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This paper was presented at the:
Chartered Institute of Transport in Australia
National Symposium, Launceston Tasmania 6-7 November 1998



BJ Fleay B Eng, M Eng Sc, MIEAust, MAWWA
Associate of the Institute for Sustainability and Technology Policy
Murdoch University, Western Australia

1. BACKGROUND 1.1 Historical context
1.2 Outline of the paper
2. ENERGY AND ECONOMICS 2.1 Background
2.2 Energy profit ratio
2.3 All fuels are not equivalent
2.4 Conclusion


3.1 Origins and rare occurrence
3.2 Uncertain forecasts
3.3 Conventional and non-conventional oil
3.4 Standards, criteria and statistics
4.2 Declining discovery and giant oil fields
4.3 Enhanced recovery
4.4 Production profiles - Hubbert curves
4.5 Oil production forecasts
4.6 Conventional natural gas
5. FROM SURPLUS TO OIL SHORTAGE 5.1 Supply overhang ending
5.2 Meeting growth AND depletion
5.3 Vertical integration ends
5.4 Exploration and development constraints
5.5 The Persian Gulf
5.6 An investment cliff
5.7 USA on a supply knife-edge
6. AUSTRALIAN OIL AND GAS 6.1 Background
6.2 Oil and condensate
6.3 Diesel, lubricating oil and bitumen supply is critical
6.4 Australia’s natural gas
6.5 New frontiers
7. ALTERNATIVE TRANSPORT FUELS 7.1 Criteria for alternative fuels
7.2 Some alternative fuels
7.3 Hydrogen
7.4 Natural gas
7.5 Liquid petroleum gas (LPG)
7.6 Electric vehicles
7.7 Hybrid vehicles
7.8 Railways
7.9 Marine
7.10 Commercial aviation
7.11 Bicycles and walking
7.12 Manage demand as well as supply
7.13 Water utilities and demand management
8.2 Australia
8.3 Saudi Arabia, Iran and Iraq
9. CONSEQUENCES FOR TRANSPORT 9.1 Four stages for oil
9.2 The climax of fossil fuels
9.3 Asian growth was driven by petroleum
9.4 Whither the global economy
9.5 Australia
9.6 Road versus rail
9.7 Aviation
9.8 Tourism
10.2 New values, new beginnings
APPENDIX Appendix1

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1.1 Historical context
1.2 Outline of the paper

1.1 Historical context

The modern world could not exist without the low cost movement of people and commodities. Oil powered transport dominates the economic infrastructure that links and sustains present day communities, agricultural systems and the global economy. Billions of people now depend on food production that requires substantial inputs of petroleum fuels to power farm machinery, for fertilisers, herbicides and transport. Some people say industrial agriculture is a way of converting petroleum into food. Countries are dependent on imported food to feed their population.

Oil supplies 40% and natural gas 22% of the world’s commercial energy. Road, rail, water and air transport consume 60% of this oil. Other fuels have a negligible transport role. The remaining petroleum products are used for power generation, heating, in agriculture and mining, and for the manufacture of plastics, fibres, petrochemicals, paint, fertilisers and pesticides. Oil has overtaken coal as the main fuel since 1945.

Everybody knows that cheap oil and gas will eventually be exhausted. Yet the future availability of cheap oil and the scope for alternative replacements is rarely discussed in transport circles. By contrast fuel supply is always a major issue for electric power generation.

Advances in shipping and navigation from the 15th century led to a gradual growth in long distance trade, first in luxuries but by the 17th century increasingly in more basic commodities like grain. We had the beginnings of today's global economy.

In the late 18th century James Watt’s improvements to the coal fired steam engine and Abraham Darby's use of coal to replace charcoal in iron production ushered in the modern era. However, 50 years passed before engineering advances enabled the age of steam to "take-off". From 1840 steam powered railways and ships significantly increased the scope and range of transport, substantially lowering its cost.

Each innovation stimulated further expansion and innovation in an ever expanding cycle, unrestrained by limits to coal supply. Thus began 150 years growth of economic activity, population, cities and centralised mass production serving global markets. The very fabric of the earth was and is being transformed.

In 1859 Pennsylvania’s Colonel Drake drilled one of the first oil wells. Another 40 years of invention led to the internal combustion engine, the beginning of oil powered transport and the many other uses of oil. Oil triumphed over coal fired steam for shipping after World War I and for rail after World War II. Road and air transport have triumphed since 1950. There was rapid expansion of electric power grids from 1920 and the take-off of oil powered industrial agriculture began in the 1930's.

US fears of oil shortages during World War II, along with the invention of welded steel pipelines, saw the first marketing of natural gas, previously flared at oil fields. Natural gas has been the world's growth fuel since 1970.

Conventional oil rapidly displaced the direct use of coal as an industrial and transport fuel because of its ease of storage and transport, the fine control possible in its various uses and its high power-weight ratio. Oil is the most economically effective of all the fuels, especially for transport.

Contemporary industries and services using coal, gas and electricity require petroleum powered transport to be economically effective and viable. The availability of cheap oil is the most critical factor for the future of our contemporary world.

Current high oil production rates cannot continue indefinitely, at some time production must peak and then decline. But when? Are there equivalent replacements for cheap oil? What are the implications for economic growth, transport, employment, food supply, population and the global economy?

The whole world has now been sufficiently explored for oil and natural gas. For the first time in the mid-1990’s the database became adequate to make confident forecasts of ultimate oil and natural gas production, the timing of their production peaks and subsequent rates of decline to the middle of next century

The decade to 2010 will see this transition to decline. However, economic and political events will shape its character as much as the decline rates of oil fields.

By 2050 the Golden Age of Oil, the world we know today, will be over. We will have become preoccupied with adapting to a shrinking oil supply in the new century. The risk of chaos, disorder and destruction could face us if we fail to adapt appropriately in time. We are confronted with the greatest transformation of human affairs in all history.

Hard nosed decisions will be required and there will not be much room for error. But we must be caring for people and the environment in our approach. The more caring we are the more hard nosed the decisions can be, the easier and faster we can proceed down the path of constructive change.

If everybody pursues their own self-interest we can become locked in conflict, unable to adapt and will dissipate unproductively the scarce high quality petroleum fuels that are so essential for a safe transformation to a world "beyond oil".

1.2 Outline of the paper

We will begin by discussing the relationships between energy and economics and the failings of neo-classical economics where energy is concerned. The concept of energy profit ratio will be introduced. The economic quality of fuels is just as important as the quantity available.

World oil and gas will be our next subject. The origins of petroleum, the confusion surrounding the size of the resource and how to interpret the database will be discussed. We will conclude with the latest estimates of ultimate production and timing of the peak.

By year 2000 the large surplus oil production capacity that developed from 1979 should be back in production as explained later in paragraph 5.1. The implications for the next decade will be discussed in the context of the downsizing of the petroleum exploration and development industry and the breaking of the industry's vertical integration from oil well to petrol pump in the late 1970's.

Australia's oil and gas position will be the next topic.

Some alternative transport fuels, will be discussed from the standpoint of energy profit ratio and their potential applications addressed. The substantial scope for improvements in both energy and resource use efficiency will be outlined, including through structural change. Transport will become progressively more expensive in the new century.

A discussion of the relationship between petroleum fuels, agriculture and population from a world and Australian viewpoint will follow.

Some views on the consequences for Australia and the world are outlined, what it all means.

Finally a brief critique of neo-classical economic theory from an energy perspective to be followed by a discussion on values, culture and beliefs drawing upon HT Odum's "Ten Commandments" of the Energy Ethic for Survival of Man in Nature (Odum 1971 pp. 236-53). A brief critique of Competition Policy will be made from this perspective.

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2.1 Background
2.2 Energy profit ratio
2.3 All fuels are not equivalent
2.4 Conclusion

The leopard explodes into a burst of speed to try and pull down the impala for its next meal. It cannot afford many failures as the energy expended in the chase starts to exceed its energy stores and its capacity to replace those energy stores from capture and a meal. The leopard may die or be unable to raise its cubs.

2.1 Background

The discussion below has been inspired largely by the work of Howard T. Odum and his disciples. Odum has pioneered a synthesis of the disciplines of ecology and economics interpreted from an energy perspective (Odum 1971, Odum & Odum 1981, Hall et al. 1986, Gever et al. 1991).

Economic production is a work process which requires energy like any other process. Energy powers production and all economic costs are ultimately an energy cost. Labour, capital and other natural resources are required as well. But these inputs also require free energy for their production and maintenance, as does technological change. Because of this strong interdependence with energy, the cost of every input can be analysed according to the energy required to realise that resource into a socially useful form (Hall et al. 1986).

Human labour is important because it provides energy to perform various economic tasks in combination with machines and other tools to direct and control other large energy flows. The availability of energy sets an upper bound to our ability to locate, extract, and convert natural resources to useful goods and services, to move them to the point of consumption and to deal with by-products and residues. Energy is the ultimate limiting resource, the only one that cannot be recycled.

By contrast neo-classical economics (economic rationalism) treats the factors of capital, labour and land (land equals resources, including energy) as independent, or at best weakly interdependent. Hence one factor can readily substitute for the others and energy is regarded as just another resource. However, all goods and services are ultimately derived from natural resources by expending energy. These are the real source of material wealth for humans, not the money that represents them in market transactions.

Natural resources and energy obey a different set of laws from money flows.

So far economists have been able to ignore this major defect in economic theory. The abundant availability of high quality energy this century, especially of oil, has given the proposition that the factors of production are independent an appearance of validity. This will no longer be the case by 2010 when we can expect the production of cheap oil to be in decline.

The International Energy Agency (IEA) has taken the first step to recognise this. In March this year it dropped a generation old policy that considered oil discoveries to be merely a function of price, the higher the price the more oil one finds.

In a paper prepared for the March Summit of the G8 Energy Ministers in Moscow the IEA adopted the views of C.J. Campbell and J.H. Laherrere and others that physical constraints more than economic ones ultimately limit the amount of oil that can be produced. The report accepted evidence on physical oil field performance that conventional oil production outside the Persian Gulf would peak about year 2000 with the world peak occurring about 2013 (Spectator 1998, IEA 1998).

However, the IEA has yet to understand how the energy cost of obtaining energy limits options for most alternatives to conventional cheap oil. It still believes that expensive non-conventional oil can relatively smoothly replace conventional as it declines, that supply can continue to grow to 2030 and beyond. These and other topics are discussed below.

Hence the embodied energy of a product or service (measured in joules per unit of output) is one of the important measures of value (Hall et al. 1986, pp. 27-68). High quality resources are those that require less energy per unit of resource obtained. This conclusion is applicable to energy sources as well, the energy cost of transforming an energy source into a useful form.

2.2 Energy profit ratio

The less energy expended per joule of energy produced the more economically effective the energy source. Net energy is a more relevant measure of a nation's energy supply than gross energy because net energy is the energy actually available to produce final goods and services. Energy Profit Ratio (EPR) is one measure of this effectiveness at a given point in time and is defined as:

..........Energy content of fuel..........
Energy used in producing the fuel

The denominator is the sum of all direct and indirect energy inputs embodied in the materials, goods and services used to produce the fuel, including labour, information and government services. For industrial fuels these energy inputs include sources such as coal, oil, natural gas, hydro and nuclear electricity. Direct solar energy is not always included in the calculation unless for a specific purpose even though such energy always makes a contribution that is often substantial for the activity under study, e.g. agriculture.

FIGURE 1 compares energy sources with EPR's of 20 and 2. Nearly all the total energy output for case A is available to do useful work, whereas only half is available in case B. Furthermore, a very much larger energy industry is needed for case B if the same amount of economically useful energy is to be produced. Emission of the greenhouse gas carbon dioxide is almost doubled in case B over case A, if these fuels are carbon based.

An EPR of one means there is no net energy gain, the energy industry consumes energy equivalent to all the energy produced. As cheaper sources of energy are exhausted there is not an infinite scope for substitution of more expensive sources of energy, contrary to the viewpoint of neo-classical economics. The larger the value of EPR the higher the energy quality and the more economically useful is the fuel.

The EPR of several energy sources relevant to transport will be discussed later. See FIGURE 15.

The resources consumed by the energy extraction industry should not be included in estimates of Gross Domestic Product when this is to be used as a measure of net welfare. This distinction has been of minor significance while we have used liquid fuels with high EPR's, but that era is now ending, see FIGURE 1. Energy is a means to achieving human needs, not the end itself. Any use of energy for a particular purpose has an energy opportunity cost, the energy is not available to perform other tasks.

Neo-classical economics is deeply flawed in the way it treats energy, being in conflict with the second law of thermodynamics.

FIGURE 2 shows the EPR profile for oil and gas production in Louisiana, USA (Hall et al. 1986, p. 186). Note that the profile rose to a peak when two-thirds of the ultimate oil from this region was produced. Production also peaks when about half the ultimate production is reached, as explained below. For Louisiana both the EPR and production peaks have occurred well before production ceased.

Similar life cycle profiles can be expected for other oil and gas fields, though each will have its own unique features. Nevertheless, the peaking of both production and EPR in the middle range of ultimate production can be expected. The energy cost of extracting the last few barrels of oil steadily increases. Production becomes uneconomic when the energy consumed in production approaches that produced.

Certainly for petroleum fuels we have the cheapest and most economically effective fuel produced in the phase rising to the production peak. Post peak the reverse is the case, the onset of an exponential decline in production, then of economic effectiveness of the fuel. A barrel of oil before the peak is not the same as one post-peak.

2.3 All fuels are not equivalent

Not all fuel types are economically equivalent. For the USA oil and gas produce 1.3 to 2.45 times the dollar value in the economy than does the direct use of coal, with oil probably superior to gas (Hall et al. 1986, p. 55). Coal converted to electricity produces 2.6 to 14.3 times the dollar value in the US economy than does the direct use of coal (Gever et al. 1991, p. 269). That is why we burn coal in power stations to produce electricity even though half the heat energy is wasted to the environment.

2.4 Conclusion

This energy approach to economics is not a substitution for a major task that neo-classical economists have set themselves, i.e. to explain and understand the behaviour of buyers and sellers in the market place. Rather it enfolds and enriches economic theory, giving impetus to new and old tasks. Energy and the laws of thermodynamics must become a central consideration and transforming influence on economics.

There are other flaws in neo-classical economics and some of their historical, philosophical and theological origins are discussed again in paragraph 10. Some understanding of these flaws and the role of energy in economics is essential to comprehending the future of transport and its fuels.

