NetNacs! DownUnder October 2005

DownUnder

October 2005

What have we learnt from the recent oil shocks?
by Ian McPherson

The politics

In Australia, after the Katrina Hurricane, petrol prices hit $1.50 a litre momentarily, and have now subsided to around $1.30 to $1.40 a litre. Both our Prime Minister, John Howard, and our Deputy Prime Minister, Peter Costello, have gone into panic mode. Howard has warned us in the press to "get used to high petrol prices" and Costello flew off to Washington to confer with his counterparts in the White House.

Neither strategy has worked very well, unfortunately, probably because the government is enjoying a budget surplus of around $13.6 billion, derived mainly from taxes on booming commodity exporters.

Howard immediately performed his trademarked backflip, dragging the spotlight off petrol prices and onto his plan for expanding ethanol production. His old mate Dick Honan of Manildra, the controversial ethanol-king of Nowra, must be smiling in his sleep. Howard's plan to up ethanol production to 350 megalitres a year will be sweet music to Dick's ears.

Costello too, had some problems bringing the White House approach to the price spike home. Over in the states, they're doing their best to talk the problem down, even though the two hurricanes have inflicted record damages in the US's primary offshore oil and gas production region. Costello tried pitching the problem as a short term issue, telling us that Hurricane Rita had caused little damage.

Sadly for Costello, his information was based on early fly-overs performed by the US Coast Guard and not the more exhaustive damage checks performed by the oil companies. It is true that most of the Texas refineries were spared, but Rita caused record damage to the offshore oil and exploration rigs. MSNBC reports now that Hurricane Rita has seriously damaged or destroyed 13 rigs, 10% of the contracted fleet. "'The impact on the rigs is something that’s never been seen by this country before,' said Daniel Naatz, director of federal resources for the Independent Petroleum Association of America.

The government remains under pressure on petrol prices, but the recent Bali terrorist attacks have jumped onto page one of the newspapers, giving them some breathing room. They'll talk up the terror threat while they lick their wounds and mull some sort of concession to the public that may end up making them look a little less greedy. The opposition in Canberra is still pushing for tax breaks to offset the high petrol prices, but it will take a week or so, maybe longer, for the focus to move back to fuel prices.

The consumer

The public reacted in its predictably self-interested manner, with the interstate truckies being the first to mobilise - transport is, after all, the first industry sector to feel the pinch. On September 23, a group of owner-operator truck drivers threatened to shut down the nation's highways. They managed to blockade the Pacific Highway on the New South Wales mid-north coast for nine hours, before being broken up by state police. One fellow refused to budge and probably spent a night in the cooler for his trouble.

Next was a report in the Sydney Morning Herald that the median price for a home in Sydney had fallen 10%, with indications that the September quarter would see as large a drop, perhaps even larger. The conclusion of the article was hardly uplifting for local home owners: "Sydney is undoubtedly the basket case of the national property market."

After that came the news that high petrol prices and the strong Australian dollar had fuelled a massive slump in Australia's manufacturing sector. "Sales and new orders" fell for the first time in four years, while "exports" fell at a rate not seen since 1998. This was the first negative result after 16 consecutive quarters of growth.

Not to be outdone, Sydney's largest milk producer, Dairy Farmers, raised the price of a litre of milk by 16 cents, at first in the smaller convenience stores, and later in the larger chain stores. Consumer groups then warned that milk is only the first consumable to be hit. Norm Carruther, deputy chief executive of the Australian Consumers Association said the cost of meat, fresh fruit and vegetables would also soon increase because of higher petrol costs.

In the same article in the Sydney Morning Herald, Shannon Wheeler, a mother of one from Bondi, stated that shopping had become a "frightening prospect" and that she was planning to "switch to cheaper generic supermarket brands." The story was much the same right across the media spectrum. Shoppers interviewed on radio planned to either expand their purchases of "cheaper generic brands" cut back on shopping, or both.

Petrol buyers had a similar story to tell. Caught between a rock and a hard place, most were resigned to paying the higher petrol prices, as most felt that our public transport system was simply not up to the task. Some planned to cut back on trips, while others said that they would consider selling their car if prices continued to rise.

