Peak Moment for Peak Oil in Queensland

Margo: Stuart McCarthy, who returns to Webdiary after a long absence with this piece, is the Brisbane coordinator for the Australian Association for the Study of Peak Oil. He has 20 years of experience in engineering, logistics, disaster relief, security, risk analysis and planning in Australia, Africa, the Middle East, Southeast Asia and the Pacific Islands. And see At last, a government has a go at peak oil!!

Until recently the peak oil debate in Australia has been largely confined to internet forums such as Webdiary. Those who have dared elsewhere make the obvious point that production of the finite resource upon which our entire economy is based will soon peak and decline, have usually been labeled as doomsayers, conspiracy theorists, socialists or rabid greenies. That situation has changed dramatically in recent weeks with the release of the Queensland Government’s long-awaited Oil Vulnerability Taskforce Report. World oil production is peaking – it’s official, at least here in Queensland.

Fortunately Queensland has been blessed with a political rarity, a politician still capable of talking openly and honestly about the tough issues despite the modern obsession with spin, namely Andrew McNamara. McNamara has spoken publicly about peak oil in general and the threats to Queensland in particular for years, including his February 2005 speech in Parliament, and last year’s interviews on Four Corners and Sixty Minutes. Recently retired Premier Peter Beattie appointed him to chair a taskforce to examine the issue in May 2005. His Parliamentary colleague Rachel Nolan, who has also spoken publicly about peak oil but with less profile, assisted McNamara on the taskforce. Since 2005 those of us who have closely followed the peak oil debate have watched for news of the report’s completion with great anticipation.

Two and a half long years later, that news arrived several weeks ago with the headline “Crude Shock” splashed across the front page of the Courier-Mail, after a copy of the McNamara report was apparently leaked to Assistant Editor Paul Syvret. This occurred during a period of intense speculation about Beattie’s retirement, with some of that speculation coming from Beattie himself. Rumours abound that Beattie, the master of spin who presided over a series of unprecedented public infrastructure crises here in Queensland, didn’t want anything to do with a ‘bad news’ story like peak oil. Possibly this was a factor in his handover to Anna Bligh, who drew much of the heat for Beattie’s short-sightedness during her tenure as Deputy Premier. You can draw your own conclusion from the facts that McNamara’s report took over two years to complete, that it then sat in File 13 for six months despite public assurances by Beattie that it would be immediately released, that McNamara is now a Minister in the Bligh Government, that Nolan is now a Parliamentary Secretary, and that the report was tabled in Bligh’s first Cabinet meeting four days after she became Premier.

Personally, I will remember Beattie as the man who needlessly delayed the commencement of Queensland’s urgent peak oil mitigation effort for at least 12 crucial months while he dithered over his decision to take the soft option and get out of the way of true leaders who can guide us through the tough times ahead. A good decision, way too long in the making. Shortly after McNamara’s taskforce was convened in mid-2005, Qantas Chief Financial Officer Peter Gregg commented in The Bulletin that the airline industry is “not sustainable” if oil prices reach US$100 per barrel, and the head of the International Air Transport Association referred to high fuel prices as “a fifth horseman of the apocalypse.” 136,000 jobs (7.3 percent of the workforce) in Queensland’s tourism industry alone, the second largest export industry behind coal, rely on the viability of these airlines, while passenger rail has died the death of a thousand cuts in recent decades and ‘transport’ still means ‘roads’ in the Transport Department. As I write this light sweet crude is trading at US$83.69 per barrel at the New York Mercantile Exchange and many reputable investors are openly discussing the prospect of US$100 oil by Christmas, but there is still no plan for saving Queensland’s tourism industry, or any other industry for that matter. Only time will tell how much Beattie’s procrastination will have cost.

Nonetheless, the report has now been released. After a three week pregnant pause since the Courier-Mail article, Opposition MP Rosemary Menkens questioned McNamara in Parliament about the report last Wednesday. It was tabled on Thursday and published on the web shortly thereafter. Unsurprisingly, not one word of this made it into the mainstream media amid the contrived sensation of the stem cell cloning debate in Parliament the same day.

For those of us familiar with peak oil the report itself is unremarkable. Peak oil is real, it is soon, and the implications for key Queensland industries are huge – wow (with a lower-case ‘w’ and no exclamation mark). But there are a few gems that may see the state really come to grips with a profound sustainability agenda that addresses both peak oil and climate change. Chapter 3 examines the Impact on Various Queensland Sectors, including transport, mining, resources and primary industries. Transport received the most comprehensive treatment, however the oil price scenarios are extremely conservative and McNamara conceded that the worst case scenario is being realised even before the report was released.

For my money the most important sections are those examining the impacts on the mining and fossil fuel resource sectors. The mining industry section concludes in part:

The mining industry is highly dependent on liquid fuels, which makes it highly vulnerable to fuel price increases and shortages. The industry has been fortunate that recent high (oil) prices have occurred in conjunction with higher commodity prices. A decline in commodity prices and continuance of high oil prices would place marginal producers at risk.

The fossil fuel resources section notes Queensland’s limited oil and gas reserves, its reliance on imports, and the serious technical, thermodynamic and environmental limitations of coal gasification and liquefaction, geo-sequestration and shale oil. One of its key recommendations is to:

… carry out a major review of Queensland coal and its future utilisation …(and develop) a strategic plan for development of the state’s coal resources …

Together, these dispel the notion that Queensland could literally dig, burn and/or bury its way out of peak oil and climate change triggered socio-economic crises.

Unfortunately, the primary industries section bears the hallmarks of the prevailing stove-piped, isolationist, cornucopian approach to the problem, arguing that:

… if it becomes apparent that peak oil will eventuate in the next few years or so, Queensland is currently well placed to combat this situation, purely based on the potential of the ethanol industry … Queensland could potentially substitute almost 75% of all petrol consumed using ethanol.

Further, this section uncritically repeats the ‘clean coal’ mantra, ironically quoting a glowing endorsement for coal liquefaction by Dr Brian Fisher, the former head of ABARE who was totally discredited at last year’s Senate inquiry into peak oil when he claimed with a straight face that “If the price of eggs is high enough, even the roosters will start to lay.”

Chapter 4, Queensland’s Alternative Energy Options, dispels many of the myths that have hamstrung the debate so far. There are no silver bullet alternatives that can feasibly replace oil and allow what Jim Kunstler calls the “happy motoring utopia” to continue into the future. Ethanol, biodiesel and hydrogen, although they may have important roles to play, have enormous limitations in terms of thermodynamics, time, scale and cost. Further, the report allays one of the key fears of climate change activists in the peak oil debate, that Queensland would worsen the greenhouse gas emissions problem by turning to coal liquefaction, or coal to liquids (CTL): “The value of CTL technology in Australia is questionable, based on price and greenhouse gas intensity.” Solar power, on the other hand, although it “has no direct substitution value for oil,” is “a technology with potential to pay for itself very quickly with the right technology breakthrough.” McNamara recently suggested to me in relation to transport infrastructure that Queensland should “electrify everything.” Encouragingly, the foundations are being laid for a major switch to solar energy and public transport among other key mitigation strategies.

What is remarkable about the report, however, is that it marks the Queensland Government as the first state/provincial government in the world to recognise that peak oil is real and decide to do something about it. To borrow a phrase from Winston Churchill, the battle for acknowledgement is over; the battle for action is about to begin. To that end, Bligh has made some of the right noises, purportedly instructing McNamara to “think big” in developing Queensland’s whole-of-government’ peak oil mitigation plan.

Whether or not she fully appreciates this yet, the manner in which Bligh tackles peak oil will define her premiership. Her most important task will be to quickly sort out the wheat from the chaff in her own Cabinet. While McNamara has been talking about the need to “adopt a wartime mentality” to address peak oil for some time, many of his colleagues still don’t get it. His former boss in the transport portfolio and now Bligh’s Deputy, Paul Lucas, doesn’t appreciate that the feasibility studies for every one of Queensland’s tens of billions of dollars worth of road projects have completely omitted any consideration of rising fuel prices, and still complains about ‘subsidised’ public transport but not the $540 million per annum petrol subsidy. Echoes of Beattie’s oxymoronic ‘clean-coal’ gibberish still manifest themselves in almost $1 billion worth of government subsidies that continue to marginalise solar power and other renewable energy in what was once called the Sunshine State. One quarter of Queensland’s feed grain production is being turned into ethanol and burned while the world’s grain stockpile has halved in the last five years, food prices are skyrocketing and millions are starving. Discredited, neo-classical economic dogma still evidently holds sway over high school mathematics and physics.

Bligh has charged McNamara with developing a ‘whole-of-government’ approach to peak oil mitigation, but the reality is that it requires more than that, more like a ‘whole-of-state’ approach. Businesses, civil society, and most importantly a jaded, cynical and apathetic public, will need to quickly become involved in the development of a reform agenda unprecedented in magnitude, despite the fact that few of them yet understand what the term ‘peak oil’ means. The clock is ticking, but we will first need to debate the tough questions in a sustained and meaningful way. We haven’t seen this sort of debate since Federation. To that end the last word here must go to McNamara himself. After describing his report as “an important starting point for a debate” in Parliament on Wednesday when replying to Menkens’ question, McNamara went on to describe peak oil as:

… an issue that will require an open and honest approach from all members of this House. This is not an ideological issue — it is not a Left or Right issue; it is not a Labor, Liberal, National or indeed Independent issue — it is an issue on which the people of Queensland are going to require us, with goodwill and in good faith, to look for results and to come up with answers to preserve their lifestyles.

