Kunstler column on the denial of Limits to Growth in the New York Times

James Howard Kunstler. June 1, 2015. Twenty-Three Geniuses.


If there is a Pulitzer Booby Prize for stupidity, waste no time in awarding it to The New York Times’ Monday feature, The Unrealized Horrors of Population Explosion. The “newspaper of record” wants us to assume the sky’s the limit for human activity on the planet earth. Problemo cancelled. The article and accompanying video was actually prepared by a staff of 23 journalists. Give the Times another award for rounding up so many credentialed idiots for one job.

Apart from just dumping on Stanford U. biologist Paul Ehrlich, author of The Population Bomb (1968), this foolish “crisis report” strenuously overlooks virtually every blossoming fiasco around the world. This must be what comes of viewing the world through your cell phone.

One main contention in the story is that the problem of feeding an exponentially growing population was already solved by the plant scientist Norman Borlaug’s “Green Revolution,” which gave the world hybridized high-yielding grain crops. Wrong. The “Green Revolution” was much more about converting fossil fuels into food. What happens to the hypothetically even larger world population when that’s not possible anymore? And did any of the 23 journalists notice that the world now has enormous additional problems with water depletion and soil degradation? Or that reckless genetic modification is now required to keep the grain production stats up?

No, they didn’t notice because the Times is firmly in the camp of techno-narcissism, the belief that the diminishing returns, unanticipated consequences, and over-investments in technology can be “solved” by layering on more technology — an idea whose first cousin is the wish to solve global over-indebtedness by generating more debt. Anyone seeking to understand why the public conversation about our pressing problems is so dumb, seek no further than this article, which explains it all.

Climate change, for instance, is only mentioned once in passing, as though it was just another trashy celebrity sighted at a “hot” new restaurant in the Meatpacking District. Also left out of the picture are the particulars of peak oil (laughed at regularly by the Times, which proclaimed the US “Saudi America” some time back), degradation of the ocean and the stock of creatures that live there, loss of forests, the political instability of whole regions that can’t support exploded populations, and the desperate migrations of people fleeing these desolate zones.

The Times has no idea about the relation of finance to resources. The banking problems we see all over the world are a direct expression of the limits to growth, specifically the limits to debt creation. We can’t continue to borrow from the future to pay for our comforts and conveniences today because we have no real conviction that these debts can ever be repaid. We certainly wish we could, and the central bankers running the money system would like to pretend that we could by making negligible the cost of borrowing money and engaging in pervasive accounting fraud. But that has only served to cripple the operation of markets and pervert the meaning of interest rates — and, really, as a final result, to destroy any sense of consequence among the people running things everywhere.

The crackup of that financial system will be the signal failure of the collapse of the current economic regime. The financial system is the most fragile of all the systems we depend on (though the others do not lack fragility). This is the reason, by the way, that oil prices are so low, despite the fact that the cost of producing oil has never been higher. The oil customers are going broke even faster than the oil producers. Does anybody doubt that the standard of living in the USA is falling, despite all our cell phone apps?

The basic fact of the matter is that the energy bonanza of the past 200-odd years produced a matrix of complex systems, as well as a hypertrophy in human population. These complex systems — banking, agri-biz, hop-scotching industrialization, global commerce, Happy Motoring, commercial aviation, suburbia — have all reached their limits to growth, and those limits are expressing themselves in growing global disorder and universal bankruptcy. Do the authors of The New York Times report think that the oil distribution situation is stable?

There were two terror bombings in Saudi Arabia the past two weeks. Did anyone notice the significance of that? Or that the May 29th incident was against a Shiite mosque, or that the Shia population of Saudi Arabia is concentrated in the eastern province of the kingdom where nearly all of the oil production is concentrated? (Or that the newly failed state of neighboring Yemen is about 40% Shiite?) Have any of the 23 genius-level reporters at The New York Times tried to calculate what it would mean to the humming global economy if Arabian oil came off the market for only a few weeks?

