Executive summary
CHAPTER 1 – Introduction
This inquiry was prompted by the question of whether Australia
should be concerned about ‘peak oil’. This term refers to the theory that, for
fundamental geological reasons, global conventional oil production will reach a
peak and then start an irreversible decline soon enough to be of concern. [1.3]
CHAPTER 2 – Future oil demand and supply
Projections of world oil production
and consumption
The International Energy Agency (IEA), in its World
Energy Outlook 2005, predicts that in a 'reference scenario' world demand
for oil will grow from 82 million barrels per day in 2004 to 92 millions
barrels per day in 2010 and 115 million barrels per day in 2030 – an average
growth rate of 1.3 per cent per year over the period. [2.30]
It assumes that most of the increased demand for oil to 2030
will be supplied by a large increase in OPEC production, particularly in the Middle
East. [2.32]
The IEA argued that resources are adequate to meet projected
demand, although 'reserves will need to be "proved up" in order to
avoid a peak in production before the end of the projection period [2030].'
However it noted that financing the investment needed to find and exploit the
resources is a serious challenge. [2.31]
The core document used to support the assumption that oil
supply will not be constrained before 2030 appears to be the US Geological
Survey’s World Petroleum Assessment 2000 (USGS 2000). This estimated
that the world’s total conventional oil and natural gas liquids produced to
1995, or with potential to be added to reserves between 1995 and 2025, is about
3,345 billion barrels. Of this about 1,000 billion barrels has already been
produced. [2.35]
Oil production and consumption in Australia
Australia’s demand for petroleum is over 750,000 barrels per
day. This is projected to rise to over 800,000 barrels per day by 2009-10, and
over 1,200,000 barrels per day by 2029-2030. [2.43]
Australia’s net self-sufficiency in oil is expected to
decline significantly as future discoveries are not expected to make up for the
growth in demand and the decline in reserves as oil is produced. [2.48]
CHAPTER 3 – ‘Peak oil’ concerns about future oil supply
‘Peak oil’ commentators commonly predict a peak of
conventional oil production somewhere between now and 2030. They fear that
declining production after the peak will cause serious hardship if mitigating
action is not started soon enough. [3.3]
‘Peak oil’ commentators mostly estimate an ultimately
recoverable resource (total production past and future) of conventional oil
much lower than official agencies such as the US Geological Survey. This
affects the timing of the peak as the rate of production should be expected to
peak when about half the ultimately recoverable resource has been produced. [3.17,
3.73]
The main areas of disagreement are:
- Estimates of current reserves: Peak oil commentators argue that
estimates of remaining reserves are unreliable and probably overstated,
particularly in the Middle East. [3.19]
- Estimates of future reserve growth: ‘Reserve growth’ is the
commonly seen increase in the estimated reserves of already discovered
oilfields over time. USGS 2000 estimated future world reserve growth by
analogy with past reserve growth in the United States. Peak oil commentators
argue that this is unsound, since US reserve growth has been enlarged by
factors which do not apply worldwide or will not apply as much in future.
[3.25, 3.27, 3.31]
- Estimates of future oil discoveries: New field oil discoveries
have declined greatly since the 1960s. USGS 2000 estimates of future
discoveries, to be realised, would require a drastic turnaround of this
declining trend. Peak oil commentators argue that the declining trend of oil
discovery reflects geological fundamentals and should be expected to continue.
[3.38, 3.40, 3.52]
Estimating the timing of peak oil
The timing of peak oil is debated. However the concept
appears to be well accepted including by official agencies. [3.88]
The US Energy Information Administration in 2000 estimated a
peak between 2020 and 2050 depending on assumptions about demand growth and the
size of the ultimately recoverable resource. In a similar exercise the
International Energy Agency (IEA) in 2004 estimated a peak of conventional oil
production between 2013 and 2037 depending on assumptions. Many commentators
predict an earlier peak. [3.79, 3.82, 3.86]
The US Energy Information Administration study found that
widely differing estimates of the ultimately recoverable resource (URR) make
surprisingly little difference to the timing of the peak. The exponential
growth of demand is the dominating factor. [3.83]
From this it follows that an optimistic view of long term
oil supply cannot rely only on a high estimate of the URR. It must rely on an
optimistic view of the ability of market forces and technological progress to
bring alternative fuels on stream in a timely way in sufficient quantity to
serve the post (conventional) oil age. [3.90]
Investment needed to maintain
production
The upstream developments needed to offset depletion of
existing oilfields and to supply demand growth will require very significant
investment. The IEA’s recent World Energy Outlooks have stressed that there is
no guarantee that this will be forthcoming. [3.94]
The prospects of nonconventional
oil
All scenarios for future oil production assume increased
exploitation of nonconventional oil (heavy oil, tar sands, shale oil) to offset
declining conventional oil. Peak oil commentators argue that large scale
exploitation of these resources will be too difficult and costly to make much
difference to the peak oil problems which they predict. [3.99, 3.105]
The IEA notes that ‘producing such a massive amount of
resources can only be done over long periods of time... simply mobilising the
capital... is likely to take several decades.’ [3.107]
Implications for the price of oil
Demand for oil is relatively inelastic, because for its
major use – transport – there are no easy substitutes. This means that a
relatively small shortfall in supply can cause a large increase in price. This
will increase the volatility of the price in response to small changes in
supply when there is little spare capacity. [3.114]
The IEA now expects that the price of crude oil will ease to
about US$47 per barrel by 2012, thein increase to US$55 by 2030 (2005 dollars).