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Time to get serious on peak oil and climate change.

Submitted by John Pratt on November 28, 2007 - 5:45pm.

The Democratic candidates are also running ahead of their counterparts in Congress on fuel economy. The Senate recently passed a bill that would increase the average fuel economy of cars and light trucks to 35 miles per gallon by 2017. The current requirement is 27.5 miles per gallon for cars and 21.3 miles per gallon for pickups, sport utility vehicles and minivans.

Most of the Democratic candidates would go much further. Senator Clinton says she would require 40 miles per gallon by 2020 and 55 miles per gallon by 2030. Mr. Edwards favors 40 miles per gallon by 2016, and Gov. Bill Richardson of New Mexico wants to push to achieve 50 miles per gallon by 2020.

Now that the election is over it is time to get serious on Peak Oil and Climate Change. We should be following the Democrats in the US and passing legislation to require all vehicles to be more fuel efficient. We have the technology; we now need the Rudd government to act. If they fail us in the next three years we will have to give the Greens a go.

What to do with all the Petro Dollars?

Submitted by John Pratt on November 28, 2007 - 5:33pm.

Experts estimate that oil-rich nations have a $4 trillion cache of petrodollar investments around the world. And with oil prices likely to remain in the stratosphere, that number could increase rapidly.

In 2000, OPEC countries earned $243 billion from oil exports, according to Cambridge Energy Research Associates. For all of 2007 the estimate was more than $688 billion, but that did not include the last two months of price spikes.

“If you look at gulf countries, they have a total common economy that is about the size of the Netherlands,” said Edward L. Morse, chief energy economist of Lehman Brothers. “These are tiny countries, but they have to place collectively over $5 billion a week from their oil revenues. It’s not an easy thing to do.”

Oil rich nations are swimming in Petrodollars. The world is choking on carbon emissions. When will we do something about our addiction to oil? To even up the imbalance the world should impose a carbon tax on oil. This would reduce demand and encourage more efficient use of oil. The money earned could be used to research and develop alternate fuels and make sure the wealth is spread more evenly.

Gotta Love Those Euro Finance Guys

Submitted by Paul Morrella on November 8, 2007 - 9:27pm.

That only added to concerns that American consumers may no longer be able to sustain their spending on other goods and services, particularly the large numbers of gas-guzzling vehicles still being turned out by Detroit automakers.

Or just ONE person in all of Detroit may actually come up with the novel idea of changing the car design. I don't know maybe even break into the European market with competitive prices. Hell European pension funds might even think about investing in Detroit; giving that little something, that will otherwise, for many Europeans, be an unsustainable retirement.

Keep On Sliding

Submitted by Paul Morrella on November 8, 2007 - 7:42pm.

Stuart McCarthy, unlike many I see the US dollar depreciation as an exceptionally good long-term thing (the best thing). I can also assure you that far from China celebrating it would have their policy makers chewing their finger nails. And frankly with regard to the policy of pegging the Yuan artificially (way to long and way to low) it is way past due.

This is a necessary step for the American economy and something that should have taken place a number of years ago. Often the best medicine is a forced market change and this is the forced market change American industry (all of it) has needed for some time. For far too long much of America's once great industry has grown uncompetitive and slothful off a policy lazy Fed. The writing on this wall has been around long enough for any American willing to open his or her eyes.

There will be short-term ramifications (good or bad) for all Americans. There will also be a very real need to move decisively at the slightest hint of an inflationary outbreak (could be very painful). However, long-term this is manna from heaven for any person interested (especially the young) in the real future growth and incredible prosperity (with all the good that brings) of the American nation.

Note: A continued dollar decline added with continued resource price growth makes for some very interesting times. The biggest financial shocks always start from the most unexpected sources.

Oil Price new record $97 and rising.

Submitted by John Pratt on November 7, 2007 - 8:00am.

On Tuesday, the EIA predicted oil consumption will rise in the fourth quarter and next year despite higher prices, and that inventories will fall.
''Strong demand, limited surplus capacity, falling inventories and geopolitical concerns continue to weigh on the market,'' the EIA said in its monthly Short-Term Energy Outlook.
The weak dollar, which fell to a new low against the euro Tuesday, is also lifting oil prices. Oil futures offer a hedge against a weak dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the greenback is falling.
Light, sweet crude for December delivery rose $2.72 to settle at a record $96.70 a barrel on the New York Mercantile Exchange Tuesday after earlier rising as high as $97.10, a new trading record.

Strong demand, limited surplus capacity, and falling inventories. In other words Peak Oil. Meanwhile both Labor and Liberal parties are running around the country announcing billions of dollars for new road infrastructure. This money would be more wisely spent on improving public transport. It is a good bet that we will be introducing some kind of carbon tax in the near future to reduce our GHG emissions combine this with the continued cost of fuel and the car will soon be out of reach for many working Australians.

Governments should reduce spending on roads and increase spending on rail and other public transport solutions otherwise our economy will collapse with people unable to get to work. Inflation is being fueled by high oil prices and global warming produced drought. The conventional thinking is to raise interest rates to reduce demand. All an interest rate rise will do is increase inflation as most of us are already at the limits of our discretionary spending. More people will be left to struggle with higher mortgage rates.

Good policies

Submitted by Gareth Eastwood on November 7, 2007 - 7:38am.

Stuart, I have to admit I like your suggested policies. Rail transport is under utilised in Australia. I don't share your fears of Australian economic destruction resulting from rising oil prices and falling production.

Now worth $10B

Submitted by Gareth Eastwood on November 6, 2007 - 4:52pm.

John Pratt, Re “First the debt is $100M MIM now owes, it goes on to our debt level” I’m increasingly convinced you don’t understand how this works. There are two ways to look at it. ‘Our’ could mean the Australian people in a practical sense. Otherwise ‘our’ could refer to how Australia’s International Investment Position (foreign debt in layman’s terms) is measured from a statistical perspective.

Under the Australian people version, MIM is now wholly owned by Xstrata a Swiss based company publicly listed on the London and Zurich stock exchanges. Any debt held by MIM, is ultimately born by Xstrata from a practical sense. Interest payments are coming out of the pockets of the Xstrata shareholders (just like the profits go in), not Australians. The only way an Australian becomes involved in MIM’s debt is via the purchase of Xstrata shares. So in this respect, the MIM loan does not go onto ‘our debt level’.

Under the IIP version, I have to assume that the old MIM structure remains a resident of Australia for tax and IIP purposes (the ABS and ATO treat residency essentially the same way). Now in this respect the debt would only impact Australia’s IIP (foreign debt) if debt was taken out by the MIM entity (distinct from Xstrata) from an offshore bank (could happen; but Xstrata would get better terms offshore). So under this scenario, the $100M debt is recorded against ‘our’ IIP, but no Australian is actually liable for it. You can see how Australia can have a net foreign debt without actually owing any money, just another example of how stats can be misleading.

Also regarding the MIM offshore loan, MIM can only legally repatriate (to Xstrata) after tax profits, transfer pricing (re your earlier comments) is out the window (note the ABS comment below).

From the ABS concepts, sources and methods for the Balance of Payments “transfer pricing to avoid tax is illegal in Australia the distortions in the international accounts caused by transfer pricing are not considered widespread.”

I also don’t see how MIM’s loan leads to an interest rate rise? Also, If there was an interest rate rise, the only parties impacted would be Xstrata shareholders (assuming the offshore loan was taken in AUD), not Australians?

If the $5B had been re-invested into an ASX 200 index fund in June 2004, it would now be worth around $10B. You don’t get that kind of return from gambling.

Stuart McCarthy, if oil and coal prices moved in opposite directions, don’t you think we’d consider converting some of our coal into oil? The Germans did it in WW2; why can’t we? Australia is a net exporter in most energy resources, gas, coal, uranium etc. Historically there has always been a strong correlation between the prices of all energy resources, particularly oil and gas. As oil prices rise; so do the prices of gas, coal and uranium. What Australia pays in oil imports, it gains in gas, coal and uranium.

Alternatives

Submitted by Stuart McCarthy on November 6, 2007 - 10:12pm.

>Hi Gareth. I will touch upon on each of the alternatives you mentioned. In broad terms each suffers serious limitations of time, scale, cost and thermodynamics.

Coal Mining. Getting coal out of the ground and transporting it requires large volumes of cheap diesel. Fuel costs for a typical coalmine are equivalent to about 7% of the income (excluding all other costs and profit margins). If, say, fuel costs doubled and coal prices halved, this would become 28%, rendering a large proportion of the coalmining industry unviable.

Coal Liquefaction/Coal to Liquids (CTL). The fact that CTL has only been used on a large scale by Nazi Germany during WWII and South Africa during Apartheid should illustrate that it is a sign of desperation. The CTL process is highly energy intensive, with only a marginal EROEI (energy return on energy investment), and produces greenhouse gas emissions several times greater than oil. Even if we ignored these factors it would take at least 10 to 15 years to ramp up the CTL infrastructure required to put even a dent in fuel demand. We don’t have that long.

Natural Gas. Liquefied and compressed natural gas (LNG/CNG) is a good transport fuel but, with the exception of buses in some of the capital cities, few vehicles in Australia currently use these. Switching the vehicle fleet and mining/construction equipment across to natural gas would again take 10-15 years that we don’t have. From a trade perspective we are currently exporting cheap gas while importing expensive oil, which is absurd. Also bear in mind that world gas production will peak not long after oil production peaks. At best it could be used as an interim fuel in concert with other peak oil mitigation measures.