Paul Ehrlich was right, just a little off in his timing and in explicating with precision the unanticipated consequences of limitless growth. But isn’t it in the nature of things unanticipated that they generally are not?

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Peak Aquifers: Very little Ground water is renewable, perhaps only 1.5%

Gleeson, Tom, et al. November 2015. The global volume and distribution of modern groundwater. Nature Geoscience.

The water in aquifers and wells billions of people depend upon is mostly a non-renewable resource that could run out.

Underground water is renewed very slowly.

Only 5.8% is replenished within a human lifespan of 50 years, and is further reduced by climate change when this causes less rainfall.

The actual number may be closer to 1.5%, because 5.8% is likely to be an overestimate due to the types of rock in the areas where most of the measurements were taken.

In California and the Midwest (Ogallala aquifer), people are already using “non-renewable” water thousands of years old, water that produces about a third of America’s food. Egypt is tapping into water last renewed a million years ago. Such old water isn’t just non-renewable — it’s usually saltier and more contaminated than younger groundwater.

In addition, overusing groundwater, either old or young, can lower subsurface water levels and dry up streams, which could have a huge effect on ecosystems on the surface

This water is near enough to the surface to be contaminated by pollution or evaporated by high temperatures

While many people may think groundwater is replenished by rain and melting snow the way lakes and rivers are, underground water is actually renewed much more slowly.

Over a third of the world’s population depends on groundwater for drinking, agriculture, and commercially.

Also see Emily Chung, Nov 16, 2015, Groundwater is mostly non-renewable, CBC News

Konikow, L.F., 2013, Groundwater depletion in the United States (1900-2008): U.S. Geological Survey Scientific Investigations Report 2013-5079

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James Howard Kunstler “True Believers”

James Howard Kunstler. August 17, 2005. True Believers.


There is a special species of idiot at large in the financial media space who believe absolutely in the desperate and tragic public relations bullshit that this society churns out to convince itself that the techno-industrial high life can continue indefinitely, despite the mandates of reality — in particular, the fairy tales about oil: we’re cruising to energy independence… the shale oil “miracle” will keep us driving to WalMart forever… our wells doth overflow as if this were Saudi America… don’t worry, be happy…!

Such a true believer is John Mauldin, the investment hustler and writer of the newsletter Thoughts From the Frontline, who called me out for obloquy in his latest edition. After dissing me, he said:

“I have written for years that Peak Oil is nonsense. Longtime readers know that I’m a believer in ever-accelerating technological transformation, but I have to admit I did not see the exponential transformation of the drilling business as it is currently unfolding. The changes are truly breathtaking and have gone largely unnoticed.

Mauldin is going to be very disappointed when he discovers that the vaunted efficiencies in shale drilling and fracking he’s hyping will only accelerate the depletion of wells which, at best, produce a few hundred barrels of oil a day, and only for the first year, after which they deplete by at least half that rate, and after four years are little better than “stripper” wells. The PR shills at Cambridge Energy Research (Dan Yergin’s propaganda mill for the oil industry) must have pumped a five-gallon jug of Kool-Aid down poor John’s craw. He believes every whopper they spin out — e.g. that “Right now, some US shale operators can break even at $10/barrel.

The truth is the shale oil industry couldn’t make a profit at $100/barrel. The drilling and fracking boom that began around 2005 was paid for with high-risk, high-yield junk bond financing and other sketchy, poorly collateralized financing. Most of the earnings in the early years of shale oil came from flipping land leases to greater fools.

Now that the price of oil has fallen by more than 50% in the past year, the prospect dims for that junk financing to be repaid. Since that was “bottom-of-the-barrel” financing, the odds are that the shale producers will have a very hard time finding more borrowed money to keep up the relentless pace of drilling needed to stay ahead of the short depletion rates. They are also running out “sweet spots” that are worth drilling.

We will look back on the shale oil frenzy of 2005 to 2015 as a very interesting industrial stunt borne of desperation. It gave a floundering industry something to do with all its equipment and its trained personnel, and it gave wishful hucksters something to wish for, but it never penciled-out economically. Shale oil production turned down in 2015 and the money will not be there to get the production back to where it was before the price crash. Ever.