Prices are likely to remain volatile. Some commentators believe that much
higher prices are possible. [3.112, 3.117]
New warnings in the World Energy
Outlook 2006
The IEA’s World Energy Outlook 2006 (WEO 2006) gives
serious new warnings about the energy future. It regards current trends as
‘neither secure nor sustainable’. It stresses the need for energy policy to be
consistent with environmental goals – chiefly, the need to reduce greenhouse gas
emissions. [3.121, 3.122]
The WEO 2006 proposes an ‘alternative policy scenario’ to
reduce the growth of energy use and greenhouse gas emissions. A key finding is
that energy saving measures reduce the total investment required to meet the
demand for energy services. [3.125, 3.128]
Committee comment on peak oil
concerns
The essence of the peak oil problem is risk management. The
risks involved are high if peak oil comes earlier than expected, or if
economies cannot adapt quickly enough to the post peak decline. Australian
governments need better information from which to decide a prudent response to
the risk. [3.135]
Recommendation 1 (paragraph 3.136)
The committee recommends that Geoscience Australia and ABARE
reassess both the official estimates of future oil supply and the 'early peak'
arguments and report to the Government on the probabilities and risks involved.
The committee considers that more needs to be done to reduce
Australia’s oil dependency in the long term. This is desirable not only
because of peak oil concerns, but also for other reasons – to mitigate
greenhouse gas emissions; to mitigate the costs of the expected long term
decline in Australia’s net oil self-sufficiency; and to mitigate the risks of
supply disruptions as oil production becomes concentrated in a declining number
of major oil-producing countries, some of which are politically unstable.
[3.144]
Recommendation 2 (paragraph 3.145)
The committee recommends that in considering
a less oil dependent policy scenario, the Government take into account the
concerns expressed in the World Energy Outlook 2006, namely -
-
current trends in energy consumption are
neither secure nor sustainable;
-
energy policy needs to be consistent with
environmental goals, particularly the need to do more to reduce fossil fuel
carbon dioxide emissions.
CHAPTER 4 – Economic and social impacts of possible higher fuel prices
The general impact of a long term higher oil price would be
reduced economic growth. A price increase transfers income from oil-consuming
to oil-producing nations, and the net economic effect is negative. [4.11]
Industries in which fuel is a higher proportion of input
costs will be relatively more affected. These include transport (particularly
aviation), mining and agriculture. [4.30-4.35]
Among consumers, higher fuel prices are likely to have most
effect on those who are highly reliant on car transport and lack alternatives.
These people tend to be outer suburban residents and rural and regional
communities. [4.36]
The expected future concentration of oil production in fewer
countries increases the risk of disruptions to supply. [4.46]
CHAPTER 5 – Supply side responses: overview and exploration
Oil exploration in Australia
Australia’s self-sufficiency in oil is expected to decline
into the long term as reserves are depleted and because of rising demand. It
appears prudent to encourage oil exploration. [5.5, 5.7]
By world standards Australia’s sedimentary basins have been
only lightly explored. However opinions differ about the prospects of finding
significant quantities of new oil. [5.8, 5.12, 5.13]
Current exploration activity is not high by historical
standards, because of exploration costs and risks; uncertainty about the longer
term price of oil; and policy settings including taxation regimes and
incentives. On 14 August 2006 the Prime Minister announced a number of
initiatives to stimulate exploration. [5.18, 5.19, 5.30]
There are reasonable grounds to believe that there are good
prospects for discovering further reserves. However a multifaceted approach to
reduce dependence on imported oil is still necessary. [5.33]
CHAPTER 6 – Alternative fuels from gas, coal and shale
Gaseous fuels: natural gas, LPG and
hydrogen
Natural gas as a vehicle fuel has advantages and
disadvantages. Advantages include its ready availability and claimed lower emissions.