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3.1 Origins and rare occurrence
3.2 Uncertain forecasts
3.3 Conventional and non-conventional oil
3.4 Standards, criteria and statistics

3.1 Origins and rare occurrence

Most oil and gas began millions of years ago as prolific growth of algae in shallow tropical seas. A more or less unique scenario must then follow, dead algae must sink quickly into anoxic sinkholes and deep trenches to be rapidly buried by silt and sand. Subsequent pressure and heat at depths of 1000m or more under anaerobic conditions converts the organic matter to a solid called kerogen. At depths of 2-3,000m the kerogen breaks down to oil and at still greater depths the oil breaks down to natural gas.

The oil and gas occupies a greater volume than the kerogen it replaces. Once the increase in pressure is sufficient it forces these fluids upwards through minute cracks and pervious layers. Perhaps one per cent may get trapped in suitable impervious geological reservoirs, if these exist. These reservoirs must then remain sealed and survive intact to the present day to become economic oil and gas reserves.

Only rarely in the earth's history has this sequence of events occurred which is why significant oil and gas resources are exceptional. Most oil and gas originated in the Jurassic with lesser amounts in the Devonian and Tertiary eras. Significant natural gas can be generated in other ways as well, much of it in more recent geological times. Gas reservoirs require tight seals to prevent leakage.

Land masses in the southern hemisphere were a part of Gondwanaland around the South Pole at the time most of the world's oil was generated, which is why these continents are not major sources of oil and gas.

This understanding of the origins of oil only matured in the mid-1980's. Source rocks that contain kerogen are more extensive than geological formations with the potential to trap the migrating oil and gas and so are usually much easier to find. Now geologists search for these source rocks first. If these are absent the region is not prospective. The last decade has seen a rapid screening of unexplored parts of the world. Exploration now focuses on areas with potential to generate oil and gas.

While these and other advances have significantly increased the efficiency of petroleum exploration, they have also shown that many areas are not prospective for petroleum. Suddenly the world has become a smaller place.

3.2 Uncertain forecasts

The art of good marketing is never to tell a lie, but never to tell all the truth.

Numerous books and reports have been published on the future of oil and natural gas since the 1970’s oil crises. These have varied in quality and the perceptions presented for the future of these fuels. The widely varying views on the size of oil reserves and that remaining to be discovered arose for a number of reasons that include:

• Insufficient attention being given to consistent definition of petroleum categories from natural gas to bitumen, based on the economics of their production.

• Inconsistent and ambiguous use of statistical techniques in estimating and reporting on reserves leading to over or under estimation, often done for political reasons by companies and producing countries.

• There were still regions unexplored for oil and gas.

• Widely varying estimates on the amount of petroleum yet to be discovered in unexplored regions, and on the scope for technology to reduce costs and increase the yield of oil-in-place.

• Failure to recognise the economic constraints to production of cheap oil from many hydrocarbon deposits, a failure related to the deficiencies of neo-classical economics discussed above.

• Much of the data is confidential, unaudited and has been unavailable to authors who do not always undertake a rigorous assessment of the data.

• Failure to recognise the political nature of many published figures.

• Failure to recognise the significance of the role of giant oil fields.

3.3 Conventional and non-conventional oil

Petroleum is a broad term including hydrocarbons ranging from the gas methane, through fluid "light" oils to viscous "heavy oils", then to tars and bitumens. However, light oils comprise over 95 per cent of production, mostly from giant sized oil fields at very low cost. This is known as conventional oil and includes increased yields obtained by water flooding and gas pressurisation to force out more of the oil-in-place. It is this oil that powers our contemporary transport systems.

Liquids stripped from conventional natural gas (condensate or natural gas liquids, NGL) are also classed as conventional oil.

By contrast non-conventional oil derived from deposits of tars, bitumens and heavy oils is expensive to produce. Tars and bitumen are mined, then heated and processed with chemicals to produce an oil which requires further refining to produce the equivalent of crude oil. Heavy oils require fluidising in situ by steam or chemical means to permit extraction in the normal way. Sulphur and heavy metal content is normally high, requiring removal to avoid pollution (George !998). The massive scale of the operation, high energy consumption and environmental problems work against significant cost reduction. Canadian tar sand oil has an EPR of about two (Youngquist 1997, p 216). Any efficiency gains will be offset by the need to mine lower grade deposits.

Oil from very small fields, enhanced recovery, remote locations and hostile environments (eg Antarctica) can also be classed as non-conventional on cost grounds. Enhanced recovery involves reducing the viscosity of the oil in situ by injecting steam or chemicals and fracturing the formation to increase flow rates to wells, so increasing the percentage of oil in-place that can be extracted.

The resource base of extra heavy oils, tars and bitumens in geological formations exceeds that for conventional oil and gas. However, non-conventional oil production will always be severely limited by high cost and low EPR's. Most will be produced after conventional oil peaks.

It is conventional oil that matters, the oil that has built our present industrial system and is essential for its continuation.

3.4 Standards, criteria and statistics

Oil and gas reservoirs occur at great depth and published figures for reserves are necessarily estimates. There is not a rigorous internationally agreed basis for making these estimates, nor are rigorous statutory standards for reporting widespread. Statistically based estimates are becoming more common. Three estimates are usually given, a high figure with a probability of say 5% (P5), a median figure (P50) and a low conservative figure of say 95% probability (P95). Statistically the most likely estimate is the mean, but the median is more commonly used.

These ambiguous situations leave companies and governments free to publish oil reserve estimates without distinguishing between light or heavy oil, or stating whether these are P5, P50 or P95 estimates. Jean Laherrere discusses these issues at length in Fleay & Laherrere (1997). He says all such estimates should be regarded as political statements made to suit the convenience of the reporter.

Oil & Gas Journal (O&GJ), World Oil and the Petroleum Economist publish annual data obtained from companies and countries on petroleum production and reserves, with lesser detail in each issue. Their figures often differ, depending on the definitions and statistical interpretations used, as discussed above. British Petroleum (BP) uses the O&GJ data in its annual publication BP Statistical Review of World Energy, However, all this data is published without rigorous verification. The data on oil reserves of some countries in particular is suspect.

These journals latest data quote world oil reserves at over 1000 billion barrels. But 30 per cent is due to a massive increase between 1987 and 1989 by the five major Persian Gulf producers and Venezuela, which the journals did not query. Few new discoveries had been reported, the additions being attributed to large increases expected from existing fields.

Colin Campbell, a leading commentator on the future of oil, partially discounts these increases as non-existent "political oil" invented for Organisation of Petroleum Exporting Countries (OPEC) quota bargaining. Oil consumption had fallen by 13% between 1979 and 1986, while OPEC production had halved with Middle East producers bearing the brunt of the decline. Then oil prices collapsed in 1986 leaving these producers financially strapped.

Apparently in 1987 Venezuela doubled its "reserves" by including very heavy oils which should be regarded as non-conventional oil. The effect under OPEC rules was to increase Venezuela’s oil quota at other OPEC members' expense. Not surprisingly this led to the Persian Gulf producers also announcing massive "reserve" increases by 1989. Iraq and Kuwait doubled theirs, Abu Dahbi tripled theirs and Saudi Arabia made a 50 per cent increase! Campbell says an Iranian official, F. Barkshelli, has admitted to the "political" nature of these increases (Campbell 1997a, p. 73).

Campbell suspects the accuracy of many other countries' published reserve figures as these can remain unchanged for years. Campbell & Laherrere's 1995 median estimate of 838 billion barrels for proven world oil reserves is a more realistic figure (Campbell & Laherrere 1995, p. 13-15).

Furthermore, these published figures give the appearance that discoveries are keeping pace with consumption. Three quarters of published reserve additions since 1980 have been due to revisions in existing oil fields subsequent to their discovery, not from new discoveries (Simmons 1996).

Campbell & Laherrere maintain that such revisions should be backdated to the year of discovery, not attributed to the year of revision which misleads by disguising the current low discovery rate of new oil. FIGURE 3 shows plots of both published and backdated data, illustrating the huge jump in published reserves from "political oil" ten years ago and the real decline in new discoveries (Campbell 1997a, p. 92).

These uncertainties in the database and the lack of rigorous international standards for assessment account for much of the variation in published estimates of ultimate production of conventional oil and the timing of its peak. Published estimates should never be taken at their face value. It is doubly necessary to verify and standardise the data to common definition and statistical criteria when attempting to make global assessments. When this is done the wide variation in estimates for ultimate world oil production narrows considerably. Campbell & Laherrere are leaders in this approach.

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4.1 Background
4.2 Declining discovery and giant oil fields
4.3 Enhanced recovery
4.4 Production profiles - Hubbert curves
4.5 Oil production forecasts
4.6 Conventional natural gas

4.1 Background

By the mid-1990's the world had been sufficiently explored and the data base was for the first time adequate to make confident forecasts of ultimate production of conventional oil and gas and the likely timings of peak production. The data base for oil is better than for gas.

A debate has begun in several petroleum industry journals and forums on the future of oil discovery and production. Three retired industry executives lead the debate, C.J. Campbell and J.H. Laherrere in Europe and I.F. Ivanhoe in the USA. Ivanhoe has been raising the issue since the late 1970's. Some companies are beginning to face the reality of declining discovery, especially of giant fields.

A nodal point was reached in 1995 when The World’s Oil Supply 1930-2050 by C.J. Campbell and J.H. Laherrere was published by Petroconsultants of Geneva. The authors concluded that the mid-point of ultimate conventional oil production would be reached by year 2000 and that decline would soon begin. They expected production post-peak would halve about every 25 years, an exponential decline of 2.5 to 2.9% per annum (Campbell & Laherrere 1995, p. 19 & 27). These conclusions were based on the performance data from thousands of oil fields in 65 countries and contained in Petroconsultants database.

Petroconsultants published a corresponding report on natural gas in 1996, The World’s Gas Potential, by C.J. Campbell, A. Perrodon and J.H. Laherrere.

Petroconsultants are leaders in the acquisition, management, analysis and publication of information for the oil exploration and production industry and its financiers.

Their major asset is a database containing all significant information on the world’s petroleum concessions, companies, exploration and development wells outside the USA and Canada. It has data on virtually all discoveries, on production history by country, field, and company as well as key details of geology and geophysical surveys (Petroconsultants 1995). It provides a service to the world's petroleum industry similar to that provided by the Australian Bureau of Statistics to Australian Governments. No other organisation has such a comprehensive data base on the upstream petroleum industry.

Campbell & Laherrere are in a unique position to sense the pulse of the petroleum industry, where it has come from and where it is going to. Their report pays rigorous attention to definitions and valid interpretation of statistics, as discussed above. Campbell has since published a book for the general reader, The Coming Oil Crisis (Campbell 1997).

4.2 Declining discovery and giant oil fields

Discovery peaked in 1962 when over 40 billion barrels were found. Production in 1997 was 26 billion barrels and increasing while new discovery was 6 billion barrels and decreasing, FIGURE 4. The figure for production includes a small quantity of non-conventional oil and natural gas liquids (NGL). Production has exceeded new field discoveries since 1980 (Ivanhoe 1995).

The area under the curve represents ultimate discovery. This is the basis for Campbell & Laherrere's 1995 P50 estimate of 1,800 billion barrels for ultimate production, with about 210 billion barrels left to discover and 1000 billion barrels left to produce. Their P10 estimate is 2,000 billion barrels, equivalent to the mid-point being reached about 2005 (Campbell & Laherrere 1995, p. 1).

33 out of 34 estimates for ultimate world oil production since 1974 have been in the range 1,800 to 2,300 billion barrels, representing production mid-points of about 2000 and 2010 respectively (Campbell & Laherrere 1995, Fig. 4-13). Since 1985 these estimates have centred around 2,000 billion barrels. Most of the differences are due to variations in definition, as discussed earlier.

Senior industry geologists' views on Campbell & Laherrere's arguments are summarised in the Petroleum Review (Cope 1998). There was general acceptance of the substance of their arguments; that the bulk of remaining discovery will be in ever smaller fields within established provinces. But most thought 400 billion barrels might remain to be discovered. However, Campbell points out that it would take 35 years to find their 210 billion barrels at present discovery rates. He says present conventional oil will drive production over the peak - it is too late for these other options to alter the timing of the peak.

Some say there can be unexpected surprises, but Campbell & Laherrere have made some allowances for that. Over 60% of remaining discoveries are likely to be around the Persian Gulf and in the former Soviet Union. ( Campbell & Laherrere 1995, Fig. 4-11).

About 75 per cent of conventional oil comes from 360 giant oil fields, less than one per cent of all fields (Ismail 1994, Campbell & Laherrere 1995, p. 1). Giants are fields which held more than 500 million barrels on discovery and sophisticated techniques are not needed to discover them. They are usually found first because they are large, produce the cheapest oil and have a long life.

The wave of exploration after the 1970's oil crises did not find any new major petroleum provinces, despite exploration reaching new heights of sophistication and efficiency. Giant discovery peaked in the early 1960’s and has slumped since 1980, FIGURE 5. Few giants are left to discover (Campbell 1997, p. 28).

Most conventional oil has been and will continue to be produced from giant oil fields. Fields found more than 20 years ago produce 90% of today's oil and 70% comes from fields over 30 years old (Campbell & Laherrere 1995, p. 13). Most are ageing and many are in decline. The biggest and least depleted of the giants are in the Middle East which has nearly 60% of remaining conventional oil.

4.3 Enhanced recovery

Most fields only yield about 35% of the oil-in-place, while the best achieve 60%. These yields include gains made by water flooding and gas injection to force more oil into wells. Natural gas fields usually yield up to 80% recovery - gas is more free flowing than oil. There are many who say that enhanced recovery techniques can significantly increase yields closer to 60%. These techniques include steam flooding, injection of miscible fluids and fracturing the formation by using explosives or by injecting liquids under high pressure were discussed above.

However, the lower yields are mostly from fields with heavy viscous oils and/or tight formations that restrict fluid flow while higher yields occur where the oil is light and free flowing, or where the formation is more porous and less restrictive to fluid flow. This is the main reason for variations in yield. Enhanced recovery is expensive and mostly in the non-conventional class. It will have little bearing on the timing of the peak.

Prudhoe Bay in Alaska and the Forties field in the UK North Sea illustrate the point, FIGURE 6. Depletion has been constant for many years, despite addition of a fifth platform at Forties and advanced technology - the North Sea has seen the gestation of enhanced recovery technology. These techniques mostly increase production rates near the peak, not reserves (Campbell 1998). The subsequent decline rate is steeper. More today means less tomorrow.

Campbell says many yield increases attributed to enhanced recovery are in fact statistical artefacts - the increase is partly due to a simultaneous change in reporting from say P90 estimates to ones closer to the P50 - shifting the goal posts (Campbell 1997, p. 69, 124).


4.4 Production profiles - Hubbert curves

US petroleum geologist, MK Hubbert, pioneered the use of the logistic equation to describe the discovery and production profiles for oil and natural gas in major oil provinces. The equation is widely used in population studies and for resource evaluation.

