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Feature: The Energy Paradigm Shift

Why are we still pouring money into roads, when we are facing a high risk of world oil production peaking? Danny Hannan ponders on the energy challenges we are facing, and what we should do about it.

26/09/03

The Energy Paradigm Shift

Petroleum is a substance derived from single cell organisms that once lived in shallow seas.  The single cell organisms sink to the bottom of those shallow seas and are buried in the sediments.  The sediments are further buried to a range of depths and the heat in this zone changes the organic matter to petroleum products.  At the shallow or cooler end of the required depth range heavy oil or bitumen is produced, at the deeper or hotter end of the range natural gas is produced.  The petroleum migrates from the source rock under influence of the movement of underground water and if we are lucky it is trapped in a large zone of reservoir rock that has both good porosity and permeability.  The spaces between the rock granules contain the oil and the spaces are linked so that the oil can flow through the rock.  If the petroleum is not trapped it disperses or if the reservoir rock is not permeable we cannot remove the petroleum from the rock (Deffeyes 2001).

If the above unusual geological events all happen we only need to drill a hole to the reservoir rock and the oil comes out of it's own pressure or we may need to pump it out.

It then takes a reasonably simple industrial process to refine the oil to very high-energy-density easily transportable liquid fuels.

The expensive part is to find the oil reservoirs in the first place.

There have been many trillions (12 zeros) of US dollars spent researching the formation, migration, trapping, and exploring and drilling for oil.  More is known scientifically and technically about the geology and technology of petroleum than any other scientific/technical subject  (Deffeyes 2001).

The profit available from the oil fields that are left to find is less than the costs of the exploration, oil companies are no longer investing in exploration for oil.  (Merrill Lynch 2003).

Fuels from oil are very high-energy-density liquids of reasonably low volatility.  This makes them easy/economical to transport and store, and an ideal energy source for air, rail, road, and sea transport.  Without these fuels air-transport would not exist.

Petroleum is also the main source of raw materials for a range of important products.  Plastics, synthetics, insecticides, and other pesticides, and is the main energy source for the manufacture of fertilisers.

Industries that are heavily dependant on petroleum are:

Oil is our most effective energy source with the highest energy profit ratio, exceeding 1:20.  The cost of petroleum is the base cost of the energy in our energy hungry industrialised world.  The other sources of energy, coal, natural gas, and others rely on oil for their production and transport and so their cost is determined by the cost of oil.

It is not just the cost of the oil but also the cost of the energy to make steel, aluminium, glass, cement, machines and more.  As the cost of oil changes so the costs of all these other products move to reflect the input costs of oil.

There are technically possible replacements for oil.  Bio-fuels and hydrogen are two.  Both require energy input to be manufactured.

Bio-fuels at least have a positive energy-profit ratio of about 1:2 (Lorenz & Morris 1995).  For each barrel of oil we use in agriculture to produce the bio-fuel we get the equivalent of 2 barrels of oil out.  With hydrogen for every barrel of oil equivalent we use to produce the hydrogen we only get the equivalent of about 0.8 out.  This is an energy loss situation.

Neither is economically viable.  Bio-fuels cost 2-3 times the cost of the petroleum fuels that are used for their production.  Bio-fuel production from waste products is great but purpose grown crops for the production of bio-fuels is uneconomic.  Why bother?  To put bio-fuels into perspective — the entire Australian wheat crop would produce 15% of our liquid fuel needs.

Engineering infrastructure such as new road corridors, bridges and tunnels have a life expectancy of centuries and the road pavement itself has a life expectancy of forty to fifty years (RTA).  That means that our current investment in new roads is for a service life of at least 50 to 100 years.

Both the NSW Government and the Federal Government have large new roads building programs, which assumes that; relatively cheap fuels will be readily available well past 2050.  This is in complete contradiction to reports from both distinguished petroleum geologists and the oil companies themselves.

Have the New South Wales and Australian Governments made any long-term future estimates of, costs and availability of fuels?

What are the NSW and Australian Governments estimates for the long-term future, costs and availability of fuels?

If the NSW and Australian Governments have made no such estimates, why not?

Few economists and even fewer politicians appear to realise the significance of the decline in both national and international oil reserves and production.  Australia will be importing 50% of our oil needs by 2005 and 70% of our oil needs by 2010 (John Akehurst, Managing Director Woodside Energy Ltd, 2002).  "BP Statistical Review of World Energy 2003" reports that world oil production has declined since the year 2000.  There are a number of factors that can account for the reported 0.8% decline in world oil production.  Statistical, economic, and political influences could have all contributed, but it could equally be that 2000 was the world's oil production peak.

Has world oil production already peaked?

The mathematical peak falls at the year 2004.7; call it 2005. However, I’m not betting the farm that the actual year is 2005 and not 2003 or 2006. The top of the mathematical distribution is smoothly curved, and there is a fair amount of jitter in the year-to-year production. Remember, the center of the best-fit U.S. curve was 1975 and the actual single peak year was 1970. There is nothing plausible that could postpone the peak until 2009. Get used to it.

(P158 "Hubbert's Peak — The Impending World Oil Shortage" Kenneth Deffeyes, Professor Emeritus of Geology, Princeton University, Princeton University Press 2001)

Australia is in the position of increasing oil imports in a market of rising world oil prices and probable oil supply shortages and interruptions (Akehurst 2002).

The effect of this will be to greatly increase Australia's balance of trade deficit, putting devaluation pressure on the Australian dollar and thus increasing the cost of the imports (Akehurst 2002).