Disadvantages include the size and weight of storage tanks, the limited range
of vehicles; the energy cost of compressing or liquefying the gas; the lack of
refuelling infrastructure; and doubt about the long term gas price. [6.28,
6.29, 6.36]
The claimed environmental advantages of natural gas are not
completely clear. Greenhouse gas emissions in use are lower than petrol or
diesel; however on a ‘well to wheels’ basis the advantage may be reduced or
neutralised by the energy cost of compressing or liquefying the gas; the
unintended leakage of methane (which is a powerful greenhouse gas); and by
release of carbon dioxide which is found in natural gas reservoirs. [6.65-6.67]
Australia is the world’s largest per capita user of automotive
LPG, and the number of LPG vehicles is increasing, encouraged by recently
established government subsidies. LPG is superior to regular petrol in
greenhouse terms. However there are some doubts about the long term adequacy
of supply, depending on what proportion of the vehicle fleet is converted.
[6.76, 6.83, 6.90]
Hydrogen has been put forward as a transport fuel, however
there are formidable technical challenges before it could be widely used. In
the committee’s view it might be considered for the distant future, but it is
not a useful option for the current or medium term. [6.93-6.95]
Synthetic fuels from gas or coal
Processes to produce liquid fuels from gas or coal are well
proven. [6.96]
Gas-to-liquids (GTL) diesel is compatible with existing refuelling
infrastructure and can be blended with conventional diesel. Plants have tended
to be built where gas prices are low. Uncertainty about the longer term oil
price seems to be holding back investment in Australia and elsewhere.
[6.102-6.106]
The well to wheels greenhouse gas performance of the output
liquid is debated. One study shows greenhouse emissions higher than
conventional diesel, though lower than conventional petrol. [6.110-6.111]
Coal-to-liquids (CTL) is seen by some as a viable method of
producing liquid fuel on a large scale in the near future. Capital costs per
barrel of daily capacity are somewhat higher than for a gas-to-liquids plant. A
plant currently proposed for the Latrobe Valley is estimated to cost $5 billion
to produce 60,000 barrels per day, 80 per cent of which would be diesel.
[6.116, 6.120, 6.123]
The output liquid has high well to wheels greenhouse gas emissions.
If a charge was made for carbon dioxide emissions in future this would affect
its viability. [6.121]
The CTL plant proposed for the Latrobe Valley would include
carbon capture and storage. Carbon capture and storage has been demonstrated on
a relatively small scale in several parts of the world, and the committee was
told it is ‘well on the path of being proven.’ [6.126, 6.129]
It appears that there are grounds for cautious optimism that
carbon capture and storage technology has good prospects for success. However,
the committee also notes the comments in the recently released IEA World
Energy Outlook 2006 that carbon capture and storage has not yet been
demonstrated on a commercial basis. [6.138]
Significant production of gas-to-liquids or coal-to-liquids
fuel will require large capital investment and long lead times, and involve
risks that are hard to manage, such as the longer term price of oil and gas.
[6.135-6.136]
Oil from shale could theoretically make a significant
contribution to Australia’s transport fuel requirements, however there serious
economic, technical and environmental obstacles to commercialising it. It is
suggested that oil from shale is only viable when the long term crude oil
prices reaches $US70-95 per barrel. [6.148, 6.149]
CHAPTER 7 - Supply side responses: biofuels
The government has a target of 350 million litres of
biofuels production by 2010. The two most commonly discussed biofuels are
ethanol and biodiesel. [7.1, 7.7]
Ethanol
Ethanol blended with petrol is widely used as a vehicle fuel
in some countries. In Australia it is currently produced from sugarcane
(generally using molasses), grain and grain residues. [7.15]
Some submissions argued that the availability of affordable
feedstocks is a major factor limiting greater ethanol production. Production of
ethanol from lignocellulose, though not yet proven on a large commercial scale,
offers potential to greatly increase production and improve the energy return
on energy invested. [7.17, 7.25]
E10 has fewer greenhouse gas emissions than neat petrol. The
net effect on other emissions is less clear. [7.35]
The 2005 Biofuels Taskforce found that the long term oil
price would need to average US$42-47 per barrel (2004 dollars) for new ethanol
producers to be viable after 2015 without assistance (depending on the
feedstock used). [7.44]
The main barrier to growth is the commercial risk for
investors considering the uncertainty of the future price of petrol and
ethanol, and current consumer resistance to ethanol. [7.51, 7.54]
The committee supports the development of a fuel ethanol
industry, but notes the significant barriers that need to be overcome before it
becomes a mainstream fuel. It appears that production from lignocellulose is
the only realistic way to make ethanol a mainstream fuel. [7.56, 7.57]
The committee considers that there is a need to increase
transparency in relation to whether biofuels targets are being met. [7.62]
Recommendation 3 (paragraph 7.63)
The Committee recommends that the Government publish the
results of its review of progress made towards meeting the biofuels target of
350ML per year, including which companies are meeting the target.
