CAMWEST: Cyclists’ Action Movement West

Why Are We Still Building Roads?

A synopsis of Australia’s position in the world petroleum situation
[Original article in rich text format (RTF)]

Danny Hannan 28/2/01

Summary of conclusions based on the argument presented below:

An oil price shock, and later oil supply crunch, is coming. The only argument is when.

The solution to the coming oil supply crunch is conservation. The long-term solution is a dramatic reduction in the need for energy.

The world economy relies on cheap oil and energy to function, as the price of oil and energy rise the world economy will falter and decline, possibly collapse.

So, why are we still building roads? And it is not only transport that will be affected. Food production, which relies heavily on oil, will also have to change.

Australian and world oil resources: The evidence

Australia has an annual oil consumption of just over 3x108 barrels (United States Energy Information Administration April 2000). Australia’s reserves of oil are between 2.9x109 barrels proven reserves (BP Statistical Review 1999; United States Energy Information Administration April 2000) and 3.5x109 barrels commercial and non-commercial reserves (Australian Geological Survey Organisation, May 2000).

Our reserves hold 10 to 11 years supply of oil but due to geological and technological reasons can only be extracted over a much longer period of time. This indicates that Australia will have to import increasingly larger quantities of oil in less than a decade to make up the short fall from our reserves. The Australian Institute of Petroleum in 2000 estimated that Australia would be only 60% self-sufficient in oil by 2008 with self-sufficiency declining rapidly after that. With oil prices high (BHP in 2000 forecast $27 to $33 US per barrel for 2000 to 2002, and OPEC stated in 2001 that they wish to keep oil between $28 and $32 US a barrel) and the Australian dollar weak, these increasing oil imports will have serious consequences for our balance of trade, pushing Australia further into a trade deficit. The increasing trade deficit will further devalue the Australian dollar and undermine Australia's economy.

The world's oil reserves are stated at just over 1012 barrels (BP Statistical Review, 1999) but these figures appear to be very elastic. From 1983 there was a jump from approximately 7x1011 barrels of oil to just less than 1012 barrels in 1984, with no large discoveries accounting for the stated increases in reserves (BP Statistical Review, 1993–1999). The increase has been accounted for by a change in OPEC’s quota policy to a percentage of reserves bases. (C.J. Campbell July 1999, Presentation to the House of Commons). C.J. Campbell estimates that the OPEC reserves are as much as 30% overstated.

Indeed, the world reserves are stated to have risen since 1984 until today despite the fact that the volume of oil discoveries in any of those years never exceeded the production. The short fall in oil discoveries varies from year to year but is quoted at from 10% to 50% of actual production, with the figure of 25% to 30% of production on average fairly well accepted (Alexander’s Gas and Oil Connections, Reports, June 2000) but L. B. Magoon from the United States Geological Survey quotes 1996–2000 discoveries at 11% of annual production and declining.

How have the world reserves of oil increased for the last 20 years under these conditions?

How much oil is left to be found?

We have only forty years of oil reserves worldwide but due to geological and technological reasons it will take at least another hundred years, probably more, to extract it all (BP Statistical Review, 1999)(Australian Academy of Technological Sciences and Engineering, Symposium, 1997 World energy: the big, big picture). We must reach the world peak of production soon, then production will decline, and the costs of production will increase as more energy is need to extract the oil. The world has already produced just less than 1012 barrels of oil (BP Statistical Review, 1993–1999). The United States Geological Survey 2000 has rated the probability of total world oil production of 1.9x1012 barrels at 0.95, and 2.3x1012 barrels at 0.5. At our current annual world oil consumption of 2.6x1010 barrels (and rising at about 1% a year) we have already passed 50% production of the 95% probability and we will have produced 1.1x1012 barrels of oil by 2004. We will have passed the halfway point to the USGS 50% probability of 2.3x1012 barrels by 2010. A particularly worrying issue is that there is only one group collecting first hand information on world oil reserves, the Petroconsultants. The BP Statistical Review only compiles information supplied from other sources. These two organisations do not agree on the level of world oil reserves. If the USGS is basing its probabilities on information from the BP Statistical Review (already questioned above) then the USGS probabilities are likely to be optimistic. We are very close to the world’s 50% production peak of oil, after which the production of oil will decline exponentially and the costs of production will increase (Hubertpeak.com).

There are many models for the world oil situation; but only one model can claim high correlation with past oil production history and a history of accurately forecasting future trends like, the peak and decline of American oil production in the 1970's and the oil finds in the Caspian Sea, the Hubbert Model (Hubbertpeak.com).