Some additional uncomfortable truths should temper the manic fantasies of hypsters like Mauldin. One is that we are no longer in the cheap oil age. All the new oil available now is expensive oil — whether it’s Bakken shale or deep water or arctic oil — and it costs too much for our techno-industrial society to run on. That is why the world financial system is imploding: we can’t borrow enough money from the future to keep this game going, and we can’t pay back the money we’ve already borrowed. We have to get another game going, one consistent with contraction and with much lower energy use. But that is not an acceptable option to the people running things. They are determined to keep the current matrix of rackets going at all costs, and the certain result will be very messy collapse of economies and governments.

Industrial economies face a fatal predicament: Oil above $75/barrel crushes economies; under $75/barrel it crushes oil companies.

We’ve oscillated back and forth between those conditions since 2005. The net effect in the USA is that the middle class is rapidly going broke. All the financial shenanigans aimed at propping up Wall Street and Potemkin stock markets was carried out at the expense of the middle class, now deprived of jobs, incomes, vocations, stability, and prospects. They may already be at the point where they can’t afford oil at any price. That “energy deflation” dynamic, in the words of Steve Ludlum at the Economic Undertow blog, is a self-reinforcing feedback loop that beats a path straight to epochal paradigm shift: get smaller, get local, get real, or get out.

The hypsters and hucksters won’t believe this until it jumps up and bites them on the lips. These are the same idiots who believe we are going to continue Happy Motoring by other means — self-driving, all-electric cars — and who think there is some reason for human beings to travel to other planets when we haven’t even demonstrated that we can plausibly continue life on this one.

As I averred last week, America is at the bottom of a self-knowledge low cycle in which we are incapable of constructing a coherent story about what is happening to us. The techno-industrial fiesta was such a special experience that we can’t believe it might be coming to an end. So, one option is to believe stories that have no basis in reality. As Tom McGuane wrote some forty years ago: “Life in the old USA gizzard had changed and only a clown could fail to notice. So being a clown was a possibility.”

Posted in James Howard Kunstler, Oil & Gas Fracked, Peak Natural Gas, Peak Oil | Tagged , , | Leave a comment

Geopolitics of Oil. United States Senate Hearing 110-6

Senate 110-6. January 10, 2007. Geopolitics of Oil. United States Senate Hearing. 90 pages.


Senator Jeff Bingaman (New Mexico). The idea of this hearing is to try to look at the big picture, to begin the year with an overview of the geopolitics of oil. There is a quote that my staff dug out of the files of the committee, from Scoop Jackson, when he chaired this committee back in 1980, and he said, at that time, ‘‘The world will witness a growing struggle for secure access to oil through the end of this century and into the next. This gathering energy crisis deserves the highest priority in the counsels of Government. Few other problems are more complicated, few other problems will be more difficult to resolve. Moreover, many of the policies we are currently pursuing to deal with the energy crisis are only making it worse.’’ Today, we still have the struggle for access to oil. We also, of course, have a competition among consumers that has developed, particularly with the increasing appetite for oil in places like China and India. There are great implications for the United States in all of that, both for our economy and for our national security.


Former Deputy Commander, U.S. European Command, & member of the Energy Security Leadership Council

I recently retired from the Air Force after 35 years of service and during my career had the opportunity to fly combat over Vietnam, Cambodia, Iraq and Bosnia and learned much regarding how to use military assets to effectively solve national security problems.

But I also learned that many believed the U.S. military is solely responsible for security. I like to call this the ‘‘Dial 1-800-The-U.S.- Military’’ syndrome, because it reflects how people assume the U.S. military is a “toll-free” resource that can be called on to perform tasks that no one else has either the capability or will to execute.