Recommendation 4 (paragraph 7.64)
The committee recommends that the Government examine the
adequacy of funding for lignocellulose ethanol research and demonstration
facilities in Australia, and increase funding where appropriate.
Biodiesel
Biodiesel is a diesel-like fuel made by chemically modifying
vegetable oils or animal fats. A limited amount of biodiesel is already
produced in Australia, but it is available at only a few locations. A major
challenge for increasing production is obtaining affordable feedstocks. [7.66,
7.68, 7.89]
Biodiesel has lower emissions of pollutants and greenhouse
gases than conventional diesel. [7.86 - 7.88]
Recent changes to the fuel taxation system have reportedly
had an adverse impact on the prospects of the industry. The Biofuels Taskforce
considered that between 2010 and 2015 biodiesel is likely to become
commercially unviable. [7.72]
The committee considers that biodiesel can make a small but
worthwhile contribution to Australia’s fuel mix. However the economics of the
industry are precarious, particularly if government assistance is reduced, as
is the current policy. [7.89]
Committee comments on alternative fuels in general
In relation to alternative fuels in general, the committee
acknowledges that massive investment in large scale production will be
essential if they are to replace conventional fuels to any significant degree.
Corporations see this investment as risky. Some alternative fuels face consumer
acceptance barriers. There are also long lead times associated with many of
these projects. Unless risk can be quantified or controlled, investment will
not be forthcoming. [7.90 – 7.93]
Recommendation 5 (paragraph 7.96)
The committee
recommends that the Government commission a research group within the Department
of the Treasury to identify options for addressing the financial risks faced by
prospective investments in alternative fuels projects that are currently
preventing such projects from proceeding. This group should determine how
these risks might be best addressed in order to create a favourable investment
climate for the timely development of alternative fuel industries, consistent
with the principles of sustainability and security of supply.
CHAPTER 8 – Demand side responses
Increasing the fuel efficiency of
vehicles
Since 1979 the fuel efficiency of light vehicle engines has
improved significantly. However the efficiency of the light vehicle fleet has
improved more slowly, as consumers have moved to larger, more powerful
vehicles. [8.4]
A current voluntary code agreed in 2003 between government
and the Federal Chamber of Automotive Industries calls on FCAI members to
improve the national average fuel consumption of new passenger cars to a target
of 6.8 litres per 100km by 2010 (the actual figure in 2001 was 8.28
litres/100km). This would require a significant improvement on the trend of the
decade before 2001. [8.9]
It is unclear what progress has been made to achieve this
target. The committee recommends that this should be investigated. [8.12, 8.13]
Recommendation 6 (paragraph 8.21)
The committee recommends that the Government, in
consultation with the car industry, investigate and report on trends in the
fuel efficiency of the light vehicle fleet and progress towards the 2010 target
for the fuel efficiency of new passenger cars. If progress under the present
voluntary code seems unlikely to meet the target, other measures should be
considered, including incentives to favour more fuel efficient cars; or a
mandatory code.
Other suggestions in submissions to improve the fuel
efficiency of cars include:
- measures to encourage smaller and hybrid cars, for example by
adjusting registration fees to favour them;
- measures to encourage diesel cars; and
- increasing the fuel excise to encourage use of more efficient
vehicles (this could be coupled with lower registration charges to be
tax-neutral overall). [8.16]
Congestion charges
A congestion charge is a road use charge tailored to target
the most congested times or places – for example, a cordon charge to enter a
Central Business District, or a toll that varies according to the time of day.
