Eighty percent of global oil production needs to be replaced by 2040 to meet projected demand. It is increasingly likely, particularly post COVID, that much of this oil production will not be replaced. There is an urgent and existential need to structurally reduce Australia’s oil dependence.
Energy is the economy. The functioning of modern industrial economies is entirely dependent upon enormous quantities of cheap energy, over 80% of which still comes from hundreds of millions of years of stored sunlight. Humans are using fossil fuels at a rate 10 million times greater than the rate of formation. Oil remains the world’s primary energy source, with virtually all liquid fuels being derived from it as well as important uses as a feedstock for industrial processes.
Given the obvious importance of oil to the functioning of the economy and the goods and services that we rely upon, there is a grossly misplaced sense of complacency when it comes to Australia’s future oil supply. This was aptly demonstrated by the Commonwealth Government’s myopic Interim Liquid Fuel Security Report which paid lip service to future oil supplies. In the post COVID-19 world, the evidence suggests that only a portion of oil production being lost due to depletion will be replaced.
Prior to COVID-19, the global economy consumed around 100 million barrels of oil per day (mb/d). According to the International Energy Agency (IEA), if capital investment were to cease immediately, by 2040 global oil production would be just 15 mb/d due to the natural phenomena of declining production from existing oil fields. To counter this natural decline requires around two to three mb/d of new oil production to be brought online each and every year. The critical question is thus whether the investment in oil production is sufficient to maintain, let alone grow, global oil production.
Even before COVID-19 it was clear that investment was falling well short of requirement. In its 2018 World Energy Outlook the IEA identified that approvals of new crude oil production projects would need to more than double each year from 2018 to 2025 to avoid a mismatch between supply and demand. Additionally, the IEA identified that the investment in oil demand is based upon ever increasing oil consumption whilst levels of investment in oil supply were based on stagnant or falling demand. The resulting dichotomy, the IEA concluded, increases the risk of damaging oil price spikes and increased volatility.
The largest ever drop in oil demand resulting from COVID-19 has considerably worsened the outlook for future oil production due to major job losses, bankruptcies, significant reductions in drilling and exploration activity and an estimated 30 per cent cut in investment (coming after large cuts in 2015 and 2016). With a five decade plus history of declining oil discoveries (we now consume around eight times as much oil as is discovered each year) and new projects being from smaller fields, of lower quality and more technically difficult to extract, the most plausible future scenario is one where the pace of depletion outpaces new oil production. The net result being that we can expect global oil production to, on average, decline by a couple of million barrels a day per year.
Paradoxically the COVID-19 triggered demand destruction means that the world is currently awash with oil, resulting in oil prices that make many unconventional sources of oil production, such as tight oil, uneconomical. Tight oil in the United States has been responsible for 83 percent of oil production growth over the last decade. With the operational rig count being a third of what is required to maintain production levels from rapidly depleting tight oil wells, Petroleum geologist Art Berman predicts that United States tight oil production will halve by the end of 2021, even in the unlikely event that all rigs became operational immediately. The decline in tight oil production, when combined with declines elsewhere, suggests it will only be a couple of years before the buffer that currently exists between supply and demand is eliminated, resulting in much higher and potentially economically damaging oil prices.
When confronted with the prospect of oil supplies being insufficient to meet future needs, the immediate thought is what about the alternatives such as biofuels, hydrogen and electric vehicles? It is highly unlikely that they will be able to fill the gap. For example if half of Australia’s sugarcane production was diverted to ethanol it would replace (pdf) just 1/38th of Australia’s liquid fuel consumption. Under the Commonwealth Government’s most optimistic (pdf) scenario the additional global demand for hydrogen is estimated at 50 million tonnes in 2040. Whilst this might sound impressive it only equates to around three mb/d of oil production (calculated using this energy conversion calculator). In other words, it will take 20 years to be able to produce the equivalent amount of additional hydrogen that we can expect to lose in oil production each and every year. In 2019 electric vehicle (EV) sales were just 0.6% of all new car sales with EVs making up just 0.2% of Australia’s total vehicle fleet. When it comes to alternatives the story can be summarised as too little too late.
This is not to say that alternative fuels and propulsion systems are not important, they are critically so for our long-term future beyond oil. However, it does highlight that the response to our oil predicament cannot be predicated on having access to anywhere near current levels of liquid fuel.
Geopolitics is another factor that must be considered. Conflict in the South China Sea (through which 50 per cent of Australia’s diesel and 75 per cent of our jet fuel transits), or the Persian Gulf could disrupt global oil trade with little notice. Oil infrastructure is also vulnerable as demonstrated by the 2019 drone and missile strikes against Saudi Arabia which resulted in more than half of Saudi Arabia’s oil production being temporarily taken offline. The availability of oil is also likely to reduce as more bilateral deals, such as those between China and Iran and China and Russia, are established reducing the oil available on the market for other oil importing countries.
Oil dependence is Australia’s sword of Damocles, which for all intents and purposes is being ignored by governments at all levels. Australia needs to structurally reduce its oil consumption and by a large proportion commencing immediately. It is difficult to overstate how challenging is the task that lays before us as a nation, but failure to act will have potentially devastating impacts on every aspect of economic activity and our daily lives. Having defined our oil predicament, a subsequent post will explore some ideas on how me may go about structurally reducing Australia’s oil dependency.
Cameron Leckie served as an officer in the Australian Army for 24 years. An agricultural engineer, he is currently a PhD candidate.