In 1956 he successfully predicted the time and magnitude of the 1970 peak of US oil production in the lower 48 States. The production and discovery profiles are normally bell-shaped with the peaks occurring near the mid-point of ultimate economic production or discovery. The peak of discovery precedes the peak of production.

The production peak usually occurs before the mid-point for giant fields but comes later for small fields or those offshore. These variations cancel out when data from all fields is aggregated. FIGURE 7 below illustrates these points for world conventional oil outside the Persian Gulf. The plot of discovery has been shifted forward 15 years to illustrate how the peak profile of production to 1995 is mimicking the profile of discovery with a 15 year time lag. A Hubbert curve from 1930 to 2050 is also plotted for an ultimate production of 986 billion barrels (Fleay & Laherrere 1997, Fig. 2.5). Hubbert's concepts are now widely accepted.

Laherrere has extended the use of the logistic equation to those situations where there are multiple peaks of discovery and production. He breaks down the multi-peaked curve into the sum of several bell-shaped Hubbert curves each reflecting major political and economic impacts or several phases of discovery and development, see FIGURE 11.

4.5 Oil production forecasts

FIGURE 7 shows world conventional oil production peaking in the 1990's, though influenced by the former Soviet Union where production fell from 12 to 7 million barrels per day from 1989 to 1996. Oil from non- conventional sources and natural gas liquids is additional, some 5% of all production.

FIGURE 8 shows world and several regional production curves for conventional oil to 1996 and Hubbert projections to 2050 for an ultimate world production of 1,800 billion barrels (Campbell & Laherrere 1998). The curves for the world and the Persian Gulf region are double peaked reflecting the impact of the 1970's oil crises. Increasing the world ultimate to 2,300 billion barrels only shifts the mid-point of production to 2010.

Note the imminent steep decline of North Sea production, likely to halve by 2010. About one quarter of the Persian Gulf region's oil has been produced, the only region capable of significant production expansion until it too peaks around 2010 on Campbell & Laherrere's projection. Political and economic events will have a major influence on the pattern of Persian Gulf oil development. Predictions would be hazardous.

4.6 Conventional natural gas

Campbell, Perrodon & Laherrere (1996) estimated that the ultimate production of the world’s conventional natural gas would be 9,250 terra cubic feet (Tcf), with about one quarter produced by 1995. They say other estimates range from about 8,000-12,000 Tcf by Hubbert in 1969, 10,000 Tcf by Bookout in 1989, 12,500 Tcf by Masters in 1994 and 10,500 by Ropley in 1994. Discovery and assessment of natural gas is more complex than for oil (both usually occur together) and has not yet reached the mature stage of oil. Peak production, the mid-point, is likely to occur about 2020-25 for 9,250 Tcf of conventional gas.

About 38% of world gas reserves are in the former Soviet Union, mostly in the Russian Federation. Another 28% is in the Persian Gulf region, two-thirds in Iran. Campbell, Perrodon & Laherrere's world estimate is probably the lowest because of downgrading of the former Soviet Union's published reserves. Khalimov, in commenting on Soviet practice, wrote "the resource base appears to be strongly exaggerated due to inclusion of reserves and resources that are neither reliable nor technologically and economically feasible". Petroconsultants acquired the former Soviet Union's database for oil and their assessment of the performance of oil fields has confirmed that reported reserves were overstated (Campbell 1997).

Russian gas is consumed mostly at home, in Eastern Europe and Germany, a situation unlikely to change much given the present political circumstances. Persian Gulf gas is most likely to be consumed locally and before long piped to the Indian sub-continent. The International Energy Agency expects gas production in North America, Europe and the Pacific region to peak before 2020 (IEA 1998).

There are considerable resources of non-conventional gas - but it is expensive to extract.

FIGURE 9 shows Campbell & Laherrere's estimate of world oil and gas production from 2000 to 2050, assuming an oil peak in 2000. Oil is subdivided into conventional and non-conventional categories. The decline curve for conventional oil is based on the actual performance records of thousands of oil fields using data from Petroconsultants database. The heavy oil and bitumen forecast would be the most speculative when the low Energy Profit Ratio for this oil is considered, see FIGURE 15 for tar sands.

[Return to Table of Contents]


5.1 Supply overhang ending
5.2 Meeting growth AND depletion
5.3 Vertical integration ends
5.4 Exploration and development constraints
5.5 The Persian Gulf
5.6 An investment cliff
5.7 USA on a supply knife-edge

5.1 Supply overhang ending

World oil consumption fell from 62 million barrels per day in 1979 to 53 million barrels per day in 1983 while well field capacity expanded as North Sea, Alaskan and other discoveries came on stream. By 1983 well capacity exceeded worldwide demand by 37% (Luigs 1997). Persian Gulf production halved by 1986 and high oil prices finally collapsed. Consumption began to rise again reaching over 72.2 million barrels per day in 1997 (BP 1998). The drive for energy conservation and efficiency slackened.

This surplus capacity is rapidly shrinking. The dramatic halving of oil consumption in the former Soviet Union since 1990 has disguised the 13% increase in the rest of the world and the 70% increase in Asia. The surplus capacity is now down to 3% of demand, or just over 2 million barrels per day (Luigs 1997). Most of the surplus is in the Persian Gulf region.

5.2 Meeting growth AND depletion

70% of exploration and development investment since the early 1980’s has been in the USA and North Sea where costs are high and oil yields low (Price Waterhouse 1995). Nearly all new capacity outside the Persian Gulf is now offshore and deep water is the new frontier. From 1983 to 1993 60% of growing oil and gas demand outside the former Soviet Union was met by reopening this shut-in production - the proportion for oil would have been higher than for gas. Over the next 10 years 90% of new hydrocarbon supply will have to come from drilling new wells (Luigs 1997). What is the magnitude of this task and has the industry the capacity to carry it out?

Matthew Simmons, a Houston financial adviser to the oil industry, says new development must meet the increase in consumption expected AND offset the decline in output of ageing oil fields as well. He says 70% of the world's oil supply comes from fields more than 30 years old and FIGURE 8 shows most of the world's oil production outside the Persian Gulf peaking by 2005 (Simmons 1997).

The depletion rate for these fields outside the Persian Gulf is in the range 3-7% per annum which translates to about 18 million barrels per day between 1996 and 2005, the new capacity needed just to offset production declines (Simmons 1995, Campbell 1997, pp. 201-5). For world consumption growths near 1996-7 levels (~2.25% per annum) another 17 million barrels per day would be required in 2005. However, a global recession is under way and lower annual growth rates are certain, say 30% of 1996-97 or under 1%. Gas consumption growth outside the former Soviet Union has been 4-5% for some years. TABLE 1 summarises these estimates for new capacity needed, including data and estimates for natural gas as barrels of oil equivalent.



Supply increment from new development

World outside Former Soviet Union

million barrels oil equivalent



High growth 


Low growth 1996=2005
Oil demand increase 
Gas demand increase 
Replace oil depletion 
Replace gas depletion 
Supply increase needed
40% from new fields 87-96 
90% from new fields 96-05 

Thus a two to three fold increase in new oil and gas field development is required to 2005 compared to the previous decade. Development of this capacity to meet demand in 2001 should be well advanced now, it takes 5-6 years to bring new fields into full production.

5.3 Vertical integration ends

In the late 1970's the Persian Gulf countries took control of the oil fields away from the major companies (Anthony Sampson's Seven Sisters) ending over 50 years of quasi-vertical integration of the oil industry from oil well to petrol pump. The industry has always been prone to extreme price fluctuations and debilitating price wars for crude oil - it was so easy to add new capacity and flood the market. Ever since the days of John D. Rockefeller last century there has been strong pressure to vertically integrate the industry to stabilise prices and development in this global capital intensive industry where long term planning is vital.

The world responded to the 1970's oil crises by focussing production and new development in the expensive areas of the world while calling on oil from the lowest cost producers around the Persian Gulf as a last resort.

In the early 1980's spot markets for oil developed and later a futures market. Now most crude oil prices are determined by commodity traders, mostly based on the expected state of supply and demand for up to 12 months ahead, but not for five years ahead. Few commodity traders would understand the looming supply problems discussed in this paper. Oil prices have fallen from US$24 per barrel in December 1997 to US$12-13 in August 1998. The impact of this development for supply in the next decade is only now emerging.

5.4 Exploration and development constraints

The western oil companies have been put through the financial wringer since oil prices fell from their high levels in the 1970's. The large supply overhang, investment excesses in the early 1980's and loss of control of Persian Gulf oil were responsible. Mckinsey & Co's Conn & White say their shareholders lost US$420 billion in value from 1982 to 1992 relative to alternative investments (Conn & White 1994). Furthermore, they have been confined to the expensive end of exploration and development in mature areas, mainly offshore and increasingly in deep water as the new frontier.

There have been mergers, downsizing, cost cutting and rationalisations on a grand scale. Staff numbers have been more than halved, especially in experienced exploration and development departments. The fleet of offshore and onshore drilling rigs is ageing and many have been scrapped and not replaced. Hire rates for offshore drilling rigs have been depressed, sometimes only covering 10% of replacement cost (Luigs 1997). The greatest wave of innovation and new technology development in the industry's history is occurring to cut costs and allow development of the much smaller fields now being found, especially for offshore operations.

Development activity in the mid-1990's increased as the supply overhang diminished and consumption growth reached levels not seen since the mid-1970's. By early 1998 the offshore drilling fleet was operating at an effective 98% of capacity and hire rates for some classes of rig had trebled and quadrupled. Few rigs are on order - these can cost US$200-300 million for deep water and take up to three years to build.

The new rigs will only replace attrition losses by 2000. Contractors are wary of ordering new rigs after being so badly burnt in the 1980's. The supply of onshore rigs is tightening as well, but is not as acute as for offshore. Shortages are also developing in other support areas as well, especially for skilled personnel (Luigs 1997). There is limited scope for a dramatic expansion of capacity offshore in the next five years. Both oil and gas developments are affected.

Jurgen Hendrich, oil analyst for J.B. Were & Son says oil price weakness below US$15 a barrel tends to be short lived because a significant proportion of global oil production is uneconomic below US$14 (Australian Financial Review 1998). Those "at risk" sources would be Canadian tar sand and heavy oil developments, US "stripper wells" (some 450,000 wells that average 2.2 barrels per day) and recent offshore wells in water over 1,000 m deep.

The recession that has been developing since mid-1997 is taking some of the pressure off, but has increased price volatility - crude oil prices have fallen from US$25 in December 1997 to US$11-13 in July - August 1998. This has increased financial risks and reduced cash flow needed to finance multi-billion dollar investments, threatening some production if these prices persist.

5.5 The Persian Gulf

Only the Persian Gulf, and to a much lesser extent the Caspian Sea region, can supply large increments of oil for a given investment, do it mostly onshore and relatively quickly. Export and new capacity will be rapidly concentrated in these politically unstable regions. There is no clear evidence that development on the scale needed has commenced.

The United States is attempting through the Iran-Libya Sanctions Act 1996 to control the political scene as well as future petroleum development there. The Act empowers the US President to impose penalties on companies or financiers participating in petroleum development in Iran and Libya by whatever direct or indirect avenues that come within the reach of US jurisdiction. United Nations sanctions on Iraq also seek to control the petroleum future of Iraq and the Persian Gulf, and to keep Iraqi oil off the market to help keep oil prices up.

The petroleum infrastructure of both Iran and Iraq needs substantial rehabilitation following neglect during their disastrous war in the 1980's. Additional work is needed on Iraqi oil fields damaged in the Gulf War. Iraq cannot immediately restore oil production to its 1970 's level. Iran's production capacity has fallen from 6 to 3.7 million barrels per day since 1979 due to lack of maintenance and refurbishing investment.

Foreign investment will be needed to expand production in the Persian Gulf, adding to political complications. The present political stalemate in the Persian Gulf cannot last much longer. Chinese companies have been negotiating with the Iraqis and a French, Russian and Malaysian consortium has been negotiating with Iran. US legislation excludes the participation of US companies.

5.6 An investment cliff

Capital needs of the industry could be $800 -1,400 billion by 2005, depending on demand growth, according to accountancy firm Price Waterhouse in a 1995 report (Price Waterhouse 1995). The industry is faced with heavy investment to replace ageing infrastructure, to reduce production decline in ageing oil fields, and to expand production capacity to meet growth. The report says an unprecedented number of investment opportunities are occurring at a time when internally generated cash flow is depressed. Competition within firms for increasingly scarce cash capital is intense, with an increased role for external capital. Current low oil prices have depressed cash flow even further.

The report says the upstream petroleum industry may need $572-1,000 billion to keep pace with demand, depending on demand growth rate. New liquid natural gas (LNG) investment of $55-175 billion is possible.

The former Soviet Union’s petroleum industry is so dilapidated that early expenditure of $60-100 billion is required if the infrastructure is to be restored after a 45 per cent production and consumption decline since 1990. $30 billion is required just to stabilise oil production. However, it is extremely unlikely that production can be restored to its 1980 high of 12 million barrels of oil per day. FIGURE 10 shows Campbell's assessment of the future of this region's oil production (Campbell 1998). He says the former Soviet Union could become a net oil importer by 2008. The external investment required is inhibited by political and economic instability and high sovereign risk.

Persian Gulf producers hold the key to meeting demand growth to 2005. According to energy consultant Naji Abi-Aad investment of $192 billion (1990 prices) is needed to lift production capacity from 18.5 million barrels per day in 1990 to 26.8 in 2005 with $150 billion required just to maintain current production levels (Naji Abi-Aad 1995). Naji says the national oil companies in these countries must compete with other financing needs of their governments, a problem aggravated by the Gulf War and current low prices. Price uncertainty is playing havoc with their budgets.

These countries do not have the internal funds to finance investment on this scale without harsh budget cutbacks and the risk of political destabilisation. External financing is necessary. The region's political instability makes such investments risky as does oil price volatility. All the players are forced to take a short term view of investment just when a long term view is vital to ensure expected demand for oil and gas can be met after 2000.

This is the background to the easing in of some Iraqi production in 1996. World consumption is getting uncomfortably close to maximum supply.

An early and stable oil price rise is necessary if sufficient investment is to occur to meet post-2000 oil consumption. Suddenly a financially strained industry is having to run twice as fast (Simmons 1996). However, oil prices have fallen in 1998, not risen.

But why should Persian Gulf countries expand production capacity that would risk keeping supply ahead of demand and oil prices low? Present oil prices cannot support the level of oil investment now needed in these countries AND finance their other domestic needs.

The full impact of the breaking of the vertical integration of the global petroleum industry 20 years ago is now emerging, but has not yet surfaced into public consciousness.

