Tuesday, August 16, 2011

Time to refine energy security

The Canberra Times has a guest editorial from Jenny Stewart on energy security and peak oil - Time to refine energy security.
For the past six months our national attention has, understandably, been focused on the carbon tax issue.

The policy agenda now needs to move in a related, but different direction. The reason is a three-letter word – oil.

While oil producers will be affected by the carbon tax, politics ensures that there will be no tax on petrol.

Yet oil is, arguably, one of Australia’s key energy problems. As a nation, we passed ‘‘peak oil’’ some time ago. Domestic production plateaued more than 20 years ago, and since 2005, has been in decline. The oil that is left is a long way offshore, and a long way down. Extracting it will be costly and risky.

Australian refining capacity is more constrained now than it was a decade ago. South Australia lost its one oil refinery in 2003. A number of the refineries in Queensland, Victoria and NSW are small in scale, and subject to stiff competition from imported, refined products. Further rationalisation of refining capacity seems likely as imports continue to increase, particularly from large-scale refineries in Asia.

The government (in the form of the National Energy Security Assessment released in 2009) acknowledges challenges ahead, but tells us that, fundamentally, all is well. Energy security (that is, adequacy, reliability and affordability of supplies) is assessed as ‘‘high’’ until 2018, with only moderate concerns for 2023. Essentially, the assessment assumes that, because markets will continue to operate, there is no need to worry.

Although oil prices will continue to rise, the resilience of the Australian economy will ensure that we can cope. While domestic refining capacity is expected to decline, this is not considered to be a concern, so long as more facilities are built for handling imports. The assessment does not examine the impact of possible disruptions in oil supplies from the Middle East. Indeed, the reader would be hardpressed to realise that oil is a resource whose future is problematic.

Now, price signals are important inputs into public policy. But in the case of oil in particular, there are good reasons to be sceptical about the merits of relying on this mechanism as a basis for policy. World oil prices subside when growth declines, and pick up again when growth gathers pace. And as we saw when the oil producing nations began to exercise their market power in the 1970s, they can spike rapidly. But over the longer run, oil prices do a poor job of reflecting the scarcity of the resource.

Internationally, as in Australia, rates of oil use exceed the extent to which new reserves are being found. Planetary ‘‘peak oil’’ will soon be upon us. Given this situation, the price of oil should have been rising steadily over the past 20 years, because producers would be holding back present-day production, in order to receive higher prices later. Yet while there are short-term fluctuations, the inflation-adjusted price of oil has proved remarkably steady over the past two decades, increasing only in recent years as demand has accelerated.

Governments are thinking longer term, but not in the way an environmentalist would want. Nations are looking far less at the greenhouse gas equation, and far more at economic growth and energy security. Hence the efforts in Canada to extract oil from tar sands.

Almost as much energy goes into the process as comes out of it, yet Canada’s federal and provincial governments remain committed to the industry. Despite the recent disaster in the Gulf of Mexico and in the face of the protests of conservationists, the US is again moving towards oil-drilling in the Arctic.

For countries with some oil reserves of their own, there are difficult questions to answer about the extent to which local production should substitute for imports. Certainly, since the Hawke government deregulated the industry in 1988, Australia has been content to leave the decision about whose oil to use, to market forces. As a result, our petrol and diesel prices are low by international standards and our transport (and food production) systems are more dependent upon oil than ever. But these very factors make us vulnerable to geopolitical change. Not only that, we are at the end of some very extended supply chains.

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