Uranium. Uranium mining also requires diesel and other fossil fuel energy sources, in much the same way as coal.

The inescapable conclusion is that we have to curb our demand for/reliance upon oil through serious conservation and efficiency measures. At present we are encouraging consumption and waste through perverse subsidies and taxes, as well as massive funding for road projects that ignore the likely traffic declines that will be caused by rising fuel prices. I do not advocate ceasing road funding altogether. What I do advocate is immediate, massive funding for freight rail, high-speed passenger rail and public transport. Unless we embark on this immediately, within a few short years rising costs of private car transport, food and household energy bills will cause enormous economic hardship.

The oil reserve factor

Submitted by Ian MacDougall on November 7, 2007 - 7:38am.

Stuart, I was talking to last night to a former highly placed government energy expert who is now in the private sector, who told me that as the oil price rises there is a correction mechanism that cuts in: the supply increases, because previously uneconomic oilfields start to become economic, and such fields hold significant quantities of oil.

This must have an effect on 'peak oil' thinking. I would be interested in your view of this. Climate change issues are something else again, of course.

oil supply curve

Submitted by David Roffey on November 7, 2007 - 8:12am.

There is some truth in your friend's simplistic economics, but not a lot. Any price over around $25 makes deep-sea recovery viable - after that, the supply-side argument breaks down because the higher price doesn't actually create any more oil to be found. The biggest debate here is so-called non-conventional oil, eg the Alberta tar sands, but the problem here is the rising energy costs of recovery (and appalling carbon emissions), which mean that the edges of what's available take such a high amount of energy to extract and refine that on balance it still isn't worth it.

The base thing to remember about oil is that it all got made several million years ago and ain't being made any more, whatever the price.

$1,000,000,000,000,000,000,000 per drop

Submitted by Ian MacDougall on November 7, 2007 - 12:53pm.

David: Sure, oil is a finite resource, and I would think you have encountered this situation before. If supply is diminishing and demand is growing, price increasing on some basis would on the face of it maintain the two in equilibrium. But if supply itself is a function of price, and price not just a function of demand at whatever level, then both the situation and the maths describing it get a bit more interesting.

I am not an economist, but I am sure economists must have met this situation before. Strictly speaking, crude petroleum oil will never really run out. It's just that the last drop of it will be so expensive that nobody on Earth will have the money to buy it. So to speak.

One could buy a barrel of crude today, put in in bottles, and cellar it as some people do with Grange Hermitage. Then in time, swap one or two for an island in the Whitsundays, retire to it, and live on the rest.

I might just do it.

Economy vs Entropy

Submitted by Stuart McCarthy on November 8, 2007 - 10:18am.

Ian McDougall, I was about to reply to your question regarding reserves growth (and will later today) when I saw this video linked in a reply to my piece in Online Opinion today (first published here in WD of course!). This pretty much says it all. Ironically your figure of $1,000,000,000,000,000,000,000 also makes a cameo appearance towards the end of the video!

Another Chris Shaw Video

Submitted by Stuart McCarthy on November 8, 2007 - 10:32am.

This one's even better than the last!

Margo: Is that the same Chris Shaw who is a Webdiarist? I like it a lot.

Goldman Sachs: "... an awakening that the US is in big trouble"

Submitted by Stuart McCarthy on November 8, 2007 - 4:14pm.

A good report here on the potential for China and key oil exporters to abandon the US dollar, concluding:

Countries are growing weary of losing money on the falling dollar. Many of them want to protect their financial interests, and a number of them want to end the US oversight that comes with using the dollar. Although it’s not clear how many of these countries will actually follow through on an abandonment of the dollar, it is clear that its status as a world currency is in trouble.

Obviously, an abandonment of the dollar is bad news for the currency. Simply put, as demand lessens, its value drops. Additionally, the revenue generated from the use of the dollar will be sorely missed if it’s lost. The dollar’s status as a cheaply-produced US export is a vital part of our economy. Losing this status could rock the financial lives of both Americans and the worldwide economy.

And from the New York Times:

Markets Jolted by Oil Surge and Worries Over Slowdown

... "We are experiencing among our clients an awakening that the United States is in big trouble,” said Erik Nielsen, chief Europe economist at Goldman Sachs.

The rise in oil prices, which briefly traded above $98 a barrel before closing at $96.70, now appear to be pushing up the cost of gasoline, heating oil and jet fuel as well. That only added to concerns that American consumers may no longer be able to sustain their spending on other goods and services, particularly the large numbers of gas-guzzling vehicles still being turned out by Detroit automakers.

The most immediate trigger for the sell-off in the dollar, traders said, was a jarring signal that suggested China might shift some of its enormous hoard of dollars and dollar-denominated assets — more than $1.4 trillion — into other currencies to get a better return on its money.

“We will favor stronger currencies over weaker ones and will readjust accordingly,” Cheng Siwei, vice chairman of the Standing Committee of the National People’s Congress told a conference in Beijing earlier today. A Chinese central bank vice director, Xu Jian, said the dollar was “losing its status as the world currency,” according to Bloomberg News.

Cellaring the golden drop

Submitted by David Roffey on November 7, 2007 - 2:51pm.

At any moment there are a large number of tankers full of crude sitting around on the high seas waiting to be told who has paid the most for their cargo and therefore where they should go. But the world gets through 87 million barrels a day and produces 85mbd - hence the price rises. And it doesn't really have the capacity to produce any more, it's been stuck on that 85mbd for a while now, hence some people's belief that oil peaked in 2006. A supertanker holds 2mb or more - but therefore it takes 43 of them to hold a DAYS demand - so even though some of the biggest tankers ever built have indeed been converted to moored storage, they can't really keep that golden drop back for long enough to make a real killing - remembering that boring ordinary everyday killing for ExxonMobil is US$100 million profit per day.

OPEC's so-called production caps aren't having any significant effect: there is no evidence that the cap is kept to, nor that OPEC members could pump any more if the cap were lifted. Actual OPEC production has been above the cap for at least two years, and like the RoW production has been remarkably steady throughout that time at 30mbd.

Business-as-usual demand rises at about 1.3 to 1.5%pa, bringing total world demand to above 100mbd before 2020: if supply stays at 85mbd or thereabouts, then there is indeed no theoretical limit to the potential price. But, of course, the other effect of price rises is to damp demand. A really crude ceteris paribus model will quickly tell you that the round terms effect of supply stable at 85mbd is that there will be no more world economic growth except for that which can be extracted from energy intensity - ie getting more GDP out per barrel of oil. The famous APEC statement aimed for 25% improvement in energy intensity over the next 43 years - which neatly translates into an economic growth cap of around 0.5%pa.

oils and spoils and getting panels now

Submitted by Angela Ryan on November 8, 2007 - 11:47pm.

Hi David, and thanks for that great resource. It very clearly marks out what takes quite a while to search. Notice the drop in oil production OECD. I heard the Nth Sea was drying up, is that a reality then? Seems rather a crisis time coming up. Makes a big difference to international policy and gambles.

Poor old Africa. Somehow I don't think they will get to use their oil for local requirements. Now what if Iraq came on line? That would be a few million barrels per day. Alas for planning.

Shall look into some solar panels now while they are cheap to make and buy a bike. At least the air will be cleaner and women will not have their eggs damaged as just found out, by recycled water pollutants and air emissions. If only the government would promote them to be made here.

PS: Paul, do you really think a drop of about 30% in US value is safe for stability in such a short time? Stability is important in the community.

What is reliable?

Submitted by Gareth Eastwood on November 6, 2007 - 8:00am.

Stuart McCarthy, what websites are a reliable source of data relating to volumes of Australian oil production and imports?

A Report from the WA government may help.

Submitted by John Pratt on November 6, 2007 - 8:52am.

Gareth, does this help?

As a result of declining domestic production and uncertain world supplies, WA is very vulnerable to "Oil Shocks" in the short term (2 months), medium term (2 years) and long term (within 2 decades).

APPEA Website

Submitted by Stuart McCarthy on November 6, 2007 - 10:19am.

Gareth, the Australian Petroleum Production & Exploration Association website is a good place to start. Chief Executive Belinda Robinson raised her concerns regarding the petroleum trade deficit at the annual conference in March this year:

Using Geoscience Australia projections and assuming oil prices of US $50 a barrel, Australia will have a trade deficit in oil, condensate and other refinery feedstocks of as much as $12-$18 billion by 2015 -- two to three times the 2005-06 deficit.

Add to this a growing net import bill for refined products, and the deficit for oil, condensate and refined products is projected to increase to $27 billion a year by 2015 -- around twice the 2005-06 deficit of $12.8 billion.

Given that oil is already trading above US$ 90 a barrel, you can do your own projection for the trade petroleum trade deficit in 2015. My guess is that it will blow out to somewhere in the a range of $40-80 billion, equivalent to four to eight percent of current GDP, double to quadruple the current value of Australian coal exports (based on current record high prices, which may slide if demand ebbs) or double to quadruple the current Defence budget. That's a big problem in anybody's language.

The case of the missing $5 billion

Submitted by John Pratt on November 6, 2007 - 7:23am.

Gareth Eastwood, and the case of the missing $5 billion.