Regardless of public protests however, public transport use has risen in Sydney, and in a telling indictment of our tollway planning, motorists were boycotting the @$10 round-trip cost of the Sydney City Tunnel, instead choosing to travel by their old routes, spending a little more time in traffic. Some 5,000 drivers a day are choosing not to pay for the tunnel on top of the increased cost of fuel.

Corporations

A few outspoken opposition Labor MPs have accused the oil companies of "price gouging", but they have found it hard to gain traction. The ACCC, Australia's consumer price watchdog, could find little evidence of oil industry price gouging, and released a statement saying so. Heavily caveated, the statement read like a manifesto for deregulated industry, supporting the market's contention that the government had no right to dictate what levels of "profit" were appropriate.

This left the ACCC looking a bit lame, so in stepped John Howard again, warning businesses that they could not "use soaring petrol prices as an excuse to hike up prices on goods and services". This misleading little band-aid appeared to mollify the punters, who missed the big caveat, the "excuse". In other words, if corporations could justify the price rises were actually due to the increased price of fuel, they were off the hook with the ACCC. So, naturally enough, goods and services prices are heading up, up up...

Underlying problems

In the globalised world we live in, a Hurricane in the US can, and will, affect fuel prices as far away as Australia, Europe, Asia and Africa. Since the establishment of the International Energy Agency (IEA), international agreements exist to attempt to mitigate the effects of such an oil shock, not always successfully. The EU, for instance, recently sent oil and gas to the US, primarily from French refineries.

Underlying the natural aspects of this price shock - the two Hurricanes in the Gulf of Mexico - are a range of more serious long-term problems. Firstly, no new refineries have been built in the US for some years, whilst many smaller refineries have actually closed down. The remaining refineries have expanded to take up the slack, but investors have been reluctant to build new refineries, due to the changing nature of world oil supplies.

Light sweet crude oil, for instance, is in production decline worldwide, having reached a peak in production between 2000 and 2004, according to Dr. Colin Campbell of the Association for the Study of Peak Oil and Gas. This year, OPEC supported Campbell's prediction, announcing that non-OPEC light sweet crude dropped from 41% of 66 mb/d in 2000 to 34% of 70 mb/d in 2004, a drop of 3.26 mb/d. Because light sweet crude oil is the cheapest and easiest grade of oil to refine, it is preferred by many of the US refineries.

The upshot of this will be that oil companies and investors, and eventually consumers, will have to pony up to upgrade existing refineries all over the world, as we move from the light sweet crude of the past to the medium and heavy grades of sour oil that will increasingly dominate supply. Although many of the boosters tell us that shale oil, tar sands and coal liquefaction, which can produce a synthetic sweet crude oil, may fill the gap for conventional light sweet crude oil, these techniques can be expected to be many times more expensive than conventional oil production.

Additionally, no significant discoveries of new oil have been made in the past three years, anywhere in the world. Oil discovery has fallen to the lowest rates since the 1920s, with little left to look forward to, barring Alaska, some possible arctic discoveries and increasingly expensive new deepwater finds. Iraq is still a disaster for the oil majors and may bet much worse before it gets any better. Russia will move into decline late this year and next year, and the oh-so-plentiful reserves everyone believed were hidden in the Caspian region have turned out to be highly sulphurous oil and/or natural gas, with the natural gas land-locked thousands of miles away from a profitable market.

The Long Emergency

James Howard Kunstler has written about The Long Emergency, a period of time in the future when we will see continually rising energy prices and continually falling economic conditions. The economic conditions for such a long emergency are well and truly on the way. Whilst we may see falls in the future price of oil, as some new discovery somewhere comes on-line, it will be followed by the inevitable price shock as that new discovery is swallowed by demand and the market cries out for more, more, more...