I recall a recent meeting with several major global oil company executives in Kazakhstan. Before we began our discussion, one of the executives thanked me and the U.S. military for protecting the free flow of oil around the world. The executive’s world view included the expectation that the U.S. military will be there to provide worldwide security and to ensure the free flow of oil without any assistance from others. This struck me, and frankly, does not seem like a good model, particularly for the United States. The U.S. cannot and should not be everywhere to protect all the vulnerable components of the global oil infrastructure. The global economy relies on a massive oil infrastructure that stretches far beyond the Persian Gulf to pipelines in the Caucasus and offshore drilling rigs in the Gulf of Guinea. Surveying this situation, I realized that the U.S. military could not protect this vast infrastructure without partners. And, trust me, there should be partners out there, because the free flow of oil is in the best interest of many people all over the world.

With regard to the oil dependence issue, military response and capabilities are by no means the only effective tools available and in many cases are not appropriate. In fact, the single most effective step the United States can take to improve its energy security is to increase transportation efficiency. The transportation sector is responsible for nearly 70 percent of the oil the United States consumes. Within the transportation sector, oil—nearly 13 million barrels per day of it—accounts for 97% of delivered energy. More than 8 mb/d are used to fuel the over 220 million light-duty vehicles that Americans rely on for mobility.

CAFE standards legislated in 1973 during the Arab oil embargo were instrumental in helping America lower oil usage by the 1980’s, but there has been little progress since the original mileage targets were met. As a consequence, America’s light-duty vehicle fleet now has the worst average fuel efficiency in the developed world.

Some may be surprised to hear from a former General talk about fuel efficiency standards but they shouldn’t be. In the military, we learned that forced protection isn’t only about protecting weak spots, it’s also about reducing vulnerabilities before you go into harm’s way. That’s why lowering the Nation’s demand for oil is so critical.

Nearly all of our U.S. military commands have some oil security tasks and in essence they provide a blanket of security that benefits all nations. Central Command guards access to the oil supplies in the Middle East; Southern Command defends Colombia’s Cano Limon pipeline; Pacific Command patrols the tanker routes in the Indian Ocean, the South China Sea and the Western Pacific; and my last assignment, as deputy commander of European Command, which included, by the way, most of Africa. We patrolled the Mediterranean, provided security in the Caspian Sea and off the West Coast of Africa.

During that assignment, I became more appreciative of the size and scope of the oil security challenge. While surveying that challenge, it became apparent that the U.S. military could not protect that vast infrastructure without partners—and trust me, there should be partners in this mission. The free flow is clearly in the best interests of people all over the world. These interested parties certainly cannot replicate all the capabilities of the U.S. military, but their contributions can free up military tasks that only the U.S. military can successfully accomplish.

The armed forces of the United States have thus far been successful in fulfilling our energy security mission and they continue to carry out their duties professionally and with great courage. As a result of this success, many have come to believe—and I believe, falsely—that energy security can be achieved solely by military means. We need to change this paradigm because the U.S. military is not the best instrument for confronting all the strategic dangers emanating from oil dependence. The 1973 oil embargo is the most famous example of the use of energy as a political strategic weapon.


Since 1980, the U.S. Government, through military application, has put about $50 billion to $60 billion a year into the Persian Gulf. That doesn’t count the current Iraq war or the 1990 Iraq war. And that’s good for our country, for security interests, but the problem is, we’re subsidizing world energy. There is nobody else in the world doing this, and really, if you look at how much we’re paying per gallon, me, as a U.S. citizen today, for gasoline, you could almost say it’s $7 a gallon, based on the fact that we’re subsidizing world security on this issue.

The United States protects the global oil trade for the benefit of all nations. In part, this is because the U.S. has unmatched military capabilities. But another reason is that other nations know the U.S. military is out there doing the job.

The implicit strategic and tactical demands of protecting the global trade have been recognized by national security officials for decades, but it took the Carter Doctrine of 1980, proclaimed in response to the Soviet Union’s invasion of Afghanistan, to formalize this critical military commitment.