MIM sold by Aussie to Swiss for $5B. Aussie gets $5B, Swiss gets MIM. MIM borrows $100M to buy equipment, MIM now owes S100M to someone , but has some nice new equipment worth $100M. Aussie still figuring out what do with his/her $5B.
I’m not seeing where this Australian debt is.

First the debt is $100M MIM now owes, it goes on to our debt level and leads to an interest rate rise.

It's a startling figure, $522 billion in net foreign debt, a level the like of which Australia has never seen before.

It's now more than half the size of the economy.

And to the doomsayers, it's a harbinger of dark times to come.

Steve Keen lectures in economics at the University of Western Sydney, and for years, he's been warning that Australia is heading for a debt driven recession.

Now the missing $5 billion, it went to holders of MIM shares who probably reinvested it in the Australian stock market.

The Australian sharemarket closed sharply lower as Wall Street's "Black Monday" jitters stripped the local bourse.
Local shares fell 1.9 percent, led down by US-exposed firms such as Westfield Group and top miners on fresh worries that the US housing slump was infecting the wider economy.

The $5 billion probably was lost gambling on the stock exchange. Australia has nothing left but a $100m debt. MIM is in the hands of foreigners most of the profits going overseas, the debt remains and interest rates are rising.

Peak Uranium

Submitted by Gareth Eastwood on November 5, 2007 - 8:53pm.

John Pratt, so you’re not going to explain where the $5B went?

Re “What are you saying, Gareth, there is no problem or we need not worry about the rising cost of oil imports?” Assuming by ‘we’ you mean Australia, I’d say we don’t have much to worry about. The demand based factors driving a significant portion of the rising oil price, are also driving up the price of commodities and resources for which we are net exporters. If we suffer a bit from ‘Peak Oil’ in the near future, maybe later on we’ll flourish during ‘Peak Coal,’ ‘Peak Iron’ or even ‘Peak Uranium.’

I have to admit it takes a lot to get me worried. Right now the only thing in life really worrying me, is passing the CA Tax exam in December.

Peak Uranium

Submitted by David Roffey on November 6, 2007 - 7:12am.

Peak uranium is indeed a fascinating one ...

In the unlikely event that all of the people that are talking about building new nuclear power do indeed do so, then peak uranium is only a few years after they all come on-stream - which will first multiply the cost, buggering the assumptions they made the investment on, and Australia will probably not benefit from that at all, because if our record on LNG is anything to go by, we'll have signed up to long-term contracts at the pre-peak price ... and by the time those contract are over, the nuclear boom will be over too, because the cost (and carbon emissions) associated with extracting ever-more-marginal ore will get all those stations mothballed.

In the more likely event that they don't actually get built, the value of uranium mining as an activity will potentially fall sharply, as the older stations fall into disrepair and need no new fuel.

It seems that the proponents of expanding uranium mining are just hoping for the Goldilocks as-you-were scenario in the middle of these two, but in my view that is much less likely than either of the two edges. 'Course there is the ever-growing list of people who aspire to nuclear weapons, so we could sell to them - after all, to not do that might cost JOBS.

Australian Oil Production has peaked, causing a trade imbalance.

Submitted by John Pratt on November 5, 2007 - 5:59pm.

Gareth Eastwood,

In 2006-07, Australian production of crude oil is estimated to have increased by 16 per cent to 28.3 gigalitres. Higher crude oil output reflects increases in production at a number of fields that have recently been brought into operation, such as Enfield in Western Australia and Basker and Manter in the Gippsland Basin off the coast of Victoria. The increase in production from new oil fields in 2006-07 has been large enough to offset declining output from existing fields. Australian crude oil production in 2007-08 is forecast to increase by 7 per cent to over 30 gigalitres.

A projected rise in liquids production is forecast over the next year, but is expected to decline over the next decade, leading to a worsening trade imbalance.

Oil exports 2005/2006 $6.6 billion Oil imports $12.9 billion

You can see that already Australia has a $6.3 billion dollar deficit which is due to skyrocket over the next decade. What are you saying, Gareth, there is no problem or we need not worry about the rising cost of oil imports?

More oil

Submitted by Gareth Eastwood on November 5, 2007 - 4:11pm.

Stuart McCarthy, it would be a bit silly for Australian oil importers to take delivery on American based oil contracts. I’m not sure what your point is? TAPIS contracts are also denominated in USD. Is there no correlation in price between the NYMEX and TAPIS oil contracts?

Greenspan made no mention of oil in your link? The Saudi’s are just suffering from having a fixed exchange rate, nothing to with the price setting of oil contracts? The WSJ link considers the implications of the falling USD? None of links relate to moving away from the USD as the currency used to denominate oil contracts?

Re “the monetary value of Australian oil imports has been flat, but not the volume” What’s the quantum of this change? I can’t locate any reliable volume data for overall petroleum imports. The ABS only lists value, what site/s do you use? This Abare reports states that crude imports are expected to be flat in volume terms and petroleum exports are expected to rise.

USD, TAPIS and ABARE

Submitted by Stuart McCarthy on November 5, 2007 - 10:44pm.

Gareth, I didn’t claim that Greenspan et. al. were discussing a switch from USD to euro in oil markets. The point that I did make was that many are concerned about a dumping of USD and take up of euro in the currency markets due to the weakening of the US economy, which is incurring massive foreign debt and is probably sliding into a recession. In a seller’s market for oil, of course sellers will be looking to sell in a stronger currency rather than a weaker one.

TAPIS contracts are indeed denominated in USD, but a switch away from USD will eventually become attractive here in SE Asia also.

ABARE is basically a laughing stock when it comes to oil production and price forecasts. They always forecast falling prices and they are always wrong. At last year’s Senate inquiry the head of ABARE Brian Fisher stated categorically (see link in my article) in relation to world oil production that “If the price of eggs is high enough, even the roosters will start to lay.” Fortunately Fisher has since resigned, but the cargo-cult mentality remains, as evidenced by their 2008 forecast WTI price of US$60.69.

Where's my $5 billion?

Submitted by Gareth Eastwood on November 4, 2007 - 2:37pm.

John Pratt, I’ll have to assume that I’m Alan.

(Fiona: John has already posted apologising for the confusion - those two posts should have been addressed to you.)

I did say Australian based assets, not companies; I was hoping for something a little more recent and a little more reliable. The rate of foreign ownership has actually fallen in the last five years (by about 3% according the ABS), currently around 27%. I agree foreign portfolio investment exceeds our own outbound version, it has always been so, note that we’re in surplus against the US (FIRB). I believe it is the UK which has the largest net stake in Australian companies. The day your average Australian considers a British share more enticing than a house and land package, is the day we’ll have a chance of balancing the foreign ownership of Australian equity.

Re “Let's say we sell a mining company like Mt Isa Mines to an overseas buyer. From the moment of sale all the profits go overseas.” Generally speaking I would expect to receive something in return for selling MIM, is that unreasonable?

Re “Then the overseas owner of Mt Isa Mines decides to buy some capital equipment. It borrows, and a debt is created.” So the debt is held by foreign persons, not Aussies. We’re still sitting on the wad of cash we got in return for selling MIM.

Using numbers your example goes like this.

MIM sold by Aussie to Swiss for $5B. Aussie gets $5B, Swiss gets MIM. MIM borrows $100M to buy equipment, MIM now owes S100M to someone , but has some nice new equipment worth $100M. Aussie still figuring out what do with his/her $5B.

I’m not seeing where this Australian debt is.

Good luck OPEC

Submitted by Gareth Eastwood on November 4, 2007 - 1:55pm.

Stuart McCarthy, I can’t find the figures you’re referring to, not to worry. I did note that the value of crude imports has actually fallen from this time last year. Maybe it’s time to consider the views of others on the factors causing Australia’s trade deficit.

SMH “The trade deficit widened in August as business investment and a high Australian dollar pushed up demand for imported goods.”

And SMH “Importers are enjoying the benefit of cheaper goods because of a strong Australian dollar, but economists say this will only put renewed pressure on the trade deficit.”

AME Info “the strength of the Australian dollar is also expected to trigger a sharp increase in the trade deficit.”

Age “Many Australians have already responded to the higher dollar by flocking to US-based internet retailers in the hunt for bargains.”

RBA refers to “strong import growth” driving the deficit.

Considering that petroleum imports have been flat over the last year and Australia’s total exports have fallen in this period, I’d say oil imports have played no role at all in the higher trade deficit. Based on the data I’ve seen, the strong AUD is indeed a key driver of the rising trade deficit.

Re “Demand does indeed respond to changes in price. The problem is that when high oil prices curb demand, GDP will fall because oil cannot readily be substituted throughout the economy like other commodities. Further, a large proportion of economic activity is Australia is based on discretionary demand, for example airlines, tourism, service industries and retail. These will be among the early victims of demand destruction.”

We’re talking net trade not GDP, the two concepts are largely unrelated.

The US (or any other country) does not currently determine what currency it purchases oil in. A producer can set whatever payment terms it likes (unless delivering on exchange based contracts), ultimately these terms are based on the NYMEX light sweet crude contract which trades in USD. In order for OPEC to get oil priced in a different currency requires one of two things to happen. Either they convince the NYMEX to change the contract specs on light sweet crude, or create a new contract and somehow make it the most liquid and heavily trade oil contract in the world. I’d say good luck with that OPEC; you’re going to need it.

NYMEX Irrelevant for Australian Petroleum Trade Deficit

Submitted by Stuart McCarthy on November 4, 2007 - 10:53pm.