It is a dangerous way to operate a hydrocarbon system that is so critical to the well being of the entire world, according to Simmons.

5.7 USA on a supply knife-edge

The United States consumes one quarter of the world's oil and imports 55% of its consumption. Production peaked in 1970.

Matthew Simmons says US refined oil consumption has exceeded refinery capacity since 1995. Furthermore, imports of crude oil and refined product are reaching the capacity of handling facilities and stocks in 1996 were at low levels not seen for 20-30 years (Simmons 1997). Most analysts attribute these low stocks to "just in time" inventory management. But Simmons sees little evidence that these systems were in place. He says stock liquidation was important to satisfying US oil demand in 1996.

The world supply and demand balance is becoming vulnerable to disruption from minor disturbances like the weather, political upsets, major refinery or pipeline failures, especially in the US. A hurricane in the Gulf of Mexico shutting down offshore production for several weeks, or a severe winter in North America generating high demand for heating oil could tip the balance. He says there was little spare capacity and only 80 days consumption in inventory in 1996.

The 1997 and 1998 North American winters were warm and demand for heating oil and gas was low, the main reason why a petroleum product supply crises did not develop.

The USA is approaching the decline of its natural gas as well, FIGURE 11. The curve of gas discovery has been moved forward 22 years to show how the profile of production mimics that of discovery. Some short term relief will come from Canadian gas field development currently under construction.

FIGURE 12 shows the Energy Profit Ratio at the wellhead for US domestic oil production from 1915 to 1985. Much of current production must have an EPR well below five, such as those offshore in deep water and the 450,000" stripper" wells with an average production of 2.2 barrels per day in 1994.

The USA will surely soon face the moment of truth between its high hydrocarbon consumption and declining indigenous supply. Appendix 1 shows the statistics for well numbers and oil production for the main producing countries.

[Return to Table of Contents]


6.1 Background
6.2 Oil and condensate
6.3 Diesel, lubricating oil and bitumen supply is critical
6.4 Australia’s natural gas
6.5 New frontiers

6.1 Background

Australia's ultimate production of conventional oil is likely to be 0.2% of the world's ultimate and about 2% of its gas. Over 80% is offshore, there are few giant fields and these are at the small end of the giant spectrum. Some gas discoveries are well offshore, in deep water and will be expensive to develop, their Energy Profit Ratios (EPR) are likely to be low.

Australia is a net importer of crude oil and both imports and exports refined products. Natural gas is exported as liquid natural gas (LNG). The Bureau of Resource Sciences (BRS) says Australia has produced about half of its ultimate endowment of conventional oil and about 9% of its much larger endowment of natural gas, including estimates of the undiscovered (BRS 1997, p. 57).

6.2 Oil and condensate

Australian conventional oil production could decline to very low levels between 2015 and 2025. Certainly by 2015 oil production will be minimal in Bass Strait, the Carnarvon Basin, and Central Australia. The uncertainty surrounds future discoveries and production from the Browse and Bonaparte Basins between Australia and Timor, the new exploration frontier.

However, there should still be condensate available. Condensate is the lighter liquid hydrocarbon fraction that often occurs with natural gas. The share of condensate will increase from now on as natural gas reserves are developed, but will be dependent on their timing and the level of condensate in the gas.

Bass Strait, Australia's largest oil province, peaked in 1986 and production has declined to 43% of the 1986 level. Central Australian oil production is minor. Production peaked in the Carnarvon Basin in 1996 and is expected to decline to less than one quarter of that by 2008, but condensate production will be sustained, FIGURE 13 (DRD 1998, p.95).

The BRS makes regular forecasts of Australian crude oil and condensate production, a conservative one with a 90% probability of occurring (P90), a median or 50% probability forecast (P50) and a high one with a 10% probability of occurring (P10). Statistically the P50 case is the most likely.

The BRS published in 1998 its June 1998 forecast for crude oil and condensate production to 2010. Their P50 estimate expects crude oil and condensate production to peak at 654,000 barrels per day in 1999, with 22% as condensate, and fall by 2010 to 391,000 barrels per day, 44% as condensate. Their P10 forecast for 2010 was 530,000 barrels per day, 53% as condensate (BRS 1998, pp. 51-6, in press).

The oil industry forecasts total petroleum consumption will be 900,000 barrels per day by 2008 under business-as-usual scenarios, or 325 million barrels for the year. Consumption was 746,000 barrels per day in 1997 (Petroleum Gazette 2/98, p. 29). FIGURE 14 shows these estimates for Australian production and consumption to 2010. 41% of Australian petroleum product consumption is petrol, 12.5% aviation fuel and 40% is diesel and the proportion of the latter is growing..

Natural gas developments will be delayed because of the Asian economic crisis, so these condensate production estimates are now too high beyond 2003.

Australia is in its third discovery and production phase for oil which can be represented by the sums of three Hubbert type curves (Fleay and Laherrere 1997, Fig. 3.3).

The significant third phase oil discoveries since 1994 have been well offshore in the Timor Sea in water up to 400m deep in the most cyclone prone ocean in the world. Establishment and operating costs and the financial risks are high based on 1990’s oil prices. There is minimal onshore support infrastructure and most is at Darwin.

The BRS published in 1996 its forecast for the EUR of crude oil in Australia - the likely ultimate extraction from first production to the last barrel, including from fields not yet discovered. TABLE 2 lists the data, which does not include condensate. Production to 1995 plus the BRS's P10 and P50 estimated production from 1996 to 2010 are given as well.

By 2010 Australia could have consumed some 75% of its ultimate conventional oil endowment and over 80% by 2015.



excluding condensate

billion barrels

P95 estimate
Average estimate
P5 estimate
Ultimate recovery 
Production to 1995 
Remaining end 1995
Prodn. 1996 to 2010 (P50) 
Remaining end 2010
Prodn. 1996 to 2010 (P10) 
Remaining end 2010

Source: BRS 1996, p.75. BRS 1997, pp. 54 &113

The first major oil discovery in the Browse Basin was made in mid-1997 at Cornea in shallow water near the Kimberley coast. Early reports said there may be 960 to 2,650 million barrels in place, presumably P95 and P5 estimates respectively (Oil & Gas Australia 1997). At 40 per cent recovery of in situ oil the most likely EUR would be about 600 million barrels which would make Cornea the biggest Australian discovery since two giant fields were found in Bass Strait in the late 1960’s. However, further drilling has been disappointing (West Australian 1998).

In 1993 the BRS expected Browse Basin oil discoveries to occur in a few large fields with the first over 250 million barrels (P50 estimate), or even as high as 880 million barrels (P10 estimate) (BRS 1994, p. 31).

If the Cornea discovery is as large as initial reports suggest, the most likely EUR of oil in Australia may be between the BRS’s P5 and P50 estimates in TABLE 2. The BRS says its method of estimating petroleum reserves tends to under estimate early in exploration and over estimate in the late stages (BRS 1997, p. 20). On this basis their estimates for Bass Strait, Central Australia and the Carnarvon Basin would be about right while those for the Browse and Bonaparte Basin would be low.

6.3 Diesel, lubricating oil and bitumen supply is critical

Australian crude oil has a low sulphur content and commands a premium price on world markets. It is also light and relatively low in the heavier hydrocarbons needed for refineries to produce diesel, lubricating oils, bitumen and some petrochemical feed stocks.

The nine refineries have a combined output of 800,000 barrels per day, close to current petroleum product consumption. Most refinery investment in the 1990's has aimed at improving the ability to process heavy Persian Gulf crudes as the availability of Australian light crude declined (ACIL 1997).

Since 1992 over one-third of Australia's crude has been exported and replaced by heavier crude imported from the Persian Gulf. In 1996-97 crude oil and condensate equivalent to 27.5% of consumption was exported and imports were 51% of consumption, mostly from the Persian Gulf (ABARE 1997, pp. 147-8). The transactions were partly straight commercial ones exploiting oil price and exchange rate variations, partly balancing the shortfall on local supply and partly to provide adequate heavier crudes so that refineries can meet our diesel, lubricating oil and bitumen requirements. The relative importance of the latter reason is not clear but will increase after 2000 as the proportion of condensate and dependence on imports increases.

Diesel has the highest growth rate of all the liquid petroleum fuels world wide and in East Asia most demand is for diesel. Consequently the refineries in South East Asia (Singapore is the main centre) tend to produce an excess of petrol for export at low prices. Independent retailers in Australia have exploited this situation by importing petrol and selling it in fierce competition with the four major refiner/retailers, Caltex, BP, Mobil and Shell.

The profitability of refineries is sensitive to this competition. The before tax components of fuel retail prices are; crude feed stock 56%, oil refiner 11%, oil marketeer 21.5% and service station 12%. Variations in oil prices and exchange rates can play havoc on profitability for crude imports and the controllable costs in refineries are a small proportion of the total. The four majors have responded by vigorously promoting vertical integration from refining to service station, by rationalising distribution and retailing to reduce overhead costs, often in conflict with the independent distributors, service station franchisees and the Australian Consumer and Competition Commission (ACCC).

The majors have also been successful in exporting petroleum products to keep refineries operating at maximum output to reduce unit costs. Now exports of refined products balance imports each at 7.5% of consumption (ABARE 1997 pp.147-8). Despite these responses refinery profitability continues to fall and the industry says closures are likely if the situation does not improve (ACIL 1997). Shell and Mobil are combining their refinery operations into a joint venture to save $100 million a year (West Australian 1998a).

As discussed earlier, world shortages of oil could develop by 2005 and competition for Persian Gulf oil will become fierce just when our dependence on imports will be increasing.

Will Australia be sidelined, how secure will oil imports be and at what price? By 2020 the only reliable supply may be a small quantity of local crude oil and an uncertain amount of condensate depending on natural gas developments. Shortages of diesel, lubricating oil and bitumen are likely to occur first.

Condensate and liquid petroleum gas (LPG) can be used in petrol engines. The estimated ultimate recovery (EUR) for condensate in mid-1996 was about 2,200 million barrels of which some 300 million barrels has been produced and an estimated 850 million barrels remains to be discovered. Australia's EUR for LPG is just under one billion barrels, mostly obtained from natural gas, however much is in deep water (BRS 1997, pp. 24, 25 &58). LPG is also an important petrochemical feed stock (BRS 1997, p. 59).

By 2030 the only reliable supply of cheap petroleum for transport and agriculture in Australia could be some condensate, a small quantity of LPG and natural gas. Imports of crude oil could not be relied upon at an affordable price. This suggests the closure of Australian oil refineries by then and contraction of the fuel distribution network. The only reliable hydrocarbon fuel for transport would be natural gas. Supply of lubricating oil and bitumen would be a problem.

Technologies for efficient conversion of diesel engines to burn compressed natural gas (CNG) are now well advanced, as are engines specifically designed to burn CNG. The conversion of vehicles from diesel to CNG must begin NOW before the diesel shortage hits. It takes time and investment to make the conversions AND establish the distribution networks. There are compelling air pollution reasons as well for changing vehicles to CNG in cities.

This conversion will be most difficult for agriculture because of its dispersed nature and the cost of setting up a CNG distribution network. An early phasing out of diesel powered electricity generation is called for.

6.4 Australia’s natural gas

The BRS EUR for Australia’s natural gas in December 1994 was 3960 billion cubic metres (P50 estimate) and 4500 billion cubic metres (P5 estimate) with about 8 per cent (320 billion cubic metres) already produced and about 2550 billion cubic metres discovered (BRS 1996, p. 16, 75). There have been additions to proven reserves since then, mainly in WA offshore. The BRS 1998 report will update these figures.

Over 80 per cent of Australia’s gas reserves are located off the north west coast of W.A., mostly in the Carnarvon Basin. A new exploration and discovery phase is under way in this Basin as well as in the Browse and Bonaparte Basins further north. Companies have announced new gas discoveries and upward revision of reserves in existing fields since 1996.

The tightening of global oil supply and rapid economic growth in the Asian region has stimulated interest in the rapid development of Australian gas resources since 1994, both for local consumption and for export as LNG. Rapid growth in the market for North West Shelf gas was expected. Just completed gas pipelines to Port Hedland and Kalgoorlie are serving mines, towns, power stations, gold and nickel smelters. BHP has nearly completed a hot briquetted iron plant at Port Hedland. A basic steel plant is proposed for Geraldton. Woodside is planning expansion of LNG exports at Karratha and a consortium hopes to develop the Gorgon gas fields. More such projects have been floated.

The Asian economic crisis has already seen many projects postponed - North West Shelf LNG expansion, the Geraldton steel plant and Gorgon.

Gas reserves at December 1994 for eastern Australia were about 425 billion cubic metres with about 215 billion cubic metres already produced, i.e. 640 billion cubic metres discovered to date (BRS 1996, p. 16) and ABARE expects another 255 billion cubic metres to be consumed from 1994/95 to 2009/10 (ABARE 1995, pp. 139-51). Scope for additional discoveries in these states is limited. A pipeline from the North West Shelf will be needed within ten years. What will be the EPR of gas delivered to eastern Australia, how economically effective will this gas be?

In May 1997 the Australian Gas Association (AGA) published its Gas Supply and Demand Study with forecasts to 2030 for development of natural gas resources for local consumption and export. The Study uses two natural gas demand projections which are compared with supply options. The first was commissioned from the Australian Bureau of Agricultural and Resource Economics (ABARE) (ABARE/SDS 1997), In the second, AGA modified the ABARE projections to incorporate slower growth for power generation using gas. The differences are minor. Production is assumed to grow through to 2030.

TABLE 3 summarises these projections and compares them to the BRS 1995 P50 and P5 estimates for EUR of Australian natural gas. The year for the production mid-point is given as a guide to the date of peak production, assuming that a single Hubbert curve will describe the profile of production. The forecast demand pattern makes this a reasonable assumption, but obviously the actual pattern will be influenced by many events (AGA 1997, pp. 9-14; BRS 1996, p. 75. &142). The Asian economic downturn is already delaying projects.



billion cubic metres

Discovered to 1994 
Undiscovered estimate
Estimated ultimate recovery 
Depletion mid-point
Production/Demand to 2030
Cumulative production to1994 
AGA Prodn. estimate 1994 to 2024 
Cumulative production to 2024 
AGA Prodn. estimate 2024 to 2030 
Cumulative production to 2030 

NOTE: AGA’s original data was in petajoules, recalculated on the basis of one PJ equals 25.6 million cubic metres of gas.

On AGA's production forecast the earliest date for the peak is 2030. Taking this to be the mid-point implies an EUR of 5440 billion cubic metres, almost double AGA's estimate of EUR and above both BRS's estimates! For the BRS estimates the peaks would occur between 2020 and 2026. About the same time that world gas production might peak!

