What price to keep the wheels turning?

The smart money says that a mineral oil price surge will happen sooner than most people think. We need to get ready for a very different world. [23 February 2010 | Peter Boyer]

If you think I might be a teeny bit alarmist in discussing the impact on Tasmania of coming changes in the supply of mineral oil, be assured that today’s post is at the conservative end of the global oil supply debate.

I could cite without question the widely-quoted Canadian economist Jeff Rubin, who says a serious crunch is imminent. The era of cheap oil is past, he says, and within a few short years the only way we will meet expected demand will be to spend a lot more money to extract oil from the ground.

Rubin is not alone among economists in believing that the real reason for the 2008 credit crisis was not a housing bubble in the United States, but a doubling of the price of oil: a global energy crunch. That, he says, is just a foretaste of things to come.

By the end of 2012, Rubin expects US motorists to be forking out US$7 a gallon to fuel their cars. Our globalised oil economy suggests if this happens in the US it will also happen here, which would see Tasmanians paying about $4 a litre, or $280 to fill a standard 70-litre fuel tank.

Rubin may be too pessimistic. He’s not a petroleum specialist with detailed knowledge of oil geology, or the practicalities of how gas (natural, coal, shale), or methane or other fossil sources might fill the void left by depleted liquid oil. But as an economist, he understands the massive investment required by alternative processes, and the high prices we can expect when they’re on the market.

Like everyone who studies the world petroleum scene, Rubin is also hampered by the notorious secrecy of oil companies and exporting countries. We can use estimates of capacity and past performance to make educated guesses about when the world’s oil reservoirs will pass their collective peak (or whether they’ve already passed it), but it’s impossible to know for certain.

Two major studies out of the United Kingdom over the past six months give a more measured assessment, while also indicating a rising concern in that country about the future of oil. Reports by the UK Energy Research Centre and the Industry Taskforce on Peak Oil and Energy Security each examined widely-divergent scenarios, and separately concluded that we have a big problem.

The Energy Research Centre report examined in detail the labyrinth that is the science, business and politics of world oil. Noting strong scepticism about “peak oil” among governments, oil companies and energy analysts, the report was careful to avoid any suggestion of alarmist thinking, supporting its cautious views with a mountain of evidence.

The ERC report found that world oil production would almost certainly peak well before 2040, and that a pre-2020 peak was a “significant” risk. “Given the potentially serious consequences of supply constraints and the lead times to develop alternatives,” it said, a pre-2020 peak “should be given urgent consideration”.

The Industry Taskforce report released two weeks ago was more forthright. With the era of cheap oil behind us, it said, we must plan for higher, more volatile oil prices “where oil price shocks have the potential to destabilise economic, political and social activity.”

The report sees the “oil crunch” coming within five years: “We do have the chance to prepare. The challenge is to use that time well.” Five years — if we have that long — is very little time to get ready for a whole new world.

Think of it: all our travel from daily commuting to overseas holidays depends on cheap oil, as does all our freight transport supplying virtually all the food we eat and pretty well everything else we buy. Without fuel and lubricating oil, building our roads, digging for minerals and harvesting our fields and forests will be impossible, at least in the manner to which we’ve become accustomed.

We should not allow ourselves to be placated by promises that alternative strategies are in place. Consider this:

• Electric-powered vehicles (which we will need money to buy) will become a massive drain on the power grid, at a scale that hydro and wind resources could never meet. For Tasmania, that currently leaves only Victorian coal-fired power.

• It will be many years before power is available from any other sources (large-scale solar, wave, tidal, geothermal, nuclear, biomass). Nuclear and biomass power rely on transport to carry fuel, which in the case of biomass means a yearly supply of between 9,000 and 16,000 tonnes of forest waste (depending on whether it’s dry or green) for each megawatt of electricity generated.

• Biofuel made from plant or animal material is touted in many countries as a replacement for petrol. But such material and the land for growing it will be in increasing demand to produce food, which will always come before fuel. Biofuel is an unlikely source of primary transport energy.

• Public transport could be a more efficient use of fuel for carrying people, but our sprawling population centres and entrenched car-use patterns lessen its effectiveness.

• Tasmania’s rail system remains in a state of suspended animation, barely able to cope with today’s reduced freight demand let alone a future inter-city or suburban passenger service. Light rail using existing streets may serve part of this need but not in the near-term, and not without a lot of money.

If all this is alarmist, so be it. We need a loud clamour for transport and fuel strategies. If political and business leaders can’t lift their gaze to see this, the government and corporate infrastructures that support them will be at risk of joining our transport system in one great big train wreck.

“Government must act”

Key recommendations of the 2010 UK Industry Taskforce on Peak Oil and Energy Security:

• Contingency planning by government and business to deal with a significant increase in oil price spikes, supply problems and electricity consumption.

• Reduce oil dependence of vehicles, promoting lighter hybrid and electric vehicles.

• Support public transport and promote an electrified railway system.

• Measures to change behaviour and secure shift from cars to public transport.

• Mitigate impact of higher fuel prices on cost of food and other essentials.

• Support company investment in necessary new technologies.

• Continue to support renewable energy to abate risks from peak oil and climate change.

• Support energy-efficient buildings and heat pumps to cut dependence on fossil fuel for heating.