Gareth, the monetary value of Australian oil imports has been flat, but not the volume, which has continued to increase. The trade deficit in dollar terms has been protected by the strength of the AUD against the USD. If the exchange rate stabilises or reverses as oil prices increase we won't have this protection in future.

Australian oil imports are not traded at NYMEX. Most of our crude imports are benchmarked against Malaysian TAPIS and most of our refined fuel imports, including aviation fuel, comes from Singapore.

My concerns re a switch away from the US petrodollar are shared by Alan Greenspan, former Chairman of the US Federal Reserve Bank, the UK Telegraph International Business Editor and writers at the Wall Street Journal, among others.

Australia is only a bit-player in all this, which makes Mr Howard's big-noting re 'sound economic management' all the more pathetic.

Net increase in foreign ownership

Submitted by John Pratt on November 4, 2007 - 1:29pm.

John are you even sure that there has been a net increase in foreign ownership of Australian based assets? How do you know this?

Alan,

Foreign ownership in Australia doubles - and over half the foreign companies pay no tax at all in Australia.
The following is an extract from an article by Frank Walker which appeared in the Sun Herald, 17 September 2000.

"The level of foreign ownership of Australian companies has doubled in the past decade to 21% of gross domestic product (GDP) and foreign debt hovers at 40% of GDP. The money leaving Australia to foreign owners doubled in the decade to $12 billion last year.

"Tax expert and Electronic International Trade Service director Martin Feil said multinationals use a tax trick called transfer pricing to escape paying tax in Australia. An Australian Taxation Office review of 207 companies, which generated $30 billion in annual revenue, showed they paid less than $40 million in company tax.

"'Despite having operated in Australia for decades, over half of the foreign companies paid no tax at all,' Mr. Feil said."
That's right Alan, foreign ownership has dramatically increased under the Howard Government and half of these companies pay no tax. That what I call a real level playing field. I really do appreciate the opportunities you give me to bring all the Howard economic disasters to public attention.
in reply to your questions on foreign ownership.

Where have all the profits gone?

Submitted by Gareth Eastwood on November 4, 2007 - 12:05am.

John Pratt, company profits aren’t included in a trade deficit/surplus. You may be thinking of the current account deficit, which is driven in no small part by the average Australian’s preference for housing assets over companies, cash and bonds. Sure if I sell Telstra shares and buy a house I no longer receive Telstra dividends, but now I have a house to live in.

Re “We are left with the debt.” Could you explain to me how selling an asset creates a debt? I’m not sure how this works.

John are you even sure that there has been a net increase in foreign ownership of Australian based assets? How do you know this? If in fact foreign ownership of Australian based asset has increased, has it been offset by Australian investment in other foreign based assets? Personally I’m not certain of the specific stats either way, but here’s a list to consider. Some companies listed on the ASX with a predominantly Australian based share register that have significant offshore investments.

Aristocrat (half its pokies are sold in the US)

Brambles (almost 90% of profits sourced offshore)

CSL (most profits sourced offshore)

James Hardie (sells the majority of its cement in the US)

Lend Lease (real estate conglomerate gets most profits offshore)

Macquarie Airports (large stakes in European airports)

Macquarie Infrastructure (large stakes in American toll roads)

Paperlinx (world’s largest paper merchant, majority of profits sourced offshore)

QBE (insurance operations in 25 different countries, majority of profits sourced from offshore)

Sims Group (worlds largest scrap metal dealer, owns Hugo Neu large American recycler)

Westfield (I wonder how many Americans realise those malls are Australian?)

ABS says exports are falling under Howard.

Submitted by John Pratt on November 4, 2007 - 1:09pm.

The trend estimate of the balance on goods and services in June 2007 was a deficit of $1,373m, an increase of $59m on the deficit in May. The main components contributing to the fall in the seasonally adjusted series were:

metals (excluding non-monetary gold), down $339m (25%)

metal ores and minerals, down $179m (6%)

coal, coke and briquettes, down $80m (4%)

transport equipment, down $50m (12%)

other manufactures, down $20m (1%).

Metals (excluding non-monetary gold), down $347m (24%), of which:

aluminium, down $170m (28%), with volumes down 27% and prices down 2%

nickel, down $94m (45%), with volumes down 41% and prices down 6%

zinc, down $31m (24%), with volumes down 27% and prices up 4%.

Metal ores and minerals, down $257m (8%), of which:

nickel ore, down $184m (73%) on decreased volumes

alumina, down $115m (21%), with volumes down 13% and prices down 10%

non-agglomerated iron ore, down $84m (6%), with both volumes and prices down 3%;

Alan, you will notice that not only are volumes down, so are prices. You asked me how selling an asset can create a debt. Let's say we sell a mining company like Mt Isa Mines to an overseas buyer. From the moment of sale all the profits go overseas. Then the overseas owner of Mt Isa Mines decides to buy some capital equipment. It borrows, and a debt is created. There you have it: we sold an asset and created a debt. Multiply that several hundred times and you can see why we have rising debt levels. You see, we are still borrowing but the profits are going overseas.

ONE of the paradoxes of the Howard Government has been its obsession with reducing government debt (the debt that as taxpayers we owe to ourselves as superannuants) and its benign neglect of foreign debt (the debt that we owe to foreigners).

...

Edwards points out that the current account deficit is equal to the excess of domestic investment over domestic savings so that in principle the additional liability created by the current account deficit is matched by additional investment. But will that additional investment generate the foreign exchange to service the liability?

...

To complete Edwards' iron arithmetic, the reason why Australia will need a trade surplus equal to 1 per cent of GDP in order to limit net liabilities to 100 per cent of GDP in 2015 is that the net income deficit will have risen from 3.6 per cent of GDP now to 6 per cent of GDP. Because GDP growth is expected to be 5 per cent a year, the current account deficit can't grow faster than 5 per cent a year without exceeding the 100 per cent limit. This requires an offsetting trade surplus each year equal to 1 percentage point of GDP.
And even this isn't guaranteed to stabilise the debt unless foreign lenders and investors are content with a 6 per cent return on their Australian assets despite Australia's growing net liabilities between now and 2015.

NYMEX moving to Euro?

Submitted by Gareth Eastwood on November 3, 2007 - 11:07pm.

Stuart McCarthy, I think you’re overplaying the role oil has in Australia’s trade deficit. Oil products account for about 10% of total imports (ABS). Any fall in the AUD/USD rate (assuming no corresponding fall in commodity/resource prices) would tend to close the trade deficit. It makes exports more competitive and imports less so; it’s a pretty simple concept. Your argument seems to assume that demand doesn’t respond to changes in price.

Re “the economy is at the whims not only of the commodities markets but now also the currency markets.” The impact exchange rates and commodity prices have on the Australian economy is not increasing.

Re “If we have to start buying oil in Euros rather than USD we will be in serious trouble.” I’m pretty sure the NYMEX has no intentions of switching light sweet crude into Euro based contracts; feel free to prove me wrong. As long as oil is priced in USD, it makes no difference what currency a producer demands payment in.

Basic Facts

Submitted by Stuart McCarthy on November 4, 2007 - 12:50am.

Gareth, you're thinking wrong. The petroleum trade deficit (petroleum exports minus petroleum imports) is currently approximately 2/3 of the total trade deficit (total exports minus total imports). This is simple arithmetic, all based on ABS data.

At a recent industry conference the Chief Executive of APPEA stated:

Using Geoscience Australia projections and assuming oil prices of US$50 a barrel, Australia will have a trade deficit in oil, condensate and other refinery feedstocks of as much as $12-$18 billion by 2015 - two to three times the 2005-06 deficit.

Add to this a growing net import bill for refined products, and the deficit for oil, condensate and refined products is projected to increase to $27 billion a year by 2015 - around twice the 2005-06 deficit of $12.8 billion.

... and in case you hadn't noticed, oil is already trading consistently over US$90 a barrel.

Re "The impact exchange rates and commodity prices have on the Australian economy is not increasing." You're right, but only in the present tense. I'm talking about the future.

Demand does indeed respond to changes in price. The problem is that when high oil prices curb demand, GDP will fall because oil cannot readily be substituted throughout the economy like other commodities. Further, a large proportion of economic activity is Australia is based on discretionary demand, for example airlines, tourism, service industries and retail. These will be among the early victims of demand destruction.

Re NYMEX, I wasn't refering specifically to NYMEX. The key point to note is that oil is becoming a sellers' market, not a buyers' market. OPEC (among other exporters) is already expressing concern about declining income due to the devaluing of the USD, for example:

Opec to study pricing method

CARACAS: The Opec is likely to discuss creating a basket of currencies for oil pricing at its next summit due to the steady decline in the dollar, Venezuela's Energy Minister Rafael Ramirez has said.

"The need to establish a basket of currencies ... will probably be a point of discussion in the next Opec summit," Ramirez said during an evening event in the presidential palace.

"The dollar as a benchmark currency has been weakening quite a lot and it creates distortions in oil markets."

The cartel is slated to hold a summit of the heads of state of Opec nations next month and a meeting of ministerial delegates in December.

Given that the US imports 75% of its oil, one day soon it may not have the choice of demanding that oil be sold using USD.

AUD

Submitted by Gareth Eastwood on November 3, 2007 - 11:39am.

Stuart McCarthy, I'd say the AUD's recent gains are playing a big role in the continuing trade deficit. Australian exporters (at least those not selling resources) are hurting at the moment.