Comments
5 responses to “Oil, our sword of Damocles”
Contrary to Cameron Leckie’s argument, present sales of electric vehicles (EVs) are irrelevant to potential sales in, say, 2025. EVs could substitute for almost all internal combustion engine (ICE) vehicles and the majority of Australia’s oil use within two decades, given appropriate government policies.. With several policy incentives, EVs have already rapidly achieved half of all new car sales in Norway. While Australia’s is a small market, declining battery prices will soon bring the capital costs of EVs down to those of equivalent ICE vehicles. The operating costs of EVs are much lower than those of ICEs, making EVs already economical for some fleets. Over the next two years several cheaper brands of EVs will become available in Australia.
In addition to its close relationship with the fossil fuel industry, I suspect that the federal government’s main unstated reason for resisting EVs is based on the potential loss of fuel tax. This barrier could be remedied by replacing fuel tax with a road user charge.
State and federal government policies that would facilitate the rapid growth of EVs include:
• tightening national vehicle emission standards, leading to improvements in the environment and public health;
• providing public charging infrastructure, with price incentives for charging during off-peak periods in grid electricity demand;
• low-interest loans for consumers to enable their homes for EV charging;
• a government fleet target of 25% of all new cars by 2025.
With vehicle-to-grid technology, EVs could also play an important role in buffering the variability of wind and solar power, energy technologies that continue to grow under the influence of market forces, despite the resistance of the federal government.
Thankyou for a thoughtful response Mark. As I said in the article, alternative fuels and propulsion systems will be critical to our future. I am not convinced for a number of reasons that electric vehicles uptake will be rapid enough.
We are in a race between declining of oil production and the bringing online of new oil production, alternative fuels/propulsion systems and conservation measures. At this point it appears that new oil production projects will struggle to replace declining production from existing fuels for reasons I explained as well as factors such as net energy which Karey mentioned below. Depletion, like rust, is relentless. The IEA has stated that natural depletion is around 4mb/d per year. With investment being well less than half of what is required, according to the IEA, it would not be unreasonable to see oil production decline by around 2 md/d per year from its peak (100mb/d). If oil production does decline at an average of say 2% per year that would see global oil production just over half current, well pre-COVID, levels by mid century.
So the question is can all the alternatives/conservation replace oil lost to depletion for the next 30 years? Theoretically this may be possible as you postulate but there a range of reasons that I would argue that this will not occur. Some of these reasons are below:
– economic impact from COVID-19. Pre-COVID new car sales had been falling for several years. Given the depressed economic conditions I suspect that new car sales will continue to decline for at least several years. The average age of the Australian car fleet, now around 10 years, will likely increase.
– The price of most EVs limits the pool of buyers, 19 of 23 on sale in Australia are over $60K, more than twice the average car price. Cheaper EVs will result in increased sales of course, but the first point above still stands.
– Types of vehicles. Three of the five top selling vehicles (Toyota Hilux, Ford Ranger & Mitsubishi Triton) do not seem to have an equivalent EV available in Australia. Despite all concerns of climate change etc, this has not impacted upon a large proportion of customers in the new car market. Toyota is looking to have an electrified Hilux by 2025. Until all vehicle types have an equivalent EV this limits the potential market.
– oil prices will probably remain low for several years. After the GFC it took 4.5 years for the world’s largest oil consumers(the US) consumption to return to pre-GFC levels. Given that the current downturn is far more severe than the GFC it would be unrealistic to expect demand to return to pre-COVID levels in the next five or more years. Lacking a price signal in the form of higher oil prices, will reduce the uptake rate of EVs. Cheap oil prices will however likely result in much higher oil prices in a few years from now which could trigger recession, as the work of James Hamilton has shown.
All of these factors, not considering any infrastructure limitations etc will slow the adoption of EVs.
Then there are the unforeseen/unexpected events which will crop up that also slow the uptake of EVs. Whilst these cannot be predicted we can expect in the years ahead crises which will reduce economic capacity of Australian’s to purchase EVs. This could include another pandemic, financial crisis, extreme weather events (drought/floods/fires), conflict between the US and China, US and Russia, US and Iran, the declining relationship with China, …
Then there is the current position of our Government as you have highlighted.
For all of these reasons I don’t think EVs will make up a large portion of our vehicle fleet for a couple of decades. I hope I am wrong!
Whether it is emissions from oil, coal, gas, coal seam gas, oil shale or oil sands, the biosphere as we know it can not survive 412.55 ppm CO2 rising at 2 to 3 ppm per year.
In the words of Hansen, former NASA chief climate scientist: “Burning all fossil fuels would create a different planet than the one that humanity knows. The paleo-climate record and ongoing climate change make it clear that the climate system would be pushed beyond tipping points, setting in motion irreversible changes, including ice sheet disintegration with a continually adjusting shoreline, extermination of a substantial fraction of species on the planet, and increasingly devastating regional climate extremes” and “this equates 400,000 Hiroshima atomic bombs per day 365 days per year.” James Hansen et al. 2012.
We should be working on solving our liquid fuel and climate change challenges together. There are many synergies that could be made. If we fail to do so, we could actually worsen our climate change problems in attempting to mitigate our liquid fuel problems.
This discussion totally ignores Energy Return On Energy Invested (EROEI). The fact that ‘new projects being from smaller fields, of lower quality and more technically difficult to extract’ means these new fields have poor EROEI, and we are arriving at the point where they have negative EROEI, becoming energy sinks rather than energy sources. No amount of investment can counter that.
https://en.m.wikipedia.org/wiki/Energy_return_on_investment