AGA did not discuss the likely supply position beyond 2030, but did include some production of methane from coalfields and imports of gas from Papua/New Guinea, but these quantities do not materially alter these dates.

The realism of these forecasts must be questioned from both the demand and supply sides. What are the implications for proposed steel mills, power stations and chemical plants? Are the promoters, financiers and shareholders of these projects aware that available gas may decline after 2020? Are government agencies, economists, politicians and the public aware?

By 2025 world conventional oil production could be about 60 per cent of current levels and Australia will be wholly dependent on oil imports in a fiercely competitive market, see FIGURE 8.

Oil based fuels drive the transport system and are an essential input to agriculture. These industry sectors consumed oil equivalent to 30 billion cubic metres of gas in 1994/95 which is the only fuel that can replace diesel with existing engine technology, a subject discussed below. Clearly gas consumed in these sectors should increase rapidly from 2010, adding to the pressure on available supply. AGA's domestic demand forecast made negligible allowance for consumption by these sectors.

Enough gas will need to be reserved to support Australian agriculture and transport through to 2050 when both will have to survive without prime dependence on petroleum fuels in the era "beyond petroleum". By then the world production of oil is likely to be about one quarter of present levels and natural gas well past its peak, and both with much higher production costs and lower EPR's than at present.

The BRS estimates for the EUR of gas in Australia need to be qualified. Some of the discovered gas will be very expensive to produce. Scott Reef in the Browse Basin (570 billion cubic metres) is 400 km north of Broome in water 1000m deep. Scarborough (230 billion cubic metres) on the Exmouth Plateau in the Carnarvon Basin is 270 km north west of Onslow and in water 900m deep. The Gorgon - Chryasor group (about 400 billion cubic metres) is 150km north of Onslow in water from 120 to 800m deep. What will be the EPR of this gas delivered to markets?

Some Gorgon gas contains 12-15 per cent carbon dioxide and it is not clear how this will be disposed of and at what cost. Its release to the atmosphere would make a significant addition to Australia’s enhanced greenhouse gas emissions.

6.5 New frontiers

These and other remote and deep water projects will be expensive to explore, develop and operate even with advances in technology, which is why the Australian Petroleum Production and Exploration Association (APPEA) is lobbying for an exemption to wellhead taxes. Furthermore it costs up to ten times as much to transport gas long distances as it does oil on an equivalent energy basis (Campbell & Laherrere 1995, Ch. 6).

The average cost of drilling an offshore exploration well (whether for oil or gas) is $5-8 million in water up to 200m deep, ten times the cost of an onshore well. The cost is $40-50 million in waters 1500m deep (Bulletin 1996, p. 43).

Australian upstream petroleum companies, like their international counterparts, have been suffering from poor returns on investment due to low oil prices and rising costs from marginal fields. They have been confined to the world’s expensive development areas since the 1970’s oil crises (Conn & White 1994). Companies are reluctant to invest in small fields in high cost locations when prices are low and subject to erratic variations.

APPEA is lobbying Federal and State governments to forgo short-term tax revenue from oil and gas at the wellhead (about $1.5 billion in 1993/94) in the hope of stimulating major, high risk exploration programs in deep water off the Australian coast (Bulletin 1996, p. 43). A report by ABARE, Net Economic Benefits From Australia’s Oil and Gas Resources, is providing most of the arguments (ABARE 1996). The aim is to increase net income to companies, thereby stimulating exploration and improving the economic viability of projects.

APPEA claims that production from such discoveries will ultimately yield governments greater company tax revenue to offset near term shortfalls from wellhead tax concessions. What is the EPR of such projects? The comparison with oil from Canadian tar sands, EPR about three (see below), and the aggregate EPR of mid-1980's US oil and gas suggests these projects will be of dubious economic merit. If this is so then the BRS estimates for EUR for gas need to be reduced by as much as 15-20%.

Drawn out negotiations between Australia and Indonesia over sovereignty of Timor Sea oil and gas are also delaying exploration and development in the Bonaparte Basin (Australian Financial Review 1997a).

A clearer picture of the economic merits of Australia's existing and potential hydrocarbon sources would be possible if a comprehensive survey of their Energy Profit Ratios was made. EPR is a valuable index to sort economic projects from the uneconomic ones. This task needs a high priority.

The BRS has made preliminary surveys of sites offshore on the Lord Howe Rise, the Norfolk Ridge, the Tasman Rise, the Kerguelen Plateau and the Townsville Trough east of the Great Barrier Reef. All these sites are in deep water, are remote and would be expensive to develop if hydrocarbon source rocks are present and suitable reservoirs exist.

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What alternatives to oil are available for transport and agriculture? How do you assess the economic effectiveness of a fuel? Will remaining oil be as economically effective as historical oil?

7.1 Criteria for alternative fuels
7.2 Some alternative fuels
7.3 Hydrogen
7.4 Natural gas
7.5 Liquid petroleum gas (LPG)
7.6 Electric vehicles
7.7 Hybrid vehicles
7.8 Railways
7.9 Marine
7.10 Commercial aviation
7.11 Bicycles and walking
7.12 Manage demand as well as supply
7.13 Water utilities and demand management

7.1 Criteria for alternative fuels

The principal requirements for an efficient transport fuel that can support our contemporary civilisation include: Petroleum products from conventional oil rate highly on all seven criteria, as do liquid fuels generally that have a high EPR and power-weight ratio. CNG, and LPG to a lesser extent, would be second best to oil due to greater storage and handling problems. Electric power rates highest on fine control and conversion of energy into motion, but is handicapped by low EPR's compared to 20th century oil and by poor storage and portability characteristics - a need for batteries or overhead conductors as for electric rail. Solid fuels like coal rate poorly on most criteria.


7.2 Some alternative fuels

FIGURE 15 compares the EPR and relative economic effectiveness of a range of fuels considered from a transport perspective. The right hand side lists the most effective fuels with coal as least effective on the left hand side, all compared on a joule by joule basis. Electricity occupies an intermediate position because of portability and storage constraints. Oil from giant fields in their prime has by far the highest EPR.

The EPR for photovoltaics in 2005 is what researchers expect to achieve with thin film technology (Green 1997).

The EPR for Canadian tar sands is less than two on 1990's data (Youngquist 1997, p. 436). There are also vast resources of hydrocarbons in shales in the form of solid kerogen, including in Australia.. The techniques for its extraction are similar to those for tar sands, However, an additional step of adding hydrogen to the molecular structure of the hydrocarbon is required to obtain the equivalent of a heavy crude. An Australian consortium is building stage1 of a shale oil project near Gladstone in Queensland at a cost of $250 million to produce 7,500 barrels of oil per day by 2000 (Australian Financial Review 1998a). Attempts to substitute shale oil for conventional oil would crush the rest of the economy. Technology will not solve the problem.

The remaining data in FIGURE 15 is from US sources to 1984 (Gever et al. 1991, p. 70). The EPR for nuclear power does not include the energy cost of decommissioning nuclear power plants and disposal of nuclear wastes, or of not doing so.

The EPR ratio does not account for the different time profiles for energy produced and energy consumed. Additional information to EPR is needed when assessing the economic quality of a fuel.

Most natural gas, solar, nuclear energy, hydro electric and non-conventional oil sources have high up-front costs, both in dollar and energy terms. Several years energy production is needed to "pay back" the initial energy cost which must be provided at the time of construction from current energy sources that are producing more energy than they consume.

There is an energy opportunity cost that is highest for low EPR energy sources, a factor that can limit both the rate at which new energy sources can replace declining ones and the level of energy intensity in the economy generally.

A significant and enduring energy cost will be incurred by nuclear power stations after they cease operation. The decommissioning of reactors, the guarding of the substantial quantities of weapons grade plutonium produced in nuclear reactors, the secure disposal of toxic and radioactive wastes will continue for centuries afterwards. High quality fuels will be needed for the task and these will not be available. The 80-90 US nuclear power stations will be due for decommissioning during the ten year period centred on year 2020. See FIGURE 11 for the likely levels of US oil and gas production in that year.

The sins of the fathers visited unto the thirtieth and fortieth generation!

Coal liquefaction has been carried out in Nazi Germany and South Africa where politics overrode economics. It has large pollution and environmental problems, an EPR of less than eight, and would require a massive expansion of coal mining to replace oil leading to a dramatic increase in greenhouse gas emissions.

Making liquid fuels from grains, seeds and vegetable matter consumes almost as much energy as is produced. Furthermore, such fuels require biomass in competition with food production. Conversion of Australia’s wheat crop to alcohol would only replace 15% of Australian oil consumption (Newman 1996). Biomass used in this way would reduce organic matter recycled to farm soils leading to their degradation, mining of the soil. Minor niche markets may develop for biomass fuels where these are by-products of other process streams.

All technologies are energy dependent and require minerals obtained by mining, often with substantial use of diesel or natural gas. Economic mineral grades are a function of the quantity and economic quality of the energy needed to mine and process the ores into useful resources, mediated by process efficiency improvements and new technology. Free available energy sets limits to the scope for technology and innovation to offset the eventual need to mine lower and lower grade ores. The sheer scale of operations eventually overwhelms the potential for technology to keep ahead of costs. The decline of cheap oil will have an adverse impact on the grades of ores that are economic to mine. When will technology lose the battle?

The last 50 years were unique, the era of abundant cheap oil from giant oil fields in their prime, the era when our present transport systems were constructed based on this cheap oil. In the past it has taken 40-50 years for a new energy source to displace the primacy of an older one, the technologies take time to develop and mature, infrastructure must be adapted or built to match the characteristics of the new energy source. The energy sources that can replace oil should be in their early development stages now.

There are not available nor in sight fuels that can replace oil as we have known it, both in quantity and economic performance, especially for transport. Remaining oil will become progressively less effective as supply sources become more marginal. That is the conclusion to be drawn from FIGURE 15. The consequences are profound.

We will now outline the potential of some alternative transport fuels. The discussion draws heavily upon a summary report, Fuelling Tomorrow's Transport by Sarah Cadwallader and Nelson Donovan (1996). These authors discussed alternative fuels mainly from an air pollution context. They did recognise the eventual need to find replacements for oil but anticipated these would not be required until after 2020.

7.3 Hydrogen

Hydrogen is an excellent high energy fuel whose combustion produces a minimum of polluting emissions. The engine technology is well advanced.

Fuel cells can transform hydrogen directly to electricity at 75% conversion efficiency and could become an efficient way to use hydrogen for land transport. They need development to reduce their size and initial cost and to avoid the use of platinum, a very rare metal. Fuels cells can run on natural gas and methanol as well as hydrogen.

However, hydrogen must be manufactured by electrolysis of water to give a fuel with an EPR of less than seven. Pressure vessels are needed for storage and fuel tanks which are bulky. Hydrogen should find a niche role as a transport fuel, but it will not be as economically effective as most contemporary oil.

7.4 Natural gas

Natural gas is the only alternative fuel that can readily service the existing land and sea transport systems, but not as effectively as oil.

Natural gas can be used in modified petrol and diesel engines, but the highest efficiency is obtained from engines specifically designed to use natural gas. Direct injection of CNG into engine cylinders with precision combustion control by computer is now a maturing technology for conversion of diesel engines to gas without loss of power or efficiency.

Emissions from gas powered engines are less polluting than from diesel. However, pressure vessels are needed for fuel tanks and these are heavier and two to three times larger than those for liquid fuels for the same trip range, a problem most acute for small vehicles. The absence of extensive fuel distribution networks is a barrier to widespread use of natural gas and other alternative fuels for vehicles.

Diesel shortages could develop in Australia by the middle of next decade, as discussed earlier. Diesel powered transport fleets should begin converting to gas now. Gas is critical in Australia as a bridging fuel for adapting transport and agriculture to an era "beyond petroleum".

7.5 Liquid petroleum gas (LPG)

LPG is already established as a fuel for vehicles, but the LPG resource is limited and is in strong demand as a feed stock for petrochemicals. It occurs naturally and is a by-product of oil refining and is recovered from natural gas. The supply from refineries will diminish over the next two decades as the supply of crude oil contracts.

7.6 Electric vehicles

Compact light weight batteries cannot match the range, performance and cost of oil based fuels for light road vehicles, and are unlikely to do so. The life of batteries, the time required to recharge them, their weight, trip range and performance are the stumbling block. Many high performance battery materials have low occurrence in the earth's crust and are often toxic, such as cadmium and lead (Cadwallader & Donovan 1996).

Extensive use of battery operated vehicles would require massive expansion of electric power systems. The final EPR of power from batteries recharged from grids would be less than six. Existing power systems could only accommodate up to 15 per cent replacement of the existing vehicle fleet by electric vehicles. Beyond that would require substantial expansion of power systems. Small battery powered electric vehicles will find local niche markets in urban areas (Cadwallader & Donovan 1996).

The real cost of electric powered vehicle travel will rise compared to present oil powered travel as world oil production goes into decline and the energy cost of remaining oil production rises leading to real cost increases just about everywhere.

7.7 Hybrid vehicles

Hybrid vehicles use a petrol or diesel engine connected to a generator to provide the advantages of electric drive to the wheels. A battery is incorporated to increase flexibility and permit its charging by regenerative braking. A smaller engine is required which operates in a narrower speed and power range, permitting significant improvements in fuel consumption. Engine speed is no longer tied to vehicle speed. Further fuel efficiency gains are possible by reducing vehicle weight. A 10% weight reduction can lead to a 6-7% improvement in fuel consumption. Constructing vehicles of aluminium or carbon fibre have been suggested. Claims that fuel consumption can be halved have been made, particularly if light weight materials are used in car bodies. Several manufacturers may market hybrid cars within 2-3 years (Cadwallader & Donovan 1996).

Toyota has just released a hybrid car, claiming half the fuel consumption of a Corolla. The price is $35,000 before tax of $10,000 and even that price is being subsidised by Toyota for three to five years (West Australian 1998a). The car uses a nickel-metal hydride battery. Will nickel scarcity be a problem?

Toyota says the lifetime cost of the car will be about the same as present models which suggests the higher initial cost is equivalent to the lower cost of fuel (Time 1997). Does this mean the energy cost of building the hybrid car is higher than present models? If so the energy saving may be less than fuel consumption suggests.

Hybrid vehicles could be a transition step to fuel cells replacing a conventional engine. Is there a case for hybrid drive trucks?

7.8 Railways

Rail freight is more energy efficient than trucks over medium to long hauls. Transporting freight by rail from Melbourne to Perth uses one-fifth of the energy than doing so by truck (Mason 1997). Diesel electric converted to gas (or in due course hydrogen?) and electric trains will most likely continue. Will rail make a comeback at the expense of trucks?

High speed passenger trains are being promoted. The energy cost of fast trains is higher than slower ones and wear on the tracks is increased significantly, issues that will assume much greater economic importance next century.

