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Energy to burn

The noise over high fuel costs, dirtier air and a trade deficit blowout is getting louder. But the people who matter don't seem to be listening, writes Christopher Kremmer.

The plush, light-drenched ministerial wing of Parliament House is a world away from the struggles of ordinary Australians. In the Treasurer's waiting room dark suits queue for an audience, the air heavy with the vibe of power. But in a nearby suite this week you could have sworn you smelt the acrid odour of petrol.

The Resources Minister, Ian Macfarlane, who occupies that suite, also gets his share of high-powered visitors, but as public fury over escalating petrol prices raged across the country he seemed preoccupied by an impromptu encounter with one of his constituents in Queensland a few days earlier.

"I was amazed," Macfarlane said. "A businessman in Toowoomba buttonholed me on Friday and said, 'When are you blokes going to give back some of this money you're making out of high oil prices?' I explained to him that [fuel excise] is locked in. It's fixed.

"We're the first government to do that. We're the first government that actually lowered excise."

Macfarlane is a farmer born in Kingaroy whose rugged features and gravelly voice would not be out of place in the Nationals. But he's a Liberal, a true believer in the redeeming power of market forces, and therein perhaps lies the key to his incredulity.
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This week the Government stonewalled public concern about high fuel costs, its belief in market forces transcending its populism. Even those who agree that cutting fuel excise is not the answer say there's a lot the Government should be doing but isn't.

The former president of BP Australasia, Greg Bourne, who is now head of World Wildlife Fund-Australia, said rigid free-market orthodoxy could be dangerous if it inhibited policies aimed at reducing dependence on expensive imports and building energy security.

"Greater energy security and resilience to oil shocks requires political leadership," Bourne said. "We need tax and other incentives to make people use more gas at home and in our cars. Bringing North-West Shelf gas onshore for domestic use is probably the most important option we have to rapidly build resilience."

Yet we're shipping our gas abroad as fast as the freighters will carry it, while domestic oil production is in free fall. On current estimates, Bass Strait supply will be exhausted in nine years.

Australia spent $15 billion on imported crude oil and refined petroleum products last year. In net terms we rely on imports for 17 per cent of overall consumption but by 2020, the Australian Bureau of Agricultural and Resource Economics estimates, the figure will rise to 46 per cent.

Already, the deficit due to petroleum product imports accounts for about a quarter of our total trade deficit. It will be three to five years before any major new deposits found as a result of the latest exploration incentives come on line.

Said Labor's federal resources spokesman, Martin Ferguson: "We are exposed from an energy point of view, potentially. The Government needs to get serious about more self-sufficiency in liquid fuels - oil, gas-to-liquids technology, and other similar investments."

In February a report to the United States Department of Energy outlined how messy the consequences of not properly managing the transition to a post-oil future could be. "Waiting until world oil production peaks before taking crash program action would leave the world with a significant liquid fuel deficit for more than two decades," an analyst, Robert Hirsch, told the Bush Administration in his report.

"Intervention by governments will be required, because the economic and social implications of oil peaking would otherwise be chaotic."

President George Bush, has told Americans: "Dependence on foreign oil is a matter of national security. To put it bluntly, sometimes we rely upon energy sources from countries that don't particularly like us." Yet within the Howard Government there seems little sense of urgency about the cost or security of our energy supplies. Beyond meeting the International Energy Agency's requirement that countries maintain a 90-day oil reserve, Canberra has no plans to build a stockpile, like the kind that acted as a buffer to the Hurricane Katrina-struck US.

"At this stage Australia's fuel security is still good," Macfarlane said. "Do we need to find more oil? Yes we do. But short of finding more oil I don't know what the solution is."

Macfarlane said the Government was not interested in "picking winners" when it comes to alternative energies of the future. That's up to business, but uncertainty about where the oil price will settle in the longer term is making investments in alternatives hazardous.

"The price of oil is key," said Dr John Wright, head of CSIRO's Energy Futures Forum. "At $US70 [$91] a barrel we can make biofuels and liquid fuels out of gas cost-effectively. But if it drops back to $US50 a barrel the economics get dicey at that point."