Trade deficit, Howard has sold the farm now we are going broke.

Submitted by John Pratt on November 3, 2007 - 12:25pm.

After all, Australia’s current account has been in deficit for 16 years. The economy hasn’t had a recession for 16 years. What’s so bad about the whole thing?

What’s bad is that Australia is accumulating a large debt to foreigners. In the stock market, foreigners own an increasingly large share of the income of Australian companies. Those booming profits don’t stay on-shore. And what about debt?

Capital spending was up 6.3% to AU$21 billion, according to more statistics from the ABS. Businesses are increasing spending on equipment to keep the boom going. But this is where the debt issue arises again. Businesses are borrowing to import equipment from abroad. The benefit is that the business has a new piece of capital equipment. The drawback is that the profit on the sale of the equipment goes to the foreign producer and the debt that was used to finance the purchase must be serviced.

Australia owes an ever-increasing amount of debt to foreigners. That’s the key fact of yesterday’s current account deficit. That fact seems trivial during a boom. But that rise in debt can become even more costly when interest rates rise, as they are in the current global credit crunch. It means Australia will be paying a steadily larger amount of interest to the foreign holders of its debt. The deficit will widen.

Who knows, maybe it’s all academic? We doubt it, though. A nation doesn’t get rich by consuming more than it produces any more than an individual can get rich that way. You want to own more than owe. Australia should be racking up huge trade surpluses and exporting capital to the rest of the world. Instead, it’s racking up a trade deficit and importing capital. That doesn’t seem too healthy to us.

The stock market doesn’t care about any of this right now. That’s why this market reminds us of the top of the tech boom. Even after actual stock prices topped out, the psychology of the bull market lived on. You could see all around you signs that the game was up. But those signs were contrary to the overwhelming sentiment in the market, so they were ignored.

All happy bull markets are alike. Markets move up on primary trends, broad themes investors can use to justify buying stocks at current valuations. The tech boom was one such theme. “Technology is making people more productive and changing the way the world does business.”

The resource boom is the latest theme. “China and India are undergoing the third great industrial revolution of the last 150 years, and this one is more resource-intensive than the last two combined.” Of the two, the resource boom has proven to be the more durable because it’s more tangible.

But it is not a new theme anymore. Four years into the resource bull market a new theme comes. It threatens to drown out the pleasant melody of rising commodity prices. Credit deflation. A world pumped up with trillions of dollars in financial assets is suddenly on the verge of becoming unpumped. Stocks have lost the plot.

Gareth Eastwood, I don't think the trade deficit is due to the rise in the Australian dollar. It's more to do with Howard's economic mismanagement. We have sold off our companies and now the profits go overseas. We are left with the debt. As interest rates rise we will be in a situation of high overseas debt and no income to pay. Our exports are falling due to a lack of investment in training and infrastructure. Our oil exports are falling.

Australia has been shielded from past oil shocks by our domestic oil production from Bass Strait. Hence, as a nation we have not learnt as much about oil conservation and transport planning as European countries, especially the Netherlands which radically changed its transport planning policy to reduce its oil dependence after the 1973 oil crisis. However, Bass Strait production has been declining since 1985 and until now other fields have filled the production gap. Reliable recent predictions by Geoscience Australia and Woodside indicate that Australia's oil and condensate production will fall substantially in the next decade (Akehurst (2002), APPEA (2004)).

1.Australia’s depleting oil fields and low discovery rate will raise oil imports
2. Rising volumes and/or prices will further weaken a deteriorating trade balance.
3. Higher global oil prices increase risk for lower socio-economic groups, many industries and companies
4. Our capital markets demonstrate little interest in remedying this situation.
5. Funds and financial advisers may not be fulfilling their investigative duty of care in preparing investors for oil scarcity.

Howard has sold the farm, and our mineral resources

Submitted by Ian McPherson on November 3, 2007 - 2:10pm.

Hi John. There is additional bad news. According to Monash researcher and lecturer Dr Gavin Mudd and the independent Mineral Policy Institute, the "mining boom is fading fast". Here's a snip...

Warning: The mining boom is fading fast

A Monash University environmental engineer has warned in a new report that mineral resources are running out, excavation costs are escalating and the environmental costs of mining are devastating.
The world-first report, The Sustainability of Mining in Australia: Key Trends and Their Environmental Implications for the Future, was authored by Monash researcher and lecturer Dr Gavin Mudd in conjunction with the independent Mineral Policy Institute.

Dr Mudd said the statistics were alarming. "On average, 27 tonnes of greenhouse emissions are created to mine a tonne of uranium. That's equivalent to the annual emissions of nine family cars. To mine one kilogram of gold it takes 691,000 litres of water, and it takes 141 kilograms of cyanide to produce a single kilogram of gold.

"There is often talk about sustainable mining, but our latest body ofresearch shows that minerals are being mined at an alarming rate, mining companies have to work harder to source it, and as a result the environmental costs of the process and clean-up are rising exponentially.
"If we were to project these key trends just 40 years into the future,we would find that to source the same amount of minerals would require a new Pilbara to be found or a new Mt Isa or Broken Hill -- and that's unlikely.

"It takes a minimum of two million tonnes of solid waste to produce a single kilogram of gold. Copper produces around 250 tonnes of solid waste per tonne of copper while uranium produces about 2,400 tonnes of low-level radioactive waste per tonne of uranium oxide."

The landmark report reveals critical trends in the mining industry:

A decline in mineral and ore grades
A dramatic increase in waste rock and tailings -- now at several billions of tonnes annually, much of it posing a long-term risk to the environment
Incomplete sustainability reporting -- many companies refuse to accurately report relevant data, including waste rock, tailings, energy, cyanide or water consumption

Dr Mudd said the results of his research clearly show that regulators, shareholders, governments and communities face a challenge, the full extent of which is not being discussed.

It would obviously be wise for the government to assess Australia's remaining resource base, but I see no sign of that occurring. The economist's view that higher prices will discover an endless supply of everything seems to prevail.

We're selling off our natural gas overseas at a rapid rate, our oil production peaked in 2000, and now we're suffering a decline in mineral and ore grades. This mining boom will come to an end – probably sooner than anyone thinks – and then we truly will be a banana republic. If global warning doesn't kill those off too...

Trade Deficit and AUD/USD Exchange Rate

Submitted by Stuart McCarthy on November 3, 2007 - 9:29pm.

Gareth, last month was Australia's 66th consecutive monthly trade deficit, i.e. we haven't had a trade surplus for five and a half years. Given that two thirds of the overall trade deficit is due to net petroleum imports, the favourable AUD/USD exchange rate is the only thing keeping the trade deficit from getting completely out of control, but the economy is at the whims not only of the commodities markets but now also the currency markets.

The really scary thing is that a number of the world's largest economies, oil exporters and institutional investors are giving serious consideration to dumping the USD and switching to the Euro. If we have to start buying oil in Euros rather than USD we will be in serious trouble. Based on Geoscience Australia oil production forecasts, which have been consistently over-optimistic, we will be importing approximately 80% of our oil by 2015. Within seven short years, depending on a number of variables including exchange rates, our petroleum trade deficit alone could reach the equivalent of 10% of GDP. By then our own currency would be at serious risk of collapsing.

If high oil prices start curbing demand for our minerals in Asia, and hence prices, we could experience a double-whammy of stalling resource exports and skyrocketing oil imports; indeed, probably oil shortages given the world oil production situation.

Drastically reducing our oil dependence isn't a matter of choice any more - it's a matter of necessity, i.e. preventing economic collapse.

Oil price at a new record, what do the pollies have to say?

Submitted by John Pratt on November 1, 2007 - 7:05am.

Oil prices have hit a new record of $94 a barrel, as US government data showed a surprise fall in crude stockpiles for the second week in a row.
Is demand for oil continuing to soar?
Yes. The biggest catalyst for oil's seemingly remorseless rise has been the simplest economic driver there is: the balance between demand and supply.
Demand is at an all-time high, fuelled by the continued breakneck economic expansion of the Indian and Chinese economies.
With more than a billion people in each country, and sustained growth rates of 8% in India and 10% in China, manufacturers and consumers are sucking in energy at an ever-increasing rate.

China's booming economy is sucking in a huge amount of oil

China overtook Japan as the world's second-largest consumer of oil in 2003 and is closing in on the US, with demand for oil growing at about 15% a year.
Analysts worry global demand for oil is so intense that supplies may not keep pace.
Demand will rise by an average of 2.2 million barrels a day next year, the International Energy Agency says, compared with the 1.5 million-barrel rise seen in 2007.
It says annual demand will rise 2% up to 2012, while other projections suggest demand could soar from about 90 million barrels a day to as much as 140 million over 25 years.

The price of oil continues to climb to the $100 mark, we should be asking all the political candidates what they think the high price of oil may have on our economy? We assume that the good times will continue to roll, but the writing is on the wall. The fuel price went up ten cents a litre in Cairns this week. Are we going to plan for a fuel price of maybe $500 a barrel or more, or just keep our fingers crossed and hope for the best?

Margo: John, please remember the font thing.

Growing Trade Deficit Despite 'Resources Boom'

Submitted by Stuart McCarthy on November 3, 2007 - 10:20am.

From yesterday's SMH (emphasis added):

Trade Gap Widens to Nearly $2b

THE national trade performance continues to deteriorate despite a once in a generation boom pushing commodity prices to record levels.

Official figures released yesterday showed a $1.86 billion deficit for September, the 66th month in a row the trade ledger has been in the red.

