Eighty percent of global oil production needs to be replaced by 2040 to meet projected demand. It is increasingly likely, particularly post COVID, that much of this oil production will not be replaced. There is an urgent and existential need to structurally reduce Australia’s oil dependence.
Energy is the economy. The functioning of modern industrial economies is entirely dependent upon enormous quantities of cheap energy, over 80% of which still comes from hundreds of millions of years of stored sunlight. Humans are using fossil fuels at a rate 10 million times greater than the rate of formation. Oil remains the world’s primary energy source, with virtually all liquid fuels being derived from it as well as important uses as a feedstock for industrial processes.
Given the obvious importance of oil to the functioning of the economy and the goods and services that we rely upon, there is a grossly misplaced sense of complacency when it comes to Australia’s future oil supply. This was aptly demonstrated by the Commonwealth Government’s myopic Interim Liquid Fuel Security Report which paid lip service to future oil supplies. In the post COVID-19 world, the evidence suggests that only a portion of oil production being lost due to depletion will be replaced.
Prior to COVID-19, the global economy consumed around 100 million barrels of oil per day (mb/d). According to the International Energy Agency (IEA), if capital investment were to cease immediately, by 2040 global oil production would be just 15 mb/d due to the natural phenomena of declining production from existing oil fields. To counter this natural decline requires around two to three mb/d of new oil production to be brought online each and every year. The critical question is thus whether the investment in oil production is sufficient to maintain, let alone grow, global oil production.
Even before COVID-19 it was clear that investment was falling well short of requirement. In its 2018 World Energy Outlook the IEA identified that approvals of new crude oil production projects would need to more than double each year from 2018 to 2025 to avoid a mismatch between supply and demand. Additionally, the IEA identified that the investment in oil demand is based upon ever increasing oil consumption whilst levels of investment in oil supply were based on stagnant or falling demand. The resulting dichotomy, the IEA concluded, increases the risk of damaging oil price spikes and increased volatility.
The largest ever drop in oil demand resulting from COVID-19 has considerably worsened the outlook for future oil production due to major job losses, bankruptcies, significant reductions in drilling and exploration activity and an estimated 30 per cent cut in investment (coming after large cuts in 2015 and 2016). With a five decade plus history of declining oil discoveries (we now consume around eight times as much oil as is discovered each year) and new projects being from smaller fields, of lower quality and more technically difficult to extract, the most plausible future scenario is one where the pace of depletion outpaces new oil production. The net result being that we can expect global oil production to, on average, decline by a couple of million barrels a day per year.
Paradoxically the COVID-19 triggered demand destruction means that the world is currently awash with oil, resulting in oil prices that make many unconventional sources of oil production, such as tight oil, uneconomical. Tight oil in the United States has been responsible for 83 percent of oil production growth over the last decade. With the operational rig count being a third of what is required to maintain production levels from rapidly depleting tight oil wells, Petroleum geologist Art Berman predicts that United States tight oil production will halve by the end of 2021, even in the unlikely event that all rigs became operational immediately. The decline in tight oil production, when combined with declines elsewhere, suggests it will only be a couple of years before the buffer that currently exists between supply and demand is eliminated, resulting in much higher and potentially economically damaging oil prices.
When confronted with the prospect of oil supplies being insufficient to meet future needs, the immediate thought is what about the alternatives such as biofuels, hydrogen and electric vehicles? It is highly unlikely that they will be able to fill the gap. For example if half of Australia’s sugarcane production was diverted to ethanol it would replace (pdf) just 1/38th of Australia’s liquid fuel consumption. Under the Commonwealth Government’s most optimistic (pdf) scenario the additional global demand for hydrogen is estimated at 50 million tonnes in 2040. Whilst this might sound impressive it only equates to around three mb/d of oil production (calculated using this energy conversion calculator). In other words, it will take 20 years to be able to produce the equivalent amount of additional hydrogen that we can expect to lose in oil production each and every year. In 2019 electric vehicle (EV) sales were just 0.6% of all new car sales with EVs making up just 0.2% of Australia’s total vehicle fleet. When it comes to alternatives the story can be summarised as too little too late.
This is not to say that alternative fuels and propulsion systems are not important, they are critically so for our long-term future beyond oil. However, it does highlight that the response to our oil predicament cannot be predicated on having access to anywhere near current levels of liquid fuel.
Geopolitics is another factor that must be considered. Conflict in the South China Sea (through which 50 per cent of Australia’s diesel and 75 per cent of our jet fuel transits), or the Persian Gulf could disrupt global oil trade with little notice. Oil infrastructure is also vulnerable as demonstrated by the 2019 drone and missile strikes against Saudi Arabia which resulted in more than half of Saudi Arabia’s oil production being temporarily taken offline. The availability of oil is also likely to reduce as more bilateral deals, such as those between China and Iran and China and Russia, are established reducing the oil available on the market for other oil importing countries.
Oil dependence is Australia’s sword of Damocles, which for all intents and purposes is being ignored by governments at all levels. Australia needs to structurally reduce its oil consumption and by a large proportion commencing immediately. It is difficult to overstate how challenging is the task that lays before us as a nation, but failure to act will have potentially devastating impacts on every aspect of economic activity and our daily lives. Having defined our oil predicament, a subsequent post will explore some ideas on how me may go about structurally reducing Australia’s oil dependency.