Wright's personal view is that the Government should set a price on carbon emissions, which would reduce the risk of investing in renewables and wean the economy off its dependence on oil, particularly for land transport.

But suggestions of government intervention run up against the wall of market-driven approaches. Take ethanol, a fuel which can be "grown" from corn and sugar cane, and which promises a renaissance for rural Australia. The US mandates its use as an additive in petrol, because it reduces greenhouse gas emissions.

But earlier this year when the Treasurer, Peter Costello, was asked whether we should do the same in Australia, he replied: "I don't actually think that the Government should step in and by law force people to use a product if they don't want to use it."

The report of the Prime Minister's taskforce on bio-fuels, which goes before cabinet soon, will pit dries like the Treasurer against Nationals who support mandating ethanol.

Oil executive-turned conservation lobbyist Bourne said sectional interests such as miners, farmers and the motor industry, not just ideology, were also blinding governments to the national interest. "A tax system that doesn't penalise gas-guzzling vehicles, and fuel efficiency standards that are 2 per cent lower than Europe's are forms of protectionism for car makers like Ford and General Motors that make only six-cylinder engines, when most Australians want four-cylinder cars."

Despite free-market rhetoric, a Senate inquiry into greenhouse emissions reported in November 2000 that direct and indirect subsidies to the fossil fuel industry were in the order of $6 billion, compared with $360 million for renewables. The committee accused the Government of preferring quick fixes in energy policy, rather than long-term strategic investment.

The Australian Bureau of Agricultural and Resource Economics estimates that on current policy settings coal and oil will still account for 70 per cent of Australia's energy in 2020. Much is riding on the balance between ideology and pragmatism as Australia gropes for the appropriate response to the challenge of oil depletion and global warning.

"Technology's going to solve this problem, not the imposition of Kyoto-type carbon taxes," said Macfarlane, who predicts a pilot plant to turn coal into diesel will be operating in Australia within five to seven years, although commercial production is probably a decade away.

Having junked Kyoto, Australia will host in November the inaugural meeting of the Asia-Pacific Partnership on Clean Development. The meeting - between the US, China, India, Japan, South Korea and Australia - will focus on voluntary measures to encourage cleaner energy technologies. Labor, which also has an eye to jobs in the mining industry, supports the initiative.

Cleaner coal and nuclear power are on the partnership's list for the future. For a country in the midst of a resources boom, it's not surprising that many miners - all except the oil producers, of course - are crying "Eureka".

Yet despite the recent flurry of statements by Government ministers calling for nuclear energy to be considered for Australia, Macfarlane said it's at least 20 years away.

Opponents such as the Greens' Senator Christine Milne -"You can't escape the weapons and waste" - find themselves with strange bedfellows, including the Nationals maverick Senator Barnaby Joyce, who said: "We should work out what to do with the nuclear waste we've got stored in Sydney, before moving deeper into the nuclear fuel cycle."

Bourne describes Canberra's leadership in preparing for an oil-scarce, carbon-constrained economy as "abysmal", but also says environmentalists and "flat-earthers" need to get real.

"It's no use pointing to nirvana if you can't show in practical terms how an advanced economy like Australia can get there," he said.

"Greens will typically say, 'No nuclear. Oh, and by the way, switch off all hydrocarbons tomorrow and install solar cells immediately.' Flat-earthers just deny there's a problem."

The first oil shock of the 21st century has begun. As The Economist recently pointed out, oil prices are at an all-time high relative to global export prices - the key indicator for oil importing economies.

Because rising demand rather than sudden supply disruption is the main factor driving prices, higher oil costs are likely to be more sustained. The magazine said that low interest rates and the housing boom had insulated people from the full impact of high energy costs. It predicted that when house prices fall, as they have begun to in Australia, "consumers will then feel the full force of dearer oil".

This week consumers from London to Lagos took to the streets to protest about fuel prices.

The upside is people might become more conscious of wasting energy, but rising prices will also fuel inflation and depress consumer confidence. Governments may have to pay more in indexed welfare and pensions, and oil import bills will eat into export earnings from other resources.

Whenever it begins losing domestic political or economic arguments, the Howard Government flicks the switch to terrorism. But around the world, experts are beginning to ask whether energy insecurity is the greater threat in the 21st century.

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