and low-emission technology

Oil prices may well drop temporarily if we do move into recession or if increased oil discoveries do result from the exploration triggered by current higher prices, but the general price trend is probably upwards. It is misleading to pretend otherwise. We should be preparing for that eventuality now, not playing King Canute in futile attempts to turn back the global tide with a 5 cent fuel excise or GST adjustments.

Peak Oil is arguably the biggest issue Australia will have to contend with in the next decade. Strange it did not rate a mention at the 2020 Summit.

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