For those who are concerned about the lack of an effective climate change agreement in Copenhagen, there is some consolation. Depletion of global fossil fuels is likely to force the world to move to alternative energy anyway. Higher energy prices will do what trading schemes won’t.

It has generally been assumed that depletion of global fossil fuel resources will come too late to have any bearing on policies to mitigate carbon dioxide emissions. However the future will arrive sooner than we think. It is not only oil that is running out. There is not enough coal, at least in the right places, to sustain projected global demand.

At current levels of global production, there is enough oil in the world to last about 40 years, natural gas for 60 years, and coal for over 100 years. This has led many to assume that coal is so abundant that reduced supplies of coal will not limit coal-fired emissions any time soon. This is wrong because it ignores the geographical distribution of coal resources.

The problem is that as more countries run out of fuel, they will increasingly have to turn to countries that still have reserves. The enormous strains that this will put on supply chains via international trade will mean that some of these demands will be difficult and expensive to meet, if possible at all. This is indicated in a study recently undertaken at the National Institute of Economic and Industry Research, projecting resource depletion and international trade to the year 2050.

While new discoveries of oil and gas may roughly keep pace with annual production, this is not the case with coal, where reserve estimates have often been revised downward. Most future coal supplies are expected to have to come from deeper deposits, from underground rather than open cut mines, and from more remote locations, involving higher cost and lower quality coal. For this reason, Australia is emerging as the ultimate global supplier of coal.

However, long before coal and other fuel reserves become exhausted, production rates will begin to decline. When increasing demand is met by declining production, the inevitable outcome is higher prices. We have already seen oil reach $150 a barrel and coal reach $300 per tonne. When prices reach double or triple these levels, and stay there permanently, the world will take alternative energy seriously. When will this happen? It could well be within the next decade, certainly within the time frames contemplated by carbon emission policies.

China consumes vast amounts of coal, and consumption is increasing because of its massive deployment of coal-fired power. Until recently, China was a net exporter of coal. Now it is an importer. Chinese coal production will peak in five to ten years, if not sooner. Australia is by far the biggest exporter of coal in the world, yet total Australian exports of coal represent only five percent of Chinese consumption. It simply will not be possible for Australia or any other country to supply China with the quantity of coal required.

The effects of peak oil will also happen sooner than we think, because the reserves of the world’s biggest consumer, the USA, are declining. When US and Chinese reserves are substantially exhausted, and with Russian production in decline, the pressure will be on traditional suppliers like Saudi Arabia, Iraq and Kuwait. The problem again is that infrastructure and logistical difficulties will make satisfying of import requirements problematical.

The future supply situation for natural gas is not dissimilar. As with coal and oil, major reserves are concentrated in just a few countries. Three countries, Russia, Qatar and Iran, hold over 50 percent of natural gas reserves. It is inevitable that severe supply issues will eventuate in the decades ahead. What should we do?

The effect of dwindling resources, higher resource prices, and the monopoly profits they provide, has the potential to be an additional major source of international tension. Already we see resource prices diverging widely from production costs and monopoly profits accruing in sovereign wealth funds. We need an international agreement on resource pricing, in association with agreements on global warming mitigation.

To solve the global warming issue, we need to reduce global emissions equivalent to all coal combustion. Resource prices do not currently reflect the environmental costs. In future, resource prices may be sufficiently high to reflect these costs, but the revenue may not be used for global mitigation. Rather than trading schemes based on emissions from consumption, it will become increasingly apparent that the best solution is a carbon-based resource rent tax imposed at the point of production.

This will impinge on the global chain of supply and distribution. There are incentives for suppliers to provide this solution, as the competitive disadvantages are more easily minimised through cooperation. Australia, as the major coal supplier, must play a key role. The payment of a proportion of resource revenues into a global fund, to be used for the purpose of greenhouse gas mitigation, is an appropriate use of the market power that resource suppliers will increasingly possess. For resource producers, investing in the future of the planet will be the soundest investment they will ever make.

Dr John L Perkins
Senior Economist
National Institute of Economic and Industry Research, Melbourne, Australia
email: [email protected]