A Crude Diet Might Lead to Gas

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Australians have watched the recent escalation in the cost of petrol and diesel with varying reactions. Prices approaching $1.50 per litre have been viewed by many as a temporary aberration -soon to be correctedsu by the global economy.

This position assumes that recent escalations in price are the result of temporary constraint within the global petroleum supply chain, and that high global prices can be corrected by compensating increases in supply. If this optimistic scenario is valid high fuel prices can be resolved by supply side adjustments – achieved by whatever means.

An alternate view is that recent price hikes are caused by genuine and long-term limits in crude oil supply – exacerbated by increased demand from emerging economies such as China. If this second scenario is correct, then it points to a far deeper malaise: demand is starting to outstrip supply. There is abundant evidence for this – although it is unpalatable to governments steeped in the traditions of ‘business as usual’.

This darker, but perhaps more pragmatic perspective, involves the view that the global supply of crude petroleum is finite, and that the discovery of new sources, accessible at relatively low cost, reached its peak several decades ago. In this case, the issue of escalating world fuel prices runs much deeper than the relatively simple intransigence of a few oil producing nations.

The implications of a globally constrained crude oil supply system are potentially very harsh indeed for a country like Australia. Following the discovery of indigenous crude oil fields such as Gippsland and Barrow Island in the early 1970s, we had a short period of relief from dependence on imports. We grew to become better than ninety-percent petroleum self-sufficient by the 1980s – however, this honeymoon of petroleum independence was brief. With rising international crude oil prices, the national reality is now one of rapidly declining indigenous crude oil reserves, and a renewed dependence on imports.

In 1970, when our largest indigenous oil fields came on stream, the benchmark international crude oil price was US$2 per barrel. It now sits at US$70 per barrel. The key question now is where that price will go in the future. Let’s assume for a moment that US$70 per barrel is not in fact an aberrant peak in an otherwise benign supply/price cycle, but a warning sign of ominous things to come.

Australian road transport is almost totally dependent on fuels derived from crude petroleum. The potential vulnerabilities are obvious. With population centres separated by long distances, and our reliance on road based transportation systems and imported petroleum, the cost of virtually every item in our economy becomes subject to the influence of international crude prices. With personal transport now depending increasingly on private vehicle use, and other transport modes such as rail have been allowed to decline, personal transport is subject to the vagaries of the global crude petroleum market.

If we continue to wait for a natural correction in the upward movement of international oil prices, we risk repeating the historical failure of Canute in attempting to stem the rising tide. Similarly, if we accept that the world crude supply system is strapped, then seeking to solve the fuel price problem by minor reductions in fuel excise, or other ‘trim’ effects, is likely to prove futile. Reductions of a few cents per litre in taxes or margins will offer no real comfort or relief in the medium to long term. Deferring an excise rise of 0.06 cents per litre might not save the day. We may need bolder plans.

It may be that our efforts should be directed towards a fundamental shift in thinking on transport fuels, and the transportation of people and goods more generally. Beating the crude oil habit may well require ‘cold turkey’ therapy of an immediate and substantial shift to alternative fuels and technologies.

So just what is available to us now in the area of alternative fuels, and what will emerge in the future? Fortunately, we have some real options. What is needed is the conviction and courage to embrace them.

The alternative fuels that can provide ‘critical mass’ in the short or immediate term are natural gas, ethanol and biodiesel.

The ethanol option has been highly politicised. We need to be careful not to confuse energy policy with agricultural subsidies. However, ethanol can be produced in an economically and environmentally sustainable manner, can supply ten percent of Australia’s petrol supplies without undue difficulty, and can be distributed through existing systems. This is a ‘now’ solution that can offset our overall crude petroleum dependence by between two and four percent in the short term. Not earth shattering, but a start.

Biodiesel is an alternative produced from either waste oil or oil seed crops. Operational trials have not been without difficulty, and production limitations may restrict uniform market access. Nonetheless, biodiesel remains as a viable, if niche, alternative to diesel, that can realistically supply up to 1% of the Australian transport market.

Natural gas has far greater potential in volume terms than ethanol or biodiesel. Domestic gas supply can fuel private vehicles using available overnight fill technology, and low cost, straightforward engine conversions – similar to LPG conversions. Market momentum would then drive the development of a more broadly based public refuelling network.

Given these options, how do we develop a solution that can be introduced now, and can gather momentum to match increasing crude oil prices, and possible supply constraints? Very probably the answer lies in several parts.

First, we must introduce a mix of those alternatives that can, with economic and operational viability, reduce our dependence on crude petroleum immediately. This transport energy ‘bridge’ would include the widespread introduction of natural gas and ethanol, and possibly biodiesel, coupled with an increased focus on energy efficient hybrid car and truck options. Second, we need to progress the development of hydrogen and associated fuel cell technologies in the longer term.

Natural gas is probably the most exciting and least discussed alternative transport fuel. In addition to the passenger car option, many truck and bus fleets can operate cheaply and efficiently on natural gas, using depot based refuelling facilities, and reliable gas engine options that are now available from major manufacturers. Sydney Buses has demonstrated this by successfully introducing more than four hundred natural gas buses over recent years. Sadly, for reasons best understood by the NSW Government, future bus orders have been switched back to diesel technology. A puzzling situation in the context of high and rising international crude oil prices, and low and stable domestic gas prices.

Our high level of dependence on imported and increasingly expensive petroleum products present a very real threat to our national economy, and to our collective future. A new policy framework based on a revised and more realistic view of Australia’s future transport energy requirements needs to be developed, and implemented. Government stewardship will be important – however unpalatable and unfashionable that idea may be in current political terms.

Pricing and taxation issues will need to be based on substance and not populism. Cutting tax or excise rates may be tempting in the short term, but unwise in the long haul. What will count will be the ability to manage and stabilise the end cost of transport fuels into the future. Excise revenue, wisely used, might be an important contributor to that important outcome.

The price of imported petroleum will continue to rise, and that presents Australia with some very substantial challenges. Room for optimism remains, but the process of change needs to start now.

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