Time to refine energy security

What are we to make of the energy debate? If good public policy is the art of distilling the signal from the noise, the challenge has never been greater.

How to balance the risks of climate change against the costs of doing anything about it? And what, in turn, might these decisions mean for 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.

Member states of the International Energy Agency (Australia is one) are supposed to help each other out in the event of a supply crisis, by making available their oil stockpiles. But these reserves could quickly prove inadequate, or unavailable.

Even if we escape emergency situations, affordability of petroleum-based fuels will undoubtedly decline. At some point, it will make sense to power cars from other sources, such as electricity, gas or ethanol. But if we are relying on price signals to prod us into making the switch, they may not operate in a predictable fashion.

We are far from understanding the real relationships between biophysical and economic systems.

When it comes, the change could be quite sudden. Without prior preparation, we could experience quite dramatic falls in our standard of living. Technology can help us improve efficiencies, but only if we have plenty of notice.

As the Government labours over its energy white paper (due in 2012), it seems all too probable that as far as energy security is concerned, the faith in market forces will be maintained. Yet the risks of getting it wrong seem more palpable, and probably closer at hand, than those posed by climate change.

We might think that for Australia, purveyor of resources to the world, there is no real urgency. But while we have gas and coal in abundance, we are very vulnerable to disruptions in our supplies of liquid fuels. It seems like a good time to be taking out insurance policies.

Weaning ourselves off oil (perhaps by re-emphasising natural gas as a vehicle fuel) seems a sensible move.

It would be a cruel irony if, in doing our bit for climate change, we overlooked more immediate threats to our energy security.

  • Jenny Stewart is Professor of Public Policy in the University of NSW at the Australian Defence Force Academy.


 Canberra Times link: http://www.canberratimes.com.au/opinion/editorial/time-to-refine-energy-security-20110814-1wuid.html#ixzz2BiEMvIB1

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