7.9 Marine

Most ships carrying freight are powered by marine diesel engines using bunker oil as fuel, a residual left over from refining crude oil. The quality and quantity of bunker oil is deteriorating as refineries try to extract more petrol and diesel from crude oil, causing problems with marine engine performance, wear and emissions. Some shipping is being forced to use the more expensive diesel (Cadwallader & Donovan 1996). These problems will intensify as the supply of crude oil diminishes next century. LNG tankers use gas that boils off the cargo. What can shipping use, natural gas for a period? Hydrogen? Or will there eventually be a return to sails?

7.10 Commercial aviation

Commercial aviation is most vulnerable to the coming decline of conventional oil, the transport mode least able to adapt. Liquid hydrogen is the best alternative on the horizon. It has a heat of combustion per kilogram three times that of jet fuel but occupies four times the volume. Cryogenic fuel tanks constructed to rigorous safety standards are required, most likely located in the fuselage ceiling. A new generation of aircraft and engines is required.

Deutsche Airbus and the Tupolev design bureau have successfully flown an airliner with one engine modified to burn natural gas or hydrogen. Boeing has examined modifying the 747 to run on hydrogen and concluded that such a plane would have a 24% lower take-off weight. It could operate at higher altitudes, would require less runway and produce less noise (Cadwallader & Donovan 1996).

Introduction of hydrogen powered airliners would take 20 years, given the 25 year life of commercial aircraft and the lead time for new designs. Investment of billions of dollars would be required in a high risk commercial venture. Furthermore, a substantial investment in hydrogen manufacture, storage and fuelling systems would be required at major airports. Substantial electric power capacity would be needed for the electrolysis of water to produce the hydrogen (Cadwallader & Donovan 1996).

Would the higher cost of hydrogen be offset by the lower take-off weight? What impact will the economic consequences of declining oil have on the number of people who can afford to fly? The prognosis for commercial aviation is not good, even with the weight advantage of hydrogen over jet fuel.

7.11 Bicycles and walking

Body fat is a good source of energy, it has been around for a long time and has excellent future prospects. The exercise is good for health.

Our car dependent cities face an heroic task reducing transport oil consumption to keep pace with declining oil. The deteriorating economic quality of remaining oil will compound the difficulties. But bicycles and walking can flourish in this environment once communities and governments recognise the necessity for the change.

Rapid growth of cycling and walking is possible and major research and innovation is not required. The obstacles facing cycling will shrink once the need to give cycling a higher priority is recognised. Public transport providers will need to modify their vehicles and practices to accept passengers with bicycles and provide bicycle lockers at transit stations. Town planning and urban form will need to favour these developments.

Electric powered bicycle type vehicles may flourish rather than electric cars. Bicycles will diversify to meet special uses and needs. The smaller towns and cities will find it easier to adapt, those that can be comfortably crossed in reasonable time on a bicycle.

7.12 Manage demand as well as supply

Sack unproductive energy, tonnes and litres rather than the work force.

We have discussed a supply focus - alternative fuels to replace oil. We must also manage demand, how to meet human needs and enhance the quality of life by more efficient use of energy and resources, by reducing our present scale of consumption. The latter approach has by far the greatest potential. Every use of material resources involves the use of energy, so resource use efficiency in the end amounts to energy conservation. The decline of oil will relentlessly impel us down this path.

The role of oil in the economy and community life is so all pervasive that the commitment to demand management must be across the board involving all sources of energy and resources in general. It has two facets, one is the improvement of the material and energy efficiency at a local level such as in buildings and individual businesses. These local gains can be achieved relatively quickly. The other facet is structural change, reorganising social and economic systems to eliminate waste, material and energy inefficiency at the systems level. The greatest gains will come from structural change, it is unavoidable and takes time to achieve.

There are seven good reasons for efficient use of resources, according to Ernst von Weizsacker, Amory B. Lovins and L. Hunter Lovins (1997) in their book Factor 4: Doubling Wealth - Halving resource use:

One-sixth to one-quarter of the US military budget is earmarked for forces whose main mission is getting or keeping access to foreign resources, mostly oil from the Persian Gulf. The cost effectively doubles the US$50 billion annual oil import bill.

When you travel in a car a mass of one tonne or more is moved. Most of the fuel goes to move the car, but there is a lot more. The Wuppertal Institute in Germany has estimated that 1520 tonnes are moved in the sequential processes of metal mining, refining, shipping, plastics, glass manufacturing and assembling a car (von Weizsacker et al. 1997, p.71). That is about 900 billion tonnes for all the cars in the world. More tonnes are moved to build the roads, maintain the vehicles and provide the fuel. Most of the moving is probably powered by petroleum products.


The authors of Factor 4 cite 50 case studies where dramatic increases in both resource and energy efficiency have been achieved, including ten with a transport focus. They claim their hybrid drive "hyper car" by exploiting every available opportunity for efficiency and weight reduction could achieve fuel consumptions of under 3 litres per 100 km (von Weizsacker et al. 1997, p.8).

Germans are fond of strawberry yoghurt and three billion cups are eaten annually. In 1993 a report by Stefanie Boge from the Wuppertal Institute made headlines when it revealed the embarrassing, even ludicrous, transport intensity of the product. The yoghurt, its ingredients and the materials used for the glass cup made journeys totalling 3,500 km! Another 4,500 km. could be added for the supplier's supply transports! FIGURE 16 shows Boge's findings on a map, including a case for the geography of low-transport-intensity yoghurt production (von Weizsacker et al. 1997, p.117).

Weizsaker et al. cite numerous examples of dramatic improvements in energy and resource efficiency achieved at the local and enterprise level. Some critics of earlier works by Amory Lovins and others say they assume the same efficiency gains can be achieved at the higher level of the economy, ignoring the additional resource and energy inputs required for capital and labour at this higher system level. The gains are less than the case studies appear to show, but still substantial and worth pursuing (Hall et al. 1986, p. 46 and Ch. 14). von Weizszcker et al. appear to be coming to this view in Factor 4.

A few years ago Big Ben Pies had a highly automated pie factory in Sydney from which pies were trucked to the rest of Australia! Pies should be made locally in labour intensive ways. Australian pig growers are being bankrupted by imports of subsidised pork from Denmark and Canada while citrus growers are facing similar problems from imported Brazilian oranges! Such unnecessary and wasteful transport has a limited future, it will not survive the decline of oil.

Tariffs are equivalent to an increase in the cost of transport. They have a role in eliminating such irrational international trade practices. Using tariffs to correct these anomalies will, of course, be a more complex problem than implied above. Nor does it imply everything must be done locally. The question is how much international trade will be possible and what should be traded, by whom and why.

However, many countries have so specialised according to the economists' "law of comparative advantage", or have so exceeded their regions' carrying capacity, that they can only be fed by food imports from around the world - a very dangerous development. Examples are Japan, Egypt, the city states of Singapore and Hongkong and most countries around the Persian Gulf - the oil producers. The enforced shift to local self-sufficiency will be a complex drawn out process as the economic distortions and dependencies generated by cheap transport this century are eliminated.

It will take time for populations to come down to levels that can be sustainably fed from their local environment.

The pursuit of energy efficiency is only justified if the energy saved is greater than the energy spent making the saving.. The energy profit ratio concept must be applied here as well. Likewise too much energy can be spent on resource efficiency and recycling of materials (Hall et al. 1986, Ch. 14) . This means limiting the transport component of these operations.

The efficiency trend, both by structural change and at the local and enterprise level, is bound to rapidly become a global one, the reasons are both moral and material. Countries starting at once will reap major benefits.

7.13 Water utilities and demand management

This writer, until retirement, worked for the Water Authority of Western Australia (WAWA), now the Water Corporation. He was responsible for the operation and maintenance of Perth's water sources from 1982 to 1993.

In the late 1970's WAWA faced a crisis. There was rapid population growth and water consumption at a time when cheap water sources close to Perth had been developed and the cost

of new sources was escalating in both dollar, energy and environmental terms. There was a high summer garden watering demand on large lots fostered by urban sprawl arising from car-based development.

Desalination of brackish river water was being considered as a supply option versus long distance transport of water from the south west of W.A. There was rapid expansion of bauxite mining on Perth's water catchments and a drought, all during the 1970's oil crises and the formative years of the North West Shelf gas project. Rainfall has been declining in the Perth region since 1970.

WAWA responded by a radical overhaul of its entire organisation, financial management, policies and strategies. The past meet-demand-with-new-supply strategy was modified to one focussed far more on promoting urban structural change, water use efficiency, the use of lower quality water sources for garden watering and efficient irrigation techniques. The Australian water utility industry has gone down a similar path.

The principle elements in the strategy were:

These initiatives held water consumption from the public supply below the levels of the late 1970's for nearly 15 years. But there is much more that could be done.

To succeed WAWA had to become a less secretive and less elitist, to be more open and willing to share information and to listen. There had to be a good reason to withhold information from the public..

Commercial advertising pleads with customers to buy less water.

The Water Corporation plans to the middle of next century. However these plans implicitly assume that present energy regimes available to us will continue undiminished. That is not the case as this paper demonstrates. The water industry, like transport, now faces an even greater challenge - accommodating to the decline of oil. The viability of everything the industry does and every technology that it uses will be radically transformed. Today's best practice will be tomorrow's obsolescence

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8.1 World
8.2 Australia
8.3 Saudi Arabia, Iran and Iraq

8.1 World

World population reached three billion people around 1960. By then all the world's best arable land was being cultivated and further food production would have to come from increased yields per hectare. The 2.8 billion population increase since then has been fed from higher crop yields through use of nitrogen and other fertilisers. These were the essential ingredients for the success of the Third World's Green Revolution which was based on high yielding hybrid cereal varieties (Smil 1993, pp. 163-79).

Urea is the principal nitrogen fertiliser. Ammonia synthesised from hydrogen and atmospheric nitrogen by the Haber Bosch process is the starting point. The process is energy intensive and requires a pressure of 200 atmospheres at 350 degrees centigrade in the presence of catalysts. Natural gas is the primary feed stock, both as the source of hydrogen and of energy.

World consumption of nitrogen fertilisers increased from 10 million tonnes as nitrogen in 1960 to 85 million tonnes in 1990. In Asia it increased from 1 to 48 million tonnes, principally in China, India, Java and in Egypt as well. There was a fourfold increase in the rest of the world. About one-third of the protein in humanity's diet now depends on synthetic nitrogen fertiliser (Smil 1997).

Manufacturing this amount of urea would have consumed energy equivalent to 115 billion cubic metres of natural gas, or 6 per cent of 1990 gas production, or 9% of consumption outside the former Soviet Union (Smil 1993, pp. 163-179, BP 1998). Some nitrogen fertilisers are manufactured in China via a coal route and not all electricity used would be derived from gas. FIGURE 17 shows the growth in world population and nitrogen fertiliser use this century.

These fertilisers are not used as efficiently as they might be. Leaching to water bodies and ground water is leading to pollution problems, soil acidification and other adverse side effects.

New even higher yielding hybrid varieties are needed to feed population growth by 2020, varieties that use less water and take up nitrogen more efficiently. Plant physiology is being pushed to the limit.

Fortunately world population growth rate has begun to decline in the 1990's. It peaked at 90 million in 1990 and by 1997 had declined to just over 80 million people. Fertility rates are below replacement levels in 50 countries, including China. Contraceptive use has soared in the 1990's and the "medium projection" population for 2000 has slipped by 170 million since 1992. Demographers now believe population is on track to peak about 2040 at 7.7 billion, then declining to today's level in 2100 and 3.6 billion by 2150 (New Scientist 1998). But there are no grounds for complacency.

Can natural gas continue to fuel urea production to 2150? On Campbell & Laherrere's projection gas production could be 40% of its present level in 2050, see FIGURE 9. Can the world's soils stand such intensive cultivation for that long, given all the adverse impacts?

We must remind ourselves that 38% of remaining natural gas is in the former Soviet Union and 28% in the Persian Gulf region. Conventional natural gas from other regions will most likely be close to exhaustion before 2050. Electrolysis of water is an alternative source of hydrogen and coal can provide other energy inputs required, but at a higher price. There is a phosphorus and potassium fertiliser component as well, every gardener would know about the importance of NPK for good results. All this fertilising requires a significant transport component.

An even faster fall in population growth is needed to bring population below 3.5 billion before 2100. Provided we do not allow already overtaxed soils to deteriorate even further, lowering the world's carrying capacity. Only a small further fall in population is needed, the effect compounds after two generations. How can we ensure that enough natural gas is available to manufacture urea for a century?

8.2 Australia

Industrial agriculture has been called a system for converting petroleum into food. Since 1930 petroleum has become a vital input for fertilisers, pesticides and herbicides, as well as mechanised farming and transport of products to and from farms. The food distribution and processing industries are also large consumers of these fuels (Fleay 1995, Ch. 9).

After 200 years of European farming practices rural communities are recognising they are unsuited to the Australian environment. Massive and continuing land and water degradation is occurring as well as soil fertility declines. The viability of these practices is being questioned everywhere.

Australia soils are unique. For millions of years they have missed out on the nutrient enrichment processes that occurred in the rest of the world - no ice sheets to expose fresh rock, nor mountain building and associated erosion, nor volcanic eruptions that are all needed to remineralise soils. Rather our soils have been leached of nutrients and vast quantities of salt have accumulated in sub-soils over southern Australia. In the natural state biological productivity is extremely low.

The problems are best illustrated by Western Australia's wheatbelt, once an open woodland from Geraldton to Esperance. Over 100 years of clearing this woodland for farms has radically altered the hydrological balance causing highly saline groundwaters to rise. !0% of cleared farmland has been lost to salt and a further 20% will be lost early next century if no action is taken. Half the originally fresh or slightly brackish rivers are saline and half the remainder are under threat.

The problem is well understood. The scientists and farmers are world leaders in understanding this dry land salinisation. The main solution is to selectively revegetate 30% of the land with deep rooted perennial plants to keep saline ground waters at bay. This is happening, but all too slowly, there is much to learn. The Landcare movement has taken deep roots amongst these farmers.

The granitic soils are very deficient in phosphorus, nitrogen and other trace nutrients. Cereal and canola crops fail without superphosphate, pasture is miserable. Pasture legumes introduced 50 years ago in the wetter parts have relieved the nitrogen deficiency, but only if fertilised with superphosphate. In the 1990's farmers began using urea to maintain crop yields and lift the protein content of wheat. Even then crop yields are low by world standards.

The fertilisers are acidifying the soil and soon lime will be needed at one tonne per hectare. Minimum tillage is employed to reduce erosion, but has required the use of herbicides to control weeds. The rainfall is low and unreliable, farmers wait until the rains break then plant the crops in 10 days in a highly mechanised operation.

