When the Labor backbencher Andrew McNamara rose from his seat in the Queensland Parliament in February to state a few home truths about falling world oil supplies, he expected, at most, a few catcalls from the Opposition benches.
Instead, the speech by the provincial solicitor from Hervey Bay “bounced around the world”.
Although his words were little reported elsewhere in Australia, McNamara was inundated with emails from around the globe congratulating him for addressing an issue that might have seen him labelled a flat-earther.
The issue is Peak Oil, the theory that the world will face a sudden, cataclysmic decline in supplies after global production peaks in the next 20 years.
According to McNamara, who believes it will happen sooner rather than later, the direct impact on our lives will be greater than terrorism, global warming or bird flu.
“The challenges we face after Peak Oil will require localised food production and industry in a way not seen for 100 years,” he says. “Local rail lines and fishing fleets will be vital to regional communities. Self-contained communities living close to work, farms, services and schools will not be merely desirable; they will be essential.”
To some, it’s a vision splendid of an oil-free idyll; to others, an alarmist nightmare that takes no account of our love affair with cars and suburbs, and humanity’s remarkable gift for survival.
But when Australian petrol and global crude oil prices hit all-time highs, as they have in the past few weeks, people start to listen.
In 1999, had anyone told David Thurtell, a commodities analyst at the Commonwealth Bank in Sydney, that oil prices would rise 500 per cent within five years, he would have accepted the wager and bet against it – and lost.
A series of unrelated events – a strike in Venezuela, the troubles of Russia’s oil giant Yukos, unrest in Nigeria and even Hurricane Ivan hitting the US – have kept the pressure on prices. But a hypersensitive market is also one of the symptoms forecast for when the world enters the twilight years of oil production.
Then there’s the war in Iraq.
“Iraq is just an ongoing disaster. There’s continual sabotage of oil infrastructure. Production is down to 60 or 70 per cent of prewar levels,” says Thurtell, referring to the nation with the world’s second-largest reserves, and the one country where output could quickly be lifted were circumstances propitious.
Member nations of the Organisation of the Petroleum Exporting Countries (OPEC) agreed in Iran last month to boost production by a token half-million barrels a day. But the world uses 82 million barrels and demand is growing at its fastest for more than two decades.
With rigs and terminals operating at above 90 per cent capacity, the OPEC members admit their once vaunted ability to manipulate prices by boosting production is a thing of the past.
“OPEC has done all it can do,” Qatar’s Oil Minister, Abdullah al-Attiyah, says. “This is out of the control of OPEC.”
Not everyone buys that line, but whether due to market machinations, genuine paucity or reckless consumption, the prices speak volumes. The industry journal Oil & Gas Journal says a series of oil shocks could unfold – we may be in one now – with more to come in 2010 and 2015.
After surviving the oil shock of the 1970s, consumers in the richer nations became insensitive to doomsday scenarios. Consumption kept rising but production kept pace. The honeymoon appears to be over. In 2003, for the first time since the 1920s, no oilfield of 500 million barrels a day or more was discovered anywhere. For every four barrels of oil we consume, only one new barrel is found.
At the world’s largest oilfield, Saudi Arabia’s Ghawar – which produces 5 per cent of the world’s daily needs – roughly a third of what is pumped up is water that has been pumped in to raise the oil table, a sure sign the resource is diminishing.
Part of the problem is the phenomenal economic growth of China as it rapidly becomes the world’s factory. When Thurtell visited last year, he found some manufacturers working a three-day week due to power cuts. “If you build a $300 million manufacturing plant, bringing in some diesel generators and buying some oil is a small price to pay, and that’s exactly what they’re doing,” he says.
The former Liberal MP for Kingston in South Australia, Susan Jeanes, her state have become accustomed to blackouts and a 25 per cent rise in electricity prices in the past two years, following privatisation and access to the national energy grid.
Australia produces most of its energy from coal, a handy buffer against fast-rising oil prices, but the process creates 30 per cent of Australia’s greenhouse gas emissions.
Jeanes, the executive director of the Renewable Energy Generators Association, believes international pressure will force the Government to move to such alternatives as solar, wind, and geothermal power.
“There’s already talk of trade sanctions against Australia over its refusal to ratify the Kyoto Protocol. There’ve been all sorts of hints from the Europeans, and the Japanese have decided all future coal imports will need to come with Kyoto-compliant credits,” she says.
Yet Jeanes has been disappointed by what she calls the policy vacuum of Canberra, a failure symbolised by last year’s white paper, Securing Australia’s Energy Future.
“It was a good white paper to go to an election with, because it quashed any speculation about increased energy prices,” Jeanes says. “Now we need to face reality. The white paper provided no incentives for renewable energy. On the current policy settings not a lot will happen on developing renewable energy.”
The upside of rising oil prices, it has long been believed, is the revaluing of deposits once thought uneconomical. Revival of the long-delayed Gorgon gas project off north-western Australia and the decision by Southern Hydro last month to go ahead with a $130 million power station in Victoria’s high country are two examples.
Two weeks ago, Federal Parliament passed tax incentives for oil exploration. The Government has also asked Geoscience Australia to survey offshore in the hope of making it more economic for private drilling. The cost of sinking a well onshore is $100,000. In shallow waters offshore it’s $10 million. In deep water, $50 million.
But Barry Jones, executive director of the Australia Petroleum Production and Exploration Association, says it will be at least five years before any finds come on line.
When the association meets in Perth this month, exploration will be top of the agenda. But if the law of diminishing returns holds, so will the amount of oil found. Proponents of Peak Oil theory note that in 2003, $8 billion was spent on exploration which found oil worth only $4 billion.
Once a net exporter, Australia still exports oil and gas, but now depends on imports for 60 per cent of its crude oil. According to Jones, another critic of last year’s white paper, oil imports will add $25 billion to our balance of trade deficit, equivalent to last year’s entire deficit.
“We find it fascinating that Australian Government experts are quite blase about the risk of importing oil and becoming more and more dependent on imported oil,” he says.
Rising energy costs – whether for petrol or electricity – appear set to continue. On the Sydney market this week, oil futures to 2007 were selling for above $50. “People are betting significant sums of money that the world price will stay around $50 for a number of years,” says Thurtell.
Rising prices make conservation measures such as high fuel excise less politically palatable. The Howard Government removed indexation of fuel excise in 2001. “That was a knee-jerk reaction to public pressure. Nobody’s thinking long-term,” says Jeanes.
The complexities of running a growth economy in a democracy against a backdrop of declining fossil fuel supplies and rising energy costs will test the political agility of future Australian governments.
Renewable energy sources still provide no feasible alternative fuels for aviation and surface transport. And, as McNamara told the Queensland Parliament, most of the world’s fertiliser is now made from natural gas, and most of the world’s pesticide is made from oil.
“As fuel prices double and then double again in the years after the peak [of oil production], we will be faced with some very hard choices in the fields of agriculture, food distribution and transport generally.”
At the Centre for International Economics in Canberra, such hard choices are no bad thing. “To an economist, high prices are the solution to the problem. As long as we let markets work correctly, we’ll get through this in the cheapest possible way,” says the executive-director, Andrew Stoeckel.
However, to Victorian Liberal Senator Tsebin Tchen, that sounds like an economic rationalist’s version of Marie Antoinette’s “let them eat cake”. “That’s how revolutions happen. It’s a very painful and risky way of doing it,” he says.
Until the crunch, whenever and however it comes, Jones believes the public will go on gas-guzzling until the bitter end.
“Who cares about petrol costing $1.20? People are still driving their cars. If you live in Sydney, you know how bad the trains are. What else can they do?”