Australia’s future energy security

Whilst not the sole cause of the global financial crisis there are a number of economists, such as Jeff Rubin and Dr James Hamilton (PDF 638KB)who argue that the oil price increases of 2005 - 2008 were a major factor in the current financial crisis. For example, Rubin states that:

The oil price rises, and the economy stalls. The demand for oil then drops sharply, and the oil price falls. Consumers and producers alike heave a sigh of relief and get back to work until the next spike.

Rubin’s research also suggests that there is a link (PDF 748KB) between oil price spikes and global economic recessions with five of the last six global recessions being preceded by an oil price spike.

The investment feedback loop suggests that a lower oil price, resulting (at least in part) from economic recession triggered by high oil prices will lead to falling investments and increase the likelihood of future oil shocks. The NESA acknowledges that there is a risk of a supply side crunch however not until 2018 is this seen as a concern. Current events would indicate that this supply crunch is likely to occur much sooner. Treasury expects economic growth of 4.5 per cent in 2011-12. This is about the same timeframe that the next oil shock is likely to occur. If the link between oil price spikes and economic recession holds, then it is hard to see how this recovery will be possible. This in turn raises the question of how the Government will pay off its debt.

A more realistic liquid fuels security assessment

The real weaknesses of the both the NESA and the LFVA are not the analysis themselves but the questions that are not asked and hence not answered. Considering these key questions, namely declining oil exports, geo-political feedback loops and the investment outlook provides the opportunity to make a more realistic appraisal of Australia’s liquid fuel security as detailed below:

A realistic appraisal of Australia’s liquid fuel security

• Adequacy: the adequacy of Australia’s future oil supply is based upon this model which suggests that Australia’s fuel supply could fall short of projected demand by over two thirds by 2025.
• Reliability: the increasing impact of geopolitical feedback loops over time and the requirement to increase the length of our oil supply chain will reduce reliability of supply.
• Affordability: oil prices are likely to remain volatile over the longer term however the overall trend will be up.

Why is this important?

Australia and the world appear to have three big and conflicting investment requirements. It is highly improbable that there is sufficient investment available to meet the demands of all three. The requirements are:

• maintaining the production capacity of our fossil fuel energy sources;
• developing a renewable energy economy to replace fossil fuels as reserves deplete and to minimise the impacts of climate change; and
• responding to the global financial crisis.

Currently, it appears that governments around the world are focusing on the third and least important requirement through financial stimulus packages. This short sighted approach is aimed at maintaining “business as usual” (BAU) and is a consequence of governments failing to address the issue of oil depletion. The long term consequence is that there will be insufficient investment in both fossil fuel and renewable energy and is in fact the worst case scenario. It will result in further economic hardship from future oil shocks and increase the likelihood of dangerous climate change while not providing an alternative energy system. In effect, by trying to maintain BAU our government is actually reducing the likelihood that something like BAU can be maintained.

Of course, it does not have to be this way. A realistic appraisal of Australia’s liquid fuel security would encourage policies focused on significant growth in renewable energy, energy efficiency, rail and mass public transportation. Such an approach seems to offer the best chance of reducing oil dependency, reducing the impact of oil shocks, addressing climate change, maintaining a level of economic prosperity and creating employment. However this requires a significant change in direction by Government. According to the IEA (PDF 423KB) only 5 per cent of global stimulus packages to date have been focused on energy efficiency and clean energy. The IEA warns that the level of new funds allocated to energy efficiency and clean energy should be four times current levels and be sustained each and every year for the next few decades.

Conclusion

On the face of it, both the NESA and LFVA appear to be a comprehensive analysis of Australia’s liquid fuel security situation. However, both reports ignore or avoid the critical issues that will impact upon Australia’s future liquid fuel supply. This results in an inappropriate assessment of Australia’s liquid fuel security. The unfortunate consequence is that Australia is likely to face significant economic and social hardship over the next few decades as our liquid fuel security declines. The really disappointing aspect is that much of this hardship could be avoided through a realistic liquid fuel security assessment and appropriate policy responses. This poses the interesting question of why have these issues been avoided?