Similar situations apply in the rest of Australia with the added aggravation of El Nino induced floods and droughts in eastern and northern parts. Australian farmers now consume 500,000 tonnes of nitrogen fertiliser per year, up from 25,000 tonnes in 1960.

The viability of these practices is being questioned everywhere. Dr John Williams, deputy chief of CSIRO Land and Water Division, says farmers should change from European systems to strategies tailored to the Australian environment. He says we have compromised the ecological resilience of the landscape which has rebounded in lost farm production. Farmers should experiment with mixed crops and include more crops and trees - native Australian trees in particular (West Australian 1998a).

Cheap petroleum fuels have made current Australian agriculture practices possible and are essential for its survival.

Tim Flannery in his book The Future Eaters (1994) says we are "eating our future", the landscape and its resources, He compares it to the arrival of the Aborigines 40-60,000 years ago when he says they too "ate their future" by decimating the marsupial megafauna to extinction and triggering massive environmental changes that compromised their own survival. But the Aborigines adapted and learnt to live sustainably in the unique Australian environment, one of the great cultural and technical triumphs of homo sapiens.

The Maoris arrival in New Zealand 800 years ago led to a similar decimation and extinction of the fauna there, this time birds best symbolised by the giant moa. They "ate their future" too with similar devastating consequences. The Maoris had only reached part way to sustainability when Europeans arrived 200 years ago setting off another wave of future eating (Flannery 1994).

The primary phase of wheatbelt revegetation must be completed rapidly to beat the salinity problem. A much longer period of refinement will inevitably follow. At the same time farmers must transform their farming practices for survival "beyond petroleum", both should be seen as a single process. Reliable oil supply will disappear before 2030, high quality gas cannot be depended upon after 2030. The primary revegetation task requires high quality petroleum fuel to do the work. Rising saline groundwater and declining oil set the agenda.

Most rural roads were sealed in the 1950's and 60's and are approaching the time when major reconstruction is needed. Roads typically last about 40 years. How will the radical transformation of agriculture affect rural transport needs over this period? What will be possible?

Agriculture must receive first call on petroleum fuels to 2050 to carry out this vital transforming task. Everything else depends on the successful transformation of agriculture.

8.3 Saudi Arabia, Iran and Iraq

Iran's population is 60 million, half are under the age of 21 and 7 million live in Teheran. The birthrate is high but slowly falling. 90% of foreign earnings come from oil and gas. The principal farm land is on the Caspian Sea coast and Iran must import food to feed its people.

Iraq's population was 18 million in 1991, a 50% increase since 1977. Irrigated agriculture is practiced along the Euphrates river. Before the Gulf War Iraq imported two-thirds of its food. However, since then Iraqi agriculture has fallen apart, irrigation and drainage systems have failed and salt now shows everywhere. Spare parts for machinery are not available. FAO officials say it will take several years to rehabilitate the soil (Economist 1998).

Saudi Arabia's population is 17 million having doubled since 1974 and the growth rate is high. There is a high level of food imports and many foreign workers.

These high populations and dependence on food imports paid for in oil revenue are a potential source of trouble once these countries pass their peak oil production after 2010. Iran is likely to be the first.

Production costs will start to rise as oil depletion sets in squeezing government revenue and budgets, reducing the capacity to import food and creating strong pressures for oil price rises. Eventually oil production will fall to levels unable to provide the revenue for food imports. What will happen then? Where will the people go? One thing is certain, the present population numbers must come down as oil production declines. What will that mean for security of oil supply to the rest of the world?

Even now the heavy investment needed in the next few years will be an extra impost on these countries' oil revenues regardless of who finances it. An oil price rise is essential to maintain political stability. How volatile will the market for oil be?

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9.1 Four stages for oil
9.2 The climax of fossil fuels
9.3 Asian growth was driven by petroleum
9.4 Whither the global economy
9.5 Australia
9.6 Road versus rail
9.7 Tourism
9.8 Aviation

9.1 Four stages for oil

We can identify four stages in the cycle of world oil production. The first phase of this stage will end when production in the Persian Gulf region peaks about 2008 -12. During this phase we will finally come to terms with the reality of resource constraints to development and the world will be radically transformed. By 2050 the hydrocarbon age will be essentially over.

9.2 The climax of fossil fuels

We are at the climax of the fossil fuel age, not just of oil but also of natural gas and coal, despite the very large economic reserves of the latter.

It is not just the quantity of these fuels that matters, their economic quality is equally important, as outlined in this paper. Oil from the giant fields in their middle years, together with oil's ease of storage, transport and use, occupies a special place in economic history. It is far superior to any earlier or contemporary fuels and is unlikely to be matched in the future. Non-conventional oil cannot substitute.

Oil's unique role in fuelling the world's transport systems also makes it special, there is nothing in sight to match it in this role. Conventional gas is the next best, but it can only fill a bridging role for a limited period. It too will peak around 2025. Coal initiated the modern era by fuelling rail and sea transport, but it was quickly and easily superseded by oil as a far superior fuel.

By contrast massive infrastructure investment would be needed for decades to change to coal which is poorly suited to road and air transport. The real cost of transport is going to increase. A decline in the scope and scale of present transport systems is inevitable and will set the economic agenda for the 21st century.

While consuming this jewel in the fossil fuel crown, we have been rapidly depleting the world's high grade minerals, mostly using petroleum fuels to mine and process them. So the 21st century will also see a deterioration in both the economic quality of fuels used in mining and of ore grades, a double whammy (Youngquist 1997).

9.3 Asian growth was driven by petroleum

Asia has been the world's economic growth centre led by the so-called "tiger economies" of South Korea, Taiwan, Thailand, Indonesia and Malaysia. China occupies a special position because of its size and dependence on coal. The foundations of growth were laid in the 1960’s, matured in the 1970’s and accelerated from the mid-1980’s after oil prices collapsed. Few people are aware that oil and natural gas have powered this growth.

TABLE 4 shows fossil fuel consumption in 1986 and 1997 for the main Asian economic players, in million tonnes of oil equivalent.

Oil has fuelled economic growth of the Asian countries outside China and Japan.

The Asian regions share of world oil consumption, excluding Japan and China, has doubled to 10% in ten years and for gas has risen from 1.5% to nearly 5%. Three quarters of the oil growth has been supplied from the Persian Gulf, soaking up much of their surplus capacity over the decade. Most of the natural gas has come from Malaysia, Indonesia and Australia.

Increased gas consumption after 2000 is expected to exceed production in China and Thailand and to reduce Indonesian exports. Taiwan, South Korea and Japan were expected to increase gas imports with the Persian Gulf and East Siberia as new sources (Petroleum Economist 1996a). Australian gas producers hope to be part of the action. However, the financial crisis that engulfed these countries since mid-1997 is slowing growth rates dramatically. The immediate future is unclear.



million tonnes oil equivalent

Sth. Korea 
Less Japan
Less Japan and China

Sources: BP Statistical Review of World Energy 1997&1998.

What will be the impact of the peaking of world oil on these countries' growth? Its cessation? What will be the impact on Australia, given that most of our exports of coal, iron ore and natural gas supply these markets? What are the implications for BHP's gas fired briquetted iron and steel plant at Port Hedland and the An Feng Kingstream steelworks at Geraldton in W.A?

One thing is certain, there cannot be a business-as-usual outcome to these Asian countries financial crises. They have been proceeding down an economic cul-de-sac.

9.4 Whither the global economy

We are all urged to participate in the global economy. Exporting is said to be the highest economic achievement, the path to survival. Yet a global economy cannot exist without abundant cheap transport. And cheap conventional oil fuels the world’s transport systems!

The global economy is already at its climax, it must soon stall and begin to contract. A shift to greater local self-sufficiency will inevitably follow. By the middle of next century little will remain of the global economy we know today.

By 2010 nearly 50% of the world's oil will come from the Persian Gulf and about 80% of that will be exported, most likely at a higher price than now. Most countries' capacity to import will be limited. This is best understood by considering the energy profit ratio for imported oil.

The EPR. for imports can be calculated by dividing the energy content of a dollars worth of imported oil by the energy embodied in a dollars worth of exports needed to gain revenue to buy the oil. FIGURE 18 shows the EPR for US oil imports from 1963 to 1982. The high oil prices of the late 1970's dramatically reduced the EPR of imports - more of the indigenous US energy had to be used to buy oil. The EPR for US imports would have risen since 1986 when high oil prices collapsed. Only those countries with significant fossil fuels will be able to import much oil.

The extreme dependence of the world on Persian Gulf oil next century will be a source of great political and economic instability.

Labour productivity has increased dramatically since coal fired steam power was harnessed to labour in the 19th century. The greatest gains have occurred since the 1930’s when oil and gas began to replace coal and electric power became common place. This pattern must surely reverse as high quality energy becomes more expensive.

Labour intensive economic development will become the trend, not the substitution of capital and energy intensity for labour. The world is not short of labour, rather it is high quality energy that is scarce.

The use-once-and-throw-away society is doomed. Neither the high quality energy nor material resources exist to support its continuation, with energy the prime constraint. Indeed a reduction in primary resource consumption will be forced upon us by declining oil, despite an increasing population.

The primary focus of economic development will shift to meeting peoples needs by:

There will still be a place for long distance trade and transport, including on a global scale. However, only time will tell the scale and extent, determined largely by the availability of high quality energy to support it.

The transport and petroleum industries, as service industries, have a vital role to play in this transition to a world "beyond petroleum". But it cannot be totally on the terms that those industries might desire. There must be a balance between their over development and the risk of premature contraction, given the magnitude of the tasks involved in the transition to a new era and of feeding the world next century.

The most daunting task will be feeding the world while the human population first increases then falls to half the present number over the next hundred years.

Maintaining social and economic cohesion is essential to avoid the risk of extreme environmental degradation arising from social disorder which would further undermine the carrying capacity of the earth. Petroleum fuels are needed to power present agricultual and transport systems, while population stabilises. A long transition to agricultural sustainability is unavoidable.

9.5 Australia

Australia is a trading nation remote from most markets. It has a small population, long internal transport networks and is the third largest per capita consumer of oil after Canada and the USA. We will have to reduce our oil consumption faster than the rest of the world.

Transport consumes 26% of primary energy in Australia and 36% of end use energy. Nearly 80% is used by road transport and 11% by aviation (ABARE 1997. p. 44). Two-thirds of road transport fuel is used by passenger vehicles, the remainder by freight vehicles, buses and motor cycles. 70 per cent of vehicle kilometres is travelled in urban areas (Austroads 1994, pp. 27-8).

Agriculture must have first call on our remaining petroleum fuels for reasons discussed above. Transforming agriculture is a great challenge but also an opportunity. Cheap transport has robbed rural Australia of its population, industries, businesses and communities. Can the decline of oil see a rural revival?

Essential commercial traffic must have next priority. Car travel in Australian urban areas must therefore bear the brunt of declining oil.

Yet roads in Australia are planned and built without any regard to fuel availability for the vehicles that will use them. It is like building thermal power stations and forgetting to organise the coal supply.

The Institute of Science and Technology Policy, Murdoch University, published in 1997 a report for the World Bank on transport efficiency in 37 global cities (Kenworthy et al. 1997). The report found that cities where car use dominated were relatively poorer than those with a strong public transport orientation. When comparing car dependent cities with those that focus more on public transport, cycling and walking the report found that:

• There were no gains in economic efficiency in car based cities.

• Car based cities had significant losses from road accidents and deaths, from air pollution and had high per capita energy use - mostly as petroleum products.

• European and wealthy Asian cities appear to have both the most economically efficient and sustainable transport systems in contrast to car based US and Australian cities.

• Rail transit in conjunction with appropriate urban structure was economically more efficient than other passenger transport modes.

• Reurbanisation of inner cities was occurring in car dependent cities outside the US.

• The important role of non-motorised forms of transport was revealed.

• Excessive car use drains the economy of a city.

Massive urban road projects have been constructed in Australia since 1987. Investors have financed $4 billion worth of build-own-operate-transfer (BOOT) toll roads in Sydney and Melbourne. Financing packages, toll income and dividend payments are based on traffic forecasts extending beyond 2020 and fuel for vehicles is implicitly assumed to be available over this period, the issue was virtually ignored in the project planning and financing stages.

Similar urban road projects have been undertaken by public road authorities throughout Australia. Together these represent the most disastrous infrastructure investments ever made in this country. Had the funds been invested in public transport, cycling and walking Australia would be in a much stronger position to cope with the coming decline of oil. Our businesses would be more competitive.

Toyota's hybrid car will not greatly slow the relentless decline of oil, it is not a medium term solution. These road projects are not commercially viable.

30% of urban car trips are short local ones that can be avoided by switching to bicycles and walking (Engwitch 1996). The Metropolitan Transport Strategy for Perth to 2029 aims to divert 24.5% of expected car driver trips under current trends to car passenger, public transport, cycling walking and other alternatives. A comprehensive personalised marketing strategy called Travelsmart is the first initiative (Transport Dept. 1998). FIGURE 19 shows the targets.

Such initiatives, expanded under the compulsion of declining oil, can quickly restructure local activity to reduce oil consumption and provide the basis for relocating most workplaces within walking and cycling distance of residences. People will not feel helpless and will be inspired to more radical restructuring initiatives.

9.6 Road versus rail

The sins of the fathers are visited unto the third and fourth generation

A worldwide movement for Just In Time (JIT) logisitics is driving a rethink of production processes, warehousing and transport that involves liquidation of stockpiles and streamlined transportation. It shifts stock holding costs to primary producers and substitutes public sector transport infrastructure, nuisance and pollution costs for private sector warehousing costs. JIT amplifies the shift from rail to road due to the greater flexibility of road compared with rail.

In the UK, where JIT involves more deliveries being made in smaller vehicles not filled to capacity, transport costs were found to be over twice those of conventional logistics. In W.A. Road freight diesel fuel use rose by 17% from 35.7 litres/1000km in 1984 to 41.7 litres/1000km in 1994 while freight movement increased from 8,000 to 14,000 million tonne-kilometres. The considerable improvement in fuel efficiency of trucks over the same time has masked the real increase in diesel fuel use per tonne-km due to JIT . In 1994 Westrail fuel use was 114.3 tonne-km/litre, nearly five times more fuel efficient than heavy road transport (Select Committee 1996, p. 33 & 56).

A heavy truck using 3-5 times the fuel per kilometre compared with a car pays for its road slot in fuel taxes, where these are the main road funding mechanism. On lightly trafficked regional roads road pavement wear rather than slot cost should arguably be a major determinant of vehicle charges.