At the current rate of world consumption we only have 40 years oil supply left (BP 2003) that is, oil will be all gone by 2043.  OPEC controls 78.2% of stated world reserves (BP 2003).  Colin Campbell and Jean Laherr²re of the Petroconsultants and many other petroleum geologists warn that OPEC's reserves are up to 30% overstated (Campbell & Laherrere 1998).  This could reduce world reserves to as little as 30 years supply.  Due to technical and geological reasons world oil production will peak, sometime this decade, and then decline at about 3-5% per annum over about the next 100 years.

Perhaps most important, however, is the fact that oil and gas consumption is essential to sustaining economic growth in the industrialised world....

The catch is that while demand increases, existing production declines....

We expect that by 2010 about half the daily volume needed to meet projected demand, is not on production today....

To meet the projected demand could cost $100 billion US per year.”

(Harry Longwell, Executive Vice President Exxon-Mobil, 2002)

The effect of international oil supply shortfalls compared to the demand will cause the cost of oil to increase rapidly.  The price of oil is well on track to reach $40-50 US/barrel and more by 2006 and to double in price before 2010 ($60-80US/barrel) and with declining supply double every few years after that, and to stabilise somewhat from 2015 to 2020 at between $200-300 US/barrel (Hannan 2001), with world oil production forecast to be down from 26x109 to 19x109 barrels per annum by 2020 (Les Magoon, Senior Petroleum Geologist, USGS, 2001).  By then the western global economy will be in tatters as the Australian economy will be. 

Air transport with its crucial dependency on fuel will be hit first and hardest with other very vulnerable sectors being transport and agriculture.  The dependency of the transport industry on fuel is obvious.  The dependency of Agriculture is less obvious.  Agriculture is dependent on oil for the manufacture of insecticides and fertilisers, their transport as well as farm machinery and the transport of produce.

There will be few Australian families that will be able to afford the luxury of private motor transport passed 2015 and road freight will be in rapid decline before 2020.

By 2050 the world's oil production is forecast to be down to 5x109 barrels per annum (Magoon 2001).  Approximately the same amount that is currently used for feedstock to the plastics industries.  Plastics are an essential industrial use for petroleum feedstock.

While I agree that there will need to continue some roads funding for maintenance and possibly some minor funding for new roads construction, the roads we currently have, will be in considerable surplus to our needs by 2020.

If we are to minimise the impact of the coming energy/oil crisis we have to build the infrastructure that will make us as independent of oil as possible now while we still have the cheap energy to do it.  That means diverting as much money now to the construction of rail and active transport options as possible and at the expense of roads and possibly other state and federal services as well.

The world is on the cusp of a paradigm change.  The change will come as quickly and as devastatingly as a cyclone.  Many have the ostrich attitude of; that science and technology will find a solution and that we have alternative fuels.  However there is a large body of scientific research and evidence that explains why oil will be our cheapest energy source for several decades into the future.  Alternative fuels; bio-fuels, LNG, hydrogen etc., though all are technically possible, all have the disadvantage of requiring considerable energy input to be manufactured and/or transported compared to fuels from oil.  Alternative fuels will always be a factor of about 3 times more expensive than fuels from oil.  Even when oil is in short supply. There is nothing suggested or currently in development that will be an economically viable replacement for oil (Walter Youngquist, Retired Professor of Geology, University of Oregon, 2000).

These problems cannot be avoided but they can be minimized.  It will take combined and coordinated policies and action from both federal and state governments

Motor transport and consequently oil usage and oil dependence is encouraged by:

These situations must be quickly reversed.

The priority must go to funding options that reduce our dependence on oil, shipping, rail-based and active transport options.

Currently the subsidies for private motor transport are about 4 times the subsidies for public transport, on a passenger-kilometre basis.  The economic incentives and huge subsidies for using private motor transport must be removed.  As suggested in the Warren Centre report "Sustainable Transport in Sustainable Cities" the total cost of using motor transport must be levied on the user on a daily basis through the fuel costs.

The costs of:

Should be all paid for by levying the cost of fuel and removing the tax incentives for using motor vehicles.

The increasing use of private motor transport is making a major contribution to the obesity epidemic that is sweeping this country.  An additional levy on fuel to cover the cost of fast tracking the Active Transport infrastructure that has been neglected for many decades would redress some of the current obesity trends.  The federal funding for roads, Black Spot, Roads to Recovery and grants etc. should all require a minimum substantial percentage of the funding be spent on Active Transport options and the funding be conditional on compliance with AUSTROADS Guidelines.

With good leadership, Australia can minimise the impact of the coming paradigm shift.  The question is.  Does Australia have the leadership with the necessary honesty, integrity, humanity, foresight and fortitude to make the hard and necessary decisions?

Better to make the changes need now, in a controlled way, than to have them forced on us by harsh natural and inevitable events.

— Danny Hannan

References:

BP Statistical Review of World Energy 2003

Merrill Lynch publishes views on worldwide oil and natural gas industry

Alexander's Gas and Oil Connections, Features.

Vol 8, Issue 14, July 10 2003

World Oil Markets and the Challenges for Australia John Akehurst (Managing Director Woodside Energy Ltd.)  Woodside Energy Ltd 2002

Are We Running Out of Oil L. B. Magoon (Senior Petroleum Geologist, United States Geological Survey) USGS 2001

Hubbert's Peak — The Impending World Oil Shortage Kenneth Deffeyes, (Professor Emeritus of Geology, Princeton University) Princeton University Press 2001

Why Are We Still Building Roads?
Danny Hannan 2001

Alternative Energy Sources Walter Youngquist, (Retired Professor of Geology, University of Oregon), Eugene, Oregon, October 2000

The End of Cheap Oil Colin J. Campbell and Jean H. Laherrère

Scientific American, March 1998

How Much Energy Does It Take to Make a Gallon of Ethanol?
David Lorenz and David Morris August 1995

Institute for Local-Self Reliance

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