[8.29]
A congestion charge, by discouraging some users, reduces
congestion. This improves fuel efficiency, as vehicles use more fuel in
congested conditions. [8.29]
While the economic case for congestion charging is strong,
politically is has been difficult to implement because of the perception that
it is 'yet another tax on motorists'. To win public support it is important to
hypothecate the revenue for transport improvements, including public transport
improvements so more motorists have alternatives to their cars. [8.31]
The committee suggests that Australian governments should
take a more active role in educating the public about the benefits of
congestion charges. [8.34]
Recommendation 7 (paragraph 8.35)
The Committee recommends that Australian governments
investigate the advantages and disadvantages of congestion charges, noting that
the idea may be more politically acceptable if revenue is hypothecated to
public transport improvements (as has been done in London, for
example).
Encouraging walking, cycling and
public transport in cities
Many submissions argued for increased use of walking,
cycling and public transport as a way of reducing transport fuel use.
Ambitious goals for increasing the public transport mode share are commonly seen
in official plans. [8.36, 8.39]
Many submissions urged the Commonwealth to be more involved
in improving urban public transport infrastructure, as happens in many other
federal countries. The Commonwealth’s policy is that public transport is the
responsibility of the states. [8.39, 8.41]
However the Commonwealth has supported ‘Travelsmart’
projects through the Greenhouse Gas Abatement Programme. Travelsmart aims to
reduce car use by direct approach to targeted households (for example, to give
information about public transport services). This can be a very cost
effective, and the committee recommends that Commonwealth support should
continue. [8.42, 8.55]
Recommendation 8 (paragraph 8.56)
The committee recommends that Commonwealth support for
Travelsmart projects be maintained beyond the currently planned termination
date.
The committee does not suggest that the Commonwealth should
take over the States’ basic responsibility to operate public transport
services. However there may be a case for Commonwealth assistance to major
projects such as rail extensions which are unlikely to happen, or unlikely to
happen soon enough, without the involvement of the bigger budget which the
Commonwealth commands. [8.53]
Integrating transport planning and
land use planning
Car-dominated transport habits reflect patterns of urban
development which make high car use necessary. Submissions stressed that
turning around this situation requires better public transport and planning
policies to shape urban development so that public transport networks can work
efficiently and attract more ‘choice’ customers. [8.57, 8.61]
Urban strategic planning is the responsibility of State and
Territory governments. The needed initiatives involve state and local
governments. The right institutional arrangements and powers are needed to
ensure that the planning and the execution are coherent. [8.67]
More use of rail for long distance
freight
Many submissions argued for more use of railways for long
distance freight. Trains use about one third the fuel of trucks per net
tonne/kilometre. [8.71]
Commonwealth policy recognises that the rail system has been
under funded in the past and has the potential to increase its share of the
freight task if there are improvements to infrastructure and modernisation of
operating practices. The Commonwealth has committed $2.4 billion to rail
improvements over the five years to 2008-2009, mostly for the Melbourne-Sydney-Brisbane
corridor. [8.75]
If there is a long term rise in the price of fuel, this will
favour rail, because fuel is a greater proportion of total costs for road
transport. This may suggest a need to increase the pace of catch-up investment
in rail infrastructure. Auslink corridor strategies should allow for this.
[8.77]
Recommendation 9 (paragraph 8.78)
The committee recommends that corridor strategy planning
take into account the goal of reducing oil dependence as noted in
recommendation 2. Existing Auslink corridor strategies should be reviewed
accordingly.
Fringe benefits taxation of
employer-provided cars
Many submissions argued that the concessionary tax treatment
of cars as a fringe benefit should be abolished, on the grounds that
- it encourages car use and undesirably distorts economic
behaviour;
- as a way of assisting the Australian car industry it is poorly
targeted, as now only 29 per cent of new cars are Australian made. [8.82, 8.87]
The concession arises because the statutory formula which
most people use to calculate the tax obligation overestimates the amount of
business use of the cars in question – thus, some private use is untaxed. [8.84]
The committee notes that the Council of Australian
Governments (COAG) is now considering options for managing urban traffic
congestion. The committee suggests that this should include the Commonwealth
reconsidering the policy behind the concessionary fringe benefits taxation of
cars. [8.91]
Recommendation 10 (paragraph 8.94)
The Committee recommends that the government review the
statutory formula in relation to fringe benefits taxation of employer-provided
cars to address perverse incentives for more car use.
It should be stressed that the question of whether the tax
should be concessionary is different from the question of minimising compliance
costs. A statutory formula method can be retained for the sake of easy
compliance, while the concessionary aspect can be removed by adjusting the
rates. [8.95]
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