Because of the 'fourth power rule' of pavement wear, a legally loaded six-axle truck causes the same amount of wear per kilometre travelled as 9,000 cars. If it uses five times the fuel, is empty half the time and the pavement constitutes 50% of the total cost of a road while the other costs are equally attributable to cars and trucks, it is indicatively "charged" less than one twentieth of the cost of wear caused by a car (Select Committee 1996, p. 37). Car drivers subsidise trucks.

The following responses should emerge in the economic environment of declining oil:

• Stock holding costs will come to have diminished importance.

• Fuel efficiency will displace JIT as a priority, leading to:

• A shift from road to rail freight transport.

• A strong push to make road freight pay the full cost of road use.

• Increased action to reduce the axle load limit for trucks, especially on regional roads.

When the depreciation provision for roads is calculated by road authorities negative interest rates should be used to reflect the declining availability and economic quality of oil (Hall et al. p.146).

9.7 Aviation

Debate has raged for years over the need for and site of a second Sydney airport, The present one at Botany Bay has reached its traffic limits and there are acute noise problems in suburbs under flight paths.

The federal Dept. of Transport and Regional Development has made air traffic projections to 2024-25. Airline passenger movements were forecast to increase from just over 20 million in 1995-96 to 63.2 million in 2024-25 (Dept. of Transport & Regional Development 1996). The report ignores entirely the availability of jet fuel in its assessments and therefore cannot be taken seriously.

Sydney does not need a new airport. The present one will have ample capacity to handle future traffic.

9.8 Tourism

Tourism and the associated hospitality industry are heavily dependent on cheap transport. These industries are probably at the peak of their development now, especially where long distance travel is involved.

[Return to Table of Contents]


10.1 Foundations
10.2 New values, new beginnings

10.1 Foundations

We discussed earlier some of the connections between thermodynamics and economics, noting some defects in neo-classical economics (NCE), otherwise known as economic rationalism. It is useful to take a broader look at the historical roots of NCE.

The values embodied in NCE have dominated economic policy and practice over the last 25 years. The supreme Australian expression is Competition Policy as embodied in the Trade Practices Act, the Australian Consumer and Competition Commission and the Competition Council. The strongest international expression is in bodies such as the World Trade Organisation, the World Bank, the International Monetary Fund and the proposed Multilateral Agreement on Investment.

These mechanistic 18th century values are under challenge world wide, doubly so in the aftermath of the Asian economic crisis which threatens to engulf the world. Radical reform of these international bodies is on the agenda.

The 19th century founders of NCE, such as Leon Walras, consciously set out to build an economic model mimicking Isaac Newton's laws of motion. As W.S. Jevons put it, to develop "a mechanics of utility". Their aim was a theory that predicted how people behaved in markets by "pursuing their own self-interest" thereby leading to an optimal outcome. The founders and their core followers since have a disdain for empirical observation in favour of preserving theory (Toohey 1994). Economists rarely talk of imperfect market theories, only of imperfect markets.

NCE's central concept is a deterministic mechanical world where individuals analogous to Newton's particles interact free of distorting influences to produce a harmonious outcome that always tends to equilibrium when markets between buyers and sellers "clear" and everyone's "marginal utility" is the same. The condition of equilibrium excludes positive feedback processes, necessary to maintain the deterministic and mathematical nature of the theory, like in Newton's mechanics. But is the equilibrium assumption valid?

These propositions lead to the following exacting conditions:

• Perfect competition exists in which every buyer and seller is so inconsequential they have no influence on prices, in the jargon, everyone is a "price taker".

• Perfect knowledge can be obtained at no cost by all market participants about all possible prices for everything now and in the future. This condition effectively destroys time, both the past and the future are compressed into a single present, a characteristic of all deterministic models. Events have no history shaping their present and future..

• Perfect factor mobility allows total flexibility about how, where, when, and in what quantities labour and capital can combine, no matter how small. It implies no inertia in systems or institutions., no costs associated with mobility.

• Markets exist for the satisfaction of every possible want, no matter how obscure or far off in the future.

• There are no economies of scale - unit costs do not fall or rise as production runs change.

• 'Externalities' do not exist, there are no costs or benefits to those not directly involved in a transaction, such as the damage caused by pollution or the gains available to 'free riders' such as a beekeeper in relation to a nearby orchard.

• The impact of different distributions of income, wealth, and consumer preferences is excluded.

• Changes to tastes and technology are imposed from outside in some unexplained manner.

Creativity and innovation, as positive feedback, are excluded as these contradict the assumption that economic systems always proceed to equilibrium.

This mechanical view of human nature has no place for communities, only independent individuals. It is as if communities do not exist and therefore have no value. Disintegration of community life follows as these mechanistic views prevail.

These conditions have little relevance to petroleum and transport industry markets with their large, long-life fixed capital assets that often dictate a quasi-monopoly business structure.

Energy is not mentioned here. The science of energy, especially an appreciation of the second law of thermodynamics, was a nineteenth century development and the important understandings of relevance to economics have only matured during the last 20 years. Newton's mechanics did not encompass energy, only force, mass and acceleration - there was not the clear distinction between force and energy that we make today (Prigogine & Stengers 1984, Prigogine 1996).

From the outset NCE has taken a very restricted approach to land, i.e. resources and nature's global life support systems, the ultimate source of all wealth. Successive steps of abstraction have almost eliminated concern for physical reality and the diverse variety of nature, reducing land to "space" to appear in economists equations as real estate, just another commodity peripheral to the factors of labour and capital. Nature's contribution is free, resources are not a constraint to economic development. As prices rise new alternatives can arise without limit, only possible on a flat earth that has no boundaries (Daly & Cobb 1989, pp. 97-117).

Policies derived from a discipline that knows little of the physical world are destructive of that world.

The American economic school beginning with Alexander Hamilton concluded that land is a form of capital rather than a distinct factor in production. If land is just one form of capital alongside others, then a theory of capital suffices, no separate treatment of land is required. This theory reflects the widespread modern view that capital can substitute for land, and consequently the goal of increasing capital can proceed without attention to what is physically happening to the land, i.e. how limits are set by a finite world, resource depletion and environmental degradation.

Marginal product as an economic yardstick only makes sense for resources. If the flow of resource inputs is held constant (or reduces), then more output cannot be made, not even by working harder, more efficiently, or for longer hours as US oil drillers found in the early 1980's. In the end sophisticated technology makes no difference (Daly & Cobb 1989, pp. 97-117).

These idealistic concepts have their origin in Newton's theological ideas that underpin his laws of motion and thereby were unconsciously adopted by the pioneers and followers of NCE. He envisaged an independent observer located in perfect absolute space of infinite and homogeneous dimensions (a flat earth?) where bodies could be exactly measured in pure mathematical time. All events past, present and future could be observed in their totality, Nothing was uncertain. In his Principia Newton considered the observer and these absolute space and time entities were the everlasting omnipresence of Almighty God. An activist God whose attributes combined the mathematical order and harmony of the rational, all seeing, all knowing Judeo-Christian God with the traditional ones of His absolute dominion and wilful control of events.

Absolute space for Newton was not only the omnipresence of God; it was also the infinite scene of divine knowledge and control. Hence all real motion in the last analysis comes from an expenditure of eternal divine energy (Burtt 1932, pp. 254-260). 18th century scientists tried to invent perpetual motion machines, a possibility implied by these theological concepts. Their failure led in the 19th century to the science of energy and the second law of thermodynamics, the most economic of all physical laws.

Newton's followers enthusiastically accepted his laws of motion, but discarded his theology - or thought they had. But the ghost of God remained as the independent absolutely rational objective observer outside the phenomenon under investigation, the scientist, the economist, the manager.

The physical sciences have almost discarded these mechanistic concepts, even for Newton's laws of motion. Now concepts where energy fluxes play the central role prevail. The appropriate model for economics is a metabolic one, open systems far from equilibrium exchanging energy and matter with the supporting environment and driven by energy fluxes from nature and limited by resource and energy constraints (Prigogine & Stengers 1984, Prigogine 1996). We are in the world of the living! An important concept concerns systems that self-organise (Jantsch 1980). So called "chaos theory" derives from these new energy concepts.

However, many of NCE's descriptions of market behaviour are still relevant. Economists need to discard their present sterile mechanistic framework, come down from heaven, transform their notions on market behaviour to be consistent with physical laws, resource and environmental constraints. The decline of oil will shatter the present philosophical framework of NCE.

The International Energy Agency has taken the first step by abandoning the view that rising oil prices will lead to more conventional oil discoveries and accepting that physical constraints will limit future supply in the near future. Markets are constrained by resource and environmental boundaries (IEA 1998).

10.2 New values, new beginnings

The declining phase of oil demands a different set of values to those of the rising phase, The economic tasks are different, new opportunities open up. The scale of economic activity becomes a key issue.

Howard T. Odum's 1971 book, Environment, Power and Society and his subsequent books integrate concepts from ecology and economics interpreted through the first and second laws of thermodynamics. His ideas reflect the new physics and are as fresh today as they were in 1971. It has a chapter titled the Energetic Basis for Religion where he maintains that religious values evolved to regulate power flows between humans and nature and between humans.

He says traditional religions evolved to regulate the power sources existing before the development of fossil fuels and nuclear power, but have not yet evolved the values to regulate the latter. He lists some properties that have developed loop reinforcement in the past and has expressed them for modern times as the Ten Commandments of the Energy Ethic for Survival of Man in Nature, TABLE 5 (Odum 1971, p. 244).




    1. Thou shall not waste potential energy.
    2. Thou shall know what is right by its part in survival of thy system.
    3. Thou shall do unto others as benefits the energy flows of thy system.
    4. Thou shall revel in thy systems work rejoicing in happiness that only finds thee in this good service.
    5. Thou shall treasure the other life of thy natural system as thine own, for only together shall thee all survive.
    6. Thou shall judge value by the energies spent, the energies stored, and the energy flow which is possible, turning not to the incomplete measure of money.
    7. Thou shall not unnecessarily cultivate high power, for error, destruction, noise, and excess vigilance are its evil wastes.
    8. Thou shall not take from man or nature without returning service of equal value, for only then are thee one.
    9. Thou shall treasure thy heritage of information, and in the uniqueness of thy good works and complex roles will thy system reap that which is new and immortal in thee.
    10. Thou must find in thy religion, stability over growth, organisation over competition, diversity over uniformity, system over self, and survival process over individual peace.
The flood of cheap oil this century has created an illusion that humans have the power to control and dominate nature for human ends. It has also given some privileged groups the illusion of high power and the capacity to control and dominate on a global scale, provided they have assured access to oil. The values associated with competition, of competitive exclusion have prevailed because the power sources to sustain such agendas have existed.

This era is rapidly passing and the world is fast learning that the presumed benefits arising from these beliefs are illusory. We are being forced down the path of greater cooperation as the cost of conflict and domination becomes too high everywhere, as the power sources to support such behaviour decline.

However, Competition Policy has given the old one-sided values legal force through amendments to the Trade Practices Act in 1995. The competition values of the market place are placed as supreme over all other values. Every piece of legislation, every transaction is being judged for its effect on competition, to be amended or challenged if it is "anti-competitive". Community action for the common good, where people cooperate and work together for mutual benefit, is being penalised by this approach, is socialy destructive and generating a political backlash in the form of One Nation. Such one-sided focus on competition is an obstacle to structural change of economic systems for energy and resource efficiency, where competitive cooperation between buyers and sellers is the central economic strategy required and community values have a place.

We need an Australian Consumer, COOPERATION and Competition Commission to restore the balance. In economic activity, especially when resource constraints are given their proper weight, cooperation and competition are interdependent, not mutually exclusive as there is a symbiosis between them, but also a needed tension that can be constructive. The growing practice of partnering in many areas of business is an example. Community and the common good can find a place in this framework.

However, there is an additional important requirement. There must be a free flow of information between stakeholders, minimal commercial confidentiality which must be regarded as a privilege, not a right. After all, neo-classical economics says all buyers and sellers must have complete knowledge of all factors affecting the market for a rational outcome. It is a necessary condition for buyers and sellers to jointly restructure the economic system for it to function within energy and resource limits. This condition is especially important where there are natural monopolies or quasi monopolies which are characteristic of the energy and transport industries.

The Asian financial crisis that began in Thailand in 1997 is becoming global and is producing acute poverty and social stress in countries like Indonesia which threatens to amplify the crisis. This was the conclusion reached at the October 7 meeting of the governing body of the IMF. The President of the World Bank, James Wolfensohn, commented that the real problem is a social and cultural one. He said unless we deal with these problems we won't solve the money problem, that there has been a one-sided emphasis on stability of financial systems. He said all the problems were multi-faceted and inter-related and those who can help the nations in crisis must do so. A sense of common goals had emerged from the IMF meeting (Wolfensohn 1998).

Challenging times are here. Hard nosed decisions are required and there will not be much room for error. But we must be caring for people and the environment in our approach. The more caring we are the more hard nosed the decisions can be, the easier and faster we can proceed down the path of constructive change. If everybody pursues their own self-interest we can become locked in conflict, unable to adapt and will dissipate destructively and unproductively the scarce high quality petroleum fuels that are so essential for the transformation to a world "beyond oil".

As Howard T. Odum says at the end of his chapter, Energy Basis for Religion: "System survival makes right and the energy commandments guide the system to survival. The classical struggle between order and disorder, between angels and devils is still with us".

[Return to Table of Contents]






Number of wells
Barrels daily
Average per well
Abu Dhabi 
Former USSR 
Papua New Guinea 
Saudi Arabia 
United Kingdom 

Source: Youngquist 1997, p. 174.


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Smil, V. 1993, China’s Environmental Crisis, M.E. Sharpe, New York.

Smil, V. 1997. Global Population and the Nitrogen Cycle, Scientific American, July.

Spectator, The 1998. The oil shock to come. 29 August London. Republished in the Melbourne Age 7 September 1998.

Sydney Morning Herald (SMH) 1997. Asia to Become No. 1 Gas Guzzler, p. 28, 28 February.

Toohey, Brian 1994. Tumbling Dice, William Heinemann, Melbourne.

Time 1997. Toyota advertisements in special environment issue of Time magazine, November.

Transport Dept. of Western Australia 1998. Travelsmart Proposal for Perth Stage 1, Perth.

von Weizsacker, E., Amory B. Lovins & L. Hunter Lovins 1997. Factor 4: Doubling wealth - halving resource use, Allen & Unwin, Sydney.

West Australian 1998. Woodside surges on Shell alliance. 15 August, p. 56.

West Australian 1998a. Mobil Oil, Shell plan refining joint venture. 29 August, p.55.

Wolfensohn, James 1998. The News Hour, Special Broadcasting Service. Interview with President of the World Bank, 8 October.

Youngquist, Walter 1997. Geodestinies. National Book Coy., Portland Oregon.

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