I recently read a horrifying story in the Falls Church News-Press, penned by Tom Whipple. Tom wrote about Zimbabwe, where oil imports have simply stopped because the impoverished nation cannot afford the near record prices. A few weeks ago, nearly all the buses and taxis in the capitol had come to a standstill. Municipal services have stopped, and there are no longer any trash collections, ambulances or public works vehicles on the streets. Clean water and electricity are only available sporadically, and black market gasoline is running at around $36 a gallon, well beyond reach of the poor.

Railroads are not running, the sugar mills are shut and tobacco production has fallen dramatically. People are fleeing Zimbabwe in droves, and famine, pestilence and political upheaval are inevitable. Sure, Zimbabwe has also suffered from poor government and worse planning. But, as you fill your SUV, grumbling about the high price of gas, spare a thought for the poorer nations, the ultimate victims of a world energy system that destroys the poor whilst it merely inconveniences the rich.

Lessons we have learnt

In the misty depths of the crystal ball that is our energy future, much is unclear. Yet we need to be totally aware of the lessons this oil price spike has taught us. If oil prices rise, the price of most everything else will rise too. Even such essentials as plastic toys will rise in price, as will computers, cars, heating, air conditioning, iPods, transport, food, pharmaceuticals and medicine. Very little we consume, or rely upon, will be spared from these price rises, as oil has found its way into every nook and cranny of our industrialised society.

Conservation is a good response in the short term, but ultimately promotes more consumption in the long term, by making our consumption more affordable. Natural gas is a possible transition fuel that can replace oil in transport, but it is merely a transition fuel. Reserves of natural gas will deplete and peak more quickly if we use them for transport as well as electricity generation, and it won't be long before we need to plan for a more secure future than one based on natural gas.

Coal, tar sands and shale oil can also supply synthetic oils, pushing the day of reckoning into the future, but are monstrously expensive, damaging to the environment, wasteful of natural gas and water, and all emit many times more CO2 than traditional oil production. Hydrogen, an expensive battery, is probably not possible to employ as a transport fuel without ramping up nuclear fusion dramatically, an incredibly expensive option to what we use today. In the end, nuclear is just another option based on a finite supply of a non-renewable resource. It may appear vain and stupid to base our future on another finite resource, but humanity has a habit of repeating its past errors.

Make no mistake. The fruits of our laxity and indifference are ripening. And we are nowhere near having a competent plan for dealing with the oil price shocks to come. As we slide down the arc of world oil decline, paying more and more as we move from each superior grade of oil to a lesser grade of oil, and inevitably to the expensive non-conventional oils, we will pay the price in spades. Imagine a constantly diminishing quality of life, peppered with times of forced frugality and huge price swings, and you have it in a nutshell.

It makes sense, of course, to resist a future such as this. But who is doing so? It's not our governments. They're still handing out pork and enormous subsidies to Big Oil, Big Gas and Big Coal, rather than mandating investment in the only currently renewable energy options; solar, wind and geothermal. If they wish to continue to collect campaign funds from these fossil-based industries, it is clear that they will have to let them operate in their current manner - which is profits before common sense.

You can also forget extending the rail network in the US or Australia, which is some 10 to 12 times more efficient than interstate trucking. George Bush recently took $2.5 billion from Amtrak and $220 million from the US fast rail budget, eliminated the Hydrogen Fuel Initiative ($2.5 billion) and the Energy Star Program ($835 million), and cut $5.3 billion from the Conservation Security Program and $25 billion from the Transportation Bill, which was earmarked to promote biking, ease traffic congestion and give people options to using their car. These funds were all re-directed to rebuilding New Orleans. Here in Sydney, we can't even seem to finish the Chatswood to Epping heavy rail line. One hand builds the future; the other hand destroys it.

Perhaps we have again learnt little from our recent brush with a serious oil price shock? The opportunity will surely reoccur soon, as we slide downhill into the future. I guess we'll eventually see if our much-vaunted intelligence is sufficient to work our way out of this dilemma. Don't count on the solution coming from government or big business though. Even when we are surrounded by a multitude of warning signs - like climate change, pollution, species extinction, water shortages, rising temperatures and habitat destruction - they are deaf on the subject. We may just have to do this ourselves.