The deficit, $900 million worse than market economists had expected, came as the dollar cranked up a gear. It punched as high as US93.3c, a 23-year high, on the widening interest rate gap between Australia and the US after the US Federal Reserve cut rates again.

The director of research at Grange Securities, Stephen Roberts, said the $A could tumble if the world economy took a hit, given Australia's weak trade performance.

"The chances of that happening are very high running through 2008," he said. "When conditions change, what appears to be a very strong move up in the Australian dollar becomes an equally sharp decline. Eventually it could start to turn because there would be no support there from any trade fundamentals."

A 4 per cent deterioration in exports drove the trade slump, outweighing a 3 per cent drop in the value of imports. The export weakness was led by a 38 per cent drop in mineral fuel exports, with crude oil export volumes falling sharply. Mining and metals were down by 8.7 per cent overall, the Australian Bureau of Statistics' monthly trade figures showed.

The managing director and co-head of economic and market analysis at Citigroup, Paul Brennan, said the most disturbing thing about the trade report was that there had been no upward trend in exports in recent months, despite heavy investment in capacity and strong commodity price rises.

Howard Pre-empts Rising Petrol Prices

Submitted by Stuart McCarthy on November 3, 2007 - 10:56am.

And in the Oz:

Govt Cannot Control Petrol Price: Howard

THE fluctuating cost of crude oil is a reminder that no Australian government can control the price of petrol, Prime Minister John Howard says.

Oil prices rose to a new record in Asian trading yesterday after a surprise drop in US crude oil supplies.

"It just reminds us that no government can control the price of petrol and any attempt by the Labor party to exploit this electorally would be flimsy and lacking in substance,'' Mr Howard told Sky News today.

Mr Howard said he is more worried about the impact of soaring petrol prices on Australian drivers.

"Fortunately our dollar is strong, partly because of the weakness of the American dollar but also due to the fact that people think the Australian economy is strong and it (is) well run,'' he said.

"If the dollar were weaker the petrol price would be higher.''

In the context of peak oil Mr Howard's 'strong, well-run economy' mantra is starting to look like the ravings of a Pacific island cargo-cultist.

Mad Hugo And His Mad Merry Band

Submitted by Paul Morrella on October 29, 2007 - 2:10pm.

Ian McPherson

Can you think of another way to deal with the issue? Believe it or not, I would value your thoughts.

If you wished to go down the subsidy route I would give massive tax incentives to private investors. This would have the effect of large amounts of money being invested in alternative technologies.

I just don't like it when you group a bunch of people together, in this case people who share a political outlook, and brand most of them "dumb as a box of rocks". That's akin to the scientist who recently stated that black people are less intelligent than white people. In your case you're saying it is because of the way they think.I have never made a comment regarding race. It is you that is making such diabolical claims public in a rather sneaky fashion (attempting to blame me). I ask that you desist from doing so.

Your point about Hugo Chavez is illustrative, I think, of your agenda. Are all of the millions of Chavez's supporters (the majority of the people in Venezuela) another bunch of people who are as "dumb as a box of rocks", or perhaps another group plagued with "psychological problems"?

Any person that supports Hugo Chavez has one of the problems I have mentioned. A large amount of Venzuelan people do not have any such problems. Educated people leaving Venezuela is now a multi billion dollar business, and one (amongst many) such business benefiting from it is the Canadian oil industry. Any person outside Venezuela supporting Hugo Chavez I would classify as evil.

Morrella and his Merry Band

Submitted by Ian McPherson on October 29, 2007 - 5:38pm.

Hi Paul,

Your post was messy, but I've tried to break it up into comprehensible chunks for the other readers.

If you wished to go down the subsidy route I would give massive tax incentives to private investors. This would have the effect of large amounts of money being invested in alternative technologies.

I agree entirely. I can't see another alternative. We're going to have to mess it up some more to make it work...

Now, I hope I've got this right...

I have never made a comment regarding race. It is you that is making such diabolical claims public in a rather sneaky fashion (attempting to blame me). I ask that you desist from doing so.

What should I desist from Paul? You're the one that is stating whole groups of people are "dumb as a box of rocks" or have "psychological problems". In fact, you repeat yourself in this post;

Any person that supports Hugo Chavez has one of the problems I have mentioned. <snip> Any person outside Venezuela supporting Hugo Chavez I would classify as evil.

Look Mate, I don't know what to suggest for your problem. Find the answers somewhere else.

Oil And Choice

Submitted by Paul Morrella on October 26, 2007 - 10:26pm.

Ian McPherson

Using your reasoning ("Subsidy gives of the aura of poor business, and failure."), the fossil fuel industries are therefore poor businesses and failures.

No, the people given them direct subsidies are fools. I would also agree a level playing field with the alternative energy industry would be best. As long as government does not interfere in the market place I have not got any problem at all. The market should be left to decide where it all goes from here - as long as the field is level I take it you agree?

On another note, I would appeal to you again to avoid demeaning people for their political views. Your opinion that many socialists are "dumb as a box of rocks" is insulting and patently untrue. In fact, it is bordering on a racist theme, which trails behind you like a nasty black wake, everywhere you go. Please desist.

I appeal to you to stop appealing to me (not the first time). The people that control this board have editing control, and obviously they have allowed what was written to be posted. You have as much right to an opinion as I do; what you do not have is the right to dictate what my opinion is, and how I can express it. A continual running commentary dealing with your sensibilities, and who you perceive may be offended by very vague, and lawful generalisations is not something I will be concerning myself with (writing a reply) in the future. People have the right to read or not to read anything written on this board - called the freedom of choice.

My spoken "socialism" (not directed at any individual) is extreme socialism. It was proven in the 20th century that extreme socialism results in total failure in every circumstance. It is therefore valid to believe that many people believing in this form of socialism has either mental constraints or psychological problems (Mr Chavez comes to mind). What racism has to do with a dislike of a political theory is anyone's guess????

Oil, choice and socialism

Submitted by Ian McPherson on October 27, 2007 - 2:25pm.

Paul Morrella:

No, the people given them direct subsidies are fools. I would also agree a level playing field with the alternative energy industry would be best. As long as government does not interfere in the market place I have not got any problem at all. The market should be left to decide where it all goes from here - as long as the field is level I take it you agree?

I agree with you that a level playing field in the energy industry is desirable. The problem is how do we achieve that, now that Big Gov/Biz have already decided to milk the public purse to fuel our lifestyles with subsidised costs. Undoing some of these fossil fuel subsidy "initiatives" will send energy costs up dramatically, hurting everyone but Big Gov, who get the money back in their pocket.

Therein lies the conundrum. From my point of view, we need to leave the currently idiotic subsidy schemes in place for fossil fuels, because to do otherwise would harm all consumers. If that is the case, then the only option is to subsidise renewable energy more, to compensate, in that way levelling the market in a very complex manner.

Can you think of another way to deal with the issue? Believe it or not, I would value your thoughts.

My spoken "socialism" (not directed at any individual) is extreme socialism. It was proven in the 20th century that extreme socialism results in total failure in every circumstance. It is therefore valid to believe that many people believing in this form of socialism has either mental constraints or psychological problems (Mr Chavez comes to mind). What racism has to do with a dislike of a political theory is anyone's guess????

Look, I don't want to fight.

I just don't like it when you group a bunch of people together, in this case people who share a political outlook, and brand most of them "dumb as a box of rocks". That's akin to the scientist who recently stated that black people are less intelligent than white people. In your case you're saying it is because of the way they think. This is bordering on racism, skewed to suit your political agenda.

You don't need this sort of borderline rhetoric to make your point. If your point is good enough, you've done the job. Do you really need to demean groups of people to get your point across? If so, I feel sorry for you...

A finite resource

Submitted by Paul Morrella on October 25, 2007 - 1:40pm.

Stuart McCarthy, I have never doubted that oil will eventually run dry (when I am not convinced) it is after all a finite resource. What I do doubt is the consequences predicted by peak oil theorists.

Certainly oil will not be here on Thursday, and gone by Saturday. It will be a progression that will gather momentum over time and the market will reflect this - and I do not mean find every short term shock price to bolster your claims. As the market reflects the changing circumstances so will the lifestyles of people, and the products they consume. This as I have stated before should be a gift from God for the climate change doomsayers. Peak oil is essentially an economic issue that is being built into something that it certainly is not. Lurching into further state control because of this issue would be a huge mistake.

Now what I said were some of the people involved in pushing this particular fraud were the socialist crowd, and the scammer crowd. Contrary to your oft repeated assertions, socialists I happen to hold little fear of socialists. They certainly do not have the power to change much of anything, and for the most part many of them are as dumb as a box of rocks when actually comes to doing anything effective (such as ruling on anything). On the other hand scammers are quiet the opposite, often extremely high wealth individuals with extremely high levels of power, and sway. Far from being in it for noble reasons they are in it for...

The question is why would a person selling or holding oil wish to have rarity issue's, true or not, made very, very public? And anyway what is to say that on the eve of state control the next great find is not a drill bit away? Stranger things have happened.

Evan Hadkins:

Why not indeed?! Ask the (hopefully soon to be ex-)PM. There are all kinds of subsidies to particular industries. This doesn't exactly fit with the proclaimed belief in the market, but is no less likely to persist because of this.