By 2006 OPEC will control 75% of the world’s oil; by 2010 they will control 85% of the worlds oil (BP Statistical Review, 1999). This is due to the decline of the non-OPEC oil fields. There will be limited ability to persuade OPEC to maintain a stable oil price into the future, short of war.

Due to the serious question marks over the world's reserves of oil, and to the variability of world demand once the price of oil rises above $30 US a barrel, it is difficult to predict the timing of events. That the production of oil will peak and go into decline some time soon is not strictly critical. The critical point is when the world demand for oil overtakes the ability to supply oil. The Hubert supply curve and the demand growth curves don’t cross till several years after the peak. If the demand drops significantly once prices raise over $30 US a barrel, then maybe 2012 to 2015, well after oil production is already well into decline.

For the purposes of my own investments I have worked out a timing schedule for the likely price of oil based on the questionable stated world reserves. I have included the reasons for these price/time estimates but fear that they are optimistic.

2006 oil $40–$50 US a barrel OPEC has control of 75% of world oil but risks intervention if prices are too high.
2010 oil $60–$80 US a barrel OPEC has control of 85% of world oil and increasing oil production costs.
2012 oil $100–$120 US a barrel World oil supply in decline with increasing oil production costs.
2015 oil $200–$250 US a barrel World demand for oil exceeds an exponentially declining supply.

Some time later this decade or maybe early next decade the price of oil, and so the price of energy, will be such that owning and running private motor transport will be out of the reach of the average family. Oil is our most effective energy source, followed by natural gas and coal. The price of oil determines the price of energy and consequently the price of gas and coal. The price of both gas and coal will maintain their relativity to oil. Hybrid, electric, LNG, hydrogen powered cars and other energy sources will all go up in price as will the cost of manufacturing.

The production of alternative fuels such as ethanol, diesel from vegetable oil, petroleum from coal, shale oil, and hydrogen all require a high-energy input. This high-energy input makes these fuels from two to three times more expensive than fuels from oil. These alternate fuels will always be two to three times more expensive to manufacture than petrol and diesel. (Economics of Biomass Production in the US, 1996; How Much Energy Does It Take to Make a Gallon of Ethanol? David Lorenz and David Morris, August 1995; Ethanol from Cellulose: Too Good To Be True? May 2000; Decline of the Age of OIL, Brian Fleay 1995). Oil will remain the most economical transportable energy source even when it is over $200 US a barrel.

Families will be forced to rely on what public transport is available and on walking. The more fortunate ones will rely on cycling.

If my analyses are correct, and I believe they are, there is an oil price shock coming later this decade, followed by an oil supply crunch some few years later, that will have devastating effects on both the Australian and world economies.

The level of debt in western countries and around the world is high. The USA is the prime example requiring 20% of its GDP to service its debt. Escalating oil and energy prices will cause economic downturns and recessions as is current in 2001. As the price of oil and energy increase through this decade it will cause further economic recession, the burden of debt will increase. As the GDP reduces due to recession, the percentage of GDP required to service that debt will increase. Companies and individuals will start to go bankrupt under the burden of debt. These collapses will have effects on other companies and individuals and will eventually cause a domino collapse leading to a depression. I believe some time 2011–2015 but very possibly much sooner.

Food production worldwide is under pressure. Agricultural land is degraded, forests are under siege, wild fish stocks are depleted. It has been quoted that for every Joule of energy we trap from the sun in our food, it takes 4 to 5 Joules of energy input from us. Oil and energy play a vital role in all food production and transport, from production of fertilisers and pesticides to delivery to markets. High oil prices will have repercussions throughout world agriculture and the populations sustained

The only real solution to the coming oil price shock, and later oil supply crunch, is conservation.

The oil price shock and supply crunch are coming. Some modellers say as early as 2003, some say not till 2020. The only argument is when. If we believe the earlier forecasts and prepare for the worst by building infrastructure that will make us independent of oil, that means rail (both light and heavy) and cycling infrastructure, we will have valuable resources well into the future. If we squander our resources by building more roads, when the crunch comes there will be social and economic devastation.

Some European countries have already raised the price of fuel with taxes to about $3A /L for petrol. They are using that money to build rail and cycling infrastructure. These countries are proofing themselves against the coming energy crisis. Australia should do likewise.

For example, in New South Wales the Western Sydney Orbital motorway is a minimum fifty-year investment. With the most optimistic models forecasting oil decline early in the 2020s — and alternatives to the internal combustion engine not economically viable — the Western Sydney Orbital simply does not make economic sense.

Danny Hannan
28 February 2001

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