If the peak oil theorists are correct subsidies will not be needed. The alternative energy industry will be a massively profitable one. Subsidy gives of the aura of poor business, and failure. There are already a number of companies listed on the NASDAQ that can be invested in today. There are already massive injections into the alternative energy industry by major oil companies and the like (you certainly did'nt just think these companies plan on going bankrupt?). Show me a plan that does not need a subsidy and I guarantee you will find the funds.

Fossil fuel Subsidies

Submitted by Ian McPherson on October 26, 2007 - 11:43am.

Paul Morella:

If the peak oil theorists are correct subsidies will not be needed. The alternative energy industry will be a massively profitable one. Subsidy gives of the aura of poor business, and failure. There are already a number of companies listed on the NASDAQ that can be invested in today. There are already massive injections into the alternative energy industry by major oil companies and the like (you certainly didn't just think these companies plan on going bankrupt?). Show me a plan that does not need a subsidy and I guarantee you will find the funds.

An interesting argument Paul. But it doesn't stand up. The fossil fuel industries are highly subsidised in Australia, much more than alternative (I trust you mean renewable) energies. And the investments by the oil industry in their core businesses pale by comparison with their investments in renewable energies (if you would like the figures I can supply them).

On Australian fossil fuel subsides, a study by the Institute for Sustainable Futures in 2007 concluded that:

"The research reported here identifies total energy and transport subsidies in Australia during 2005-06 of between $9.3 billion and $10.1 billion. The range in the estimates is due to uncertainty about the size of particular subsidies and differing assumptions used to deal with this uncertainty. However, both estimates are based on conservative assumptions.
"Table ES1 shows how these subsidies are divided between the various fossil fuels and renewable energy, and how they are split across different sectors. More than 96% of the identified energy and transport subsidies provide support for fossil fuel production and consumption. Less than 4% of the identified subsidies provide support for renewable energy and energy efficiency. This effectively creates an uneven playing field for renewable energy, making it much more difficult to respond to climate change in the energy and transport sectors.
"Figure ES1 shows the disparity in subsidy support graphically and also shows their impact on greenhouse gas emissions. Fossil fuel subsidies can increase greenhouse gas emissions because they reduce the price of fossil fuel energy, which encourages greater use of fossil fuels and higher levels of greenhouse gas emissions. However, in some cases, fossil fuel subsidies can result in a net reduction in greenhouse gas emissions. For example, a subsidy to a coal-fired power station to improve the efficiency of the power station can reduce greenhouse gas emissions.
"Many of the subsidies that would increase greenhouse gas emissions are also likely to have an adverse economic impact – these subsidies are categorised as perverse. Figure ES1 shows that just over 70% of the identified fossil fuel subsidies are categorised as perverse, and about 90% per cent of the identified subsidies would increase greenhouse gas emissions. Only about 10% are likely to reduce greenhouse gas emissions.
"As shown in Figure ES2, most of the identified fossil fuel subsidies occur in the transport sector; about 74% are transport subsidies, 18% are electricity subsidies and 8% are other stationary energy subsidies. In other words, road users are currently the greatest beneficiaries from fossil fuel subsidies in Australia. However, subsidies for non-transport energy use are still significant."

Using your reasoning ("Subsidy gives of the aura of poor business, and failure."), the fossil fuel industries are therefore poor businesses and failures. Yet the truth is that government and industry have "loaded the dice" to create a distorted marketplace.

The Howard government has very successfully managed to hide this from the public, and paint the renewable energy industry as living on government handouts. In fact, some of the coal-fired power plants are given more in annual subsidies than they make in annual profits (I kid you not – it's in the report above).

Better and fairer, I think, that the government either remove all subsidies on competitive technologies to level the market (which would raise prices and is highly unlikely), or provide subsidies for renewable energies that are percentage equivalents to those for fossil fuels.

Until then, we will never know whether your "market knows best" philosophy can prevail.

-------------------------------------------

On another note, I would appeal to you again to avoid demeaning people for their political views. Your opinion that many socialists are "dumb as a box of rocks" is insulting and patently untrue. In fact, it is bordering on a racist theme, which trails behind you like a nasty black wake, everywhere you go. Please desist.

Nobody's fault but mine...

Submitted by Ian McPherson on October 26, 2007 - 2:20pm.

Apologies.

In the last post I meant to say:

An interesting argument Paul. But it doesn't stand up. The fossil fuel industries are highly subsidised in Australia, much more than alternative (I trust you mean renewable) energies. And the investments by the oil industry in their core businesses (oil and gas) is many times larger than their investments in renewable energies (if you would like the figures I can supply them).

I think I was concentrating too much on the thpelling and forgetting to write correctly...

Are These People 'Lefties' Too?

Submitted by Stuart McCarthy on October 25, 2007 - 12:10am.

Here is a short list of 'lefties', 'greenies' and other sundry communists who are taking this 'peak oil' nonsense seriously:

former Deputy Prime Minister and Leader of the National Party - John Anderson
former Chairman of the Australian Coal Association, former CEO of the Australian Institute of Company Directors, and current Deputy Convenor of ASPO-Australia - Ian Dunlop
US (Republican) Defence Secretary - Robert Gates
US (Republican) Senator - Rosco Bartlett
Serving US Army Officer - Daniel L. Davis

Ken Deffeyes' Peak Oil Lecture at the 2007 Nobel Conference

Submitted by Stuart McCarthy on October 25, 2007 - 9:24am.

Some of you may be interested to watch this lecture, Peak Oil: Here and Now, by Kenneth S. Deffeyes at the recent 2007 Nobel Conference. Deffeyes is the Professor Emeritus of Geosciences at Princeton University. I think even Paul Morrella might struggle to dismiss Princeton as a front for the politburo. The spherical earth can be a fascinating place if you ever change the channel from Big Brother or Gold Coast Indi Car.

OECD now Paying Attention to Peak Oil

Submitted by Stuart McCarthy on October 25, 2007 - 11:50am.

An extract from ASPO President Kjell Aleklett's weekly letter:

On June 22 I received an e-mail from Stephen Perkins, head of the OECD/ECMT Joint Transport Research Centre in Paris. He told me that they were organising a Round Table meeting of experts on November 15-16 to examine the short and long-term outlooks for oil prices and oil supply as well as the implications these issues will have for transport policy. Furthermore they wanted to focus on a Peak Oil and an economic resource debate.

In 2003 Colin Campbell and I wrote a peer reviewed paper for Minerals and Energy (http://www.tsl.uu.se/uhdsg/Publications/Minerals&Energy_2003.doc) and it was this paper that lead to the OECD contacting me. Stephen Perkins asked if it was possible for me to present the Peak Oil arguments, starting with this paper, at the round table research meeting in Paris and if I could prepare a detailed paper with which to brief participants beforehand. Without hesitation the answer was yes.

The Round Table will examine the long-term outlook for oil supply and oil prices and the relationship between oil prices and demand in the transport sector. It is hoped that the round table will provide valuable support for the International Transport Forum’s 2008 Ministerial meeting on Transport and Energy.
    My report "Peak-Oil and the Evolving strategies of Oil Importing and Oil Exporting Countries - Facing the hard truth about an import decline for the OECD countries" was delivered at the end of September and now it has been released for official use. I cannot publish it as the OECD and the International Transport Forum hold the copyright but they will be publishing this document after the meeting in November. However, I do have the right to hand it to interested parties. A summary of the arguments in the document is as follows:

    Statistical trends of oil intensity from individual countries and groups of countries show that an average increase of GDP of 3% per annum equates to a projected demand for liquids of 101 Million barrels per day (Mbpd) by the year 2030. This analysis shows that this demand cannot be fulfilled by production from current reserves and expected new discoveries.

    Two models to assess peaks in production of oil are considered: the depletion model (DM), and the giant field model (GFM). The DM model shows Peak Oil (the maximum rate of production) date in the year 2011 with 90 Mbpd. Adding GFM we develop a "Worst Case" scenario of a plateau in production for the next 5 to 7 years at a rate of 84 Mbpd. A more optimistic case in the "Giant High Case" scenario is a peak in 2012 at 94 Mbpd. A less steep increase demand can move the peak to 2018. Both models show an oil production rate of the order of 50 to 60 Mbpd by 2030.

    The demand for oil from countries that are importers is forecast to increase from current import levels of 50 Mbpd to 80 Mbpd. A detailed analysis shows that Saudi Arabia, Russia and Norway, today’s largest oil exporters, will experience a decline in their export volumes of the order of 4 to 6 Mbpd by 2030. The projected shortfall cannot be offset by exports from other regions.

    When I submitted my report Stephen Perkins asked me if I also could write report about CO2 emission, and I have now submitted that report.

    "This analysis is based on realistic reserve assessments. Resources that cannot be transformed into reserves are not allowed. First, we conclude that CO2 emissions from burning reserves-based oil and gas are lower than what all of the IPCC scenarios predict, and emissions from coal are much lower than the majority of the scenarios. IPCC emission scenarios for the period 2020 to 2100 must be altered to more accurately reflect the fossil fuels that are practically available."

    There are three other reports to be presented to the round table and they are:

    Price Instability: the determinants of oil prices in the short term

    Lawrence Eagles, Head of the Oil Industry and Markets Division of the International Energy Agency.

    The determinants of oil prices and supply in the long term

    Dr David Greene, Oak Ridge National Laboratory, Center for Transportation Analysis, USA.

    Long run trends in transport demand, fuel price elasticities and implications of the oil outlook for transport policy

    Professor Kenneth Small, University of California Irvine, USA.

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