The Carter Doctrine committed the U.S. to defending the Persian Gulf against aggression by any ‘‘outside force.’’ President Reagan built on this foundation by creating a military command in the Gulf and ordering the U.S. Navy to protect Kuwaiti oil tankers during the Iran-Iraq War. The Gulf War of 1991, which saw the United States lead a coalition of nations in ousting Iraqi leader Saddam Hussein from Kuwait, was an expression of an implicit corollary of the Carter Doctrine: the U.S. would not allow Persian Gulf oil to be dominated by a radical regime—even an ‘inside force’ that posed a dangerous threat to the international order. More recently, the security agenda in the Gulf has expanded beyond state actor aggression to include concerns about terrorist attacks on facilities and supply lines.


Since issuing his 1996 ‘‘Declaration of War’’ against the U.S. and its partners, Osama bin Ladin has warned of attacks on oil installations in the Persian Gulf. Last year, the world came close to experiencing an oil supply shock when an Al- Qaeda attack on the Abqaiq facility through which approximately 60% of Saudi Arabian oil exports pass was barely foiled. In addition to attacking physical infrastructure, Al Qaeda operatives have also targeted expatriates in their residential areas, in particular in Riyadh, Saudi Arabia (October 2002) and in al-Khobar (May 2004).

Iraq is also the scene of persistent insurgent and terrorist attacks on pipelines and pumping stations, especially in the North of the country. These attacks have severely limited Iraqi oil exports to the Mediterranean through Turkey, and they are a major reason why Iraqi oil production has stubbornly remained below its prewar peak. The lost output has cost Iraq billions of dollars at a time when it needs every dollar and while U.S. taxpayers have spent billions on the reconstruction of the country. But if violence continues, and especially if it spreads to the south, where most of the oil and export facilities are located, then all of Iraq’s oil production could be at risk. The implications of this supply cut would be severe.

The danger of attacks on shipping is proven—in October 2002, the French supertanker Limburg was rammed by a small boat packed with explosives off the coast of Yemen. Most oil shipments have to pass through a handful of maritime chokepoints. Roughly 80% of Middle East oil exports pass through the Strait of Hormuz (17 mb/d), Bab el Mandeb (3 mb/d), or the Suez Canal/Sumed Pipeline (3.8 mb/d). Another 11.7 mb/d pass through the Straight of Malacca and 3.1 mb/d through the Turkish Straits. All of these passageways are vulnerable to accidents, piracy, and terrorism. Since alternative routes are lacking, the effect of a major blockage at one of these points could be devastating. Even unsuccessful attacks on tankers are likely to raise insurance rates and thus oil prices.


The armed forces of the United States have been extraordinarily successful in fulfilling their energy security missions, and they continue to carry out their duties with great professionalism and courage. But, ironically, this very success may have weakened the nation’s strategic posture by allowing America’s political leaders and the American public to believe that energy security can be achieved by military means alone. We need to change the paradigm, because the U.S. military is not the best instrument for confronting all of the strategic dangers emanating from oil dependence. This is particularly true when oil is used a political weapon.

The 1973 Arab embargo is still the most famous example of the use of energy as a political strategic weapon. But in recent years, it has been Russia that has shown the most willingness to play this dangerous game, as at the beginning of 2006, when it stopped natural gas exports to the Ukraine, which in turn withheld the natural gas destined for Western Europe. The danger of conflict with a nuclear power like Russia should make it abundantly clear that there are limits on how we can use military power to guarantee energy flows. But we can take political steps to counter Russia’s brandishing oil and natural gas as political weapons. Russia wants to join the World Trade Organization (WTO) as a full member. Russia’s entry into this organization must be made contingent on its behavior. Russia must make a commitment to fostering energy security; there should be no reward for sowing insecurity.

Of course, energy exporting governments don’t need to resort to full-fledged embargoes to hurt the U.S. and other importers. Exporters can manipulate price through less drastic production cuts. Tellingly, after oil prices dropped from their 2006 peak of $78 to about $60 in the U.S. market, OPEC members began to cut back on production. Governments in oil-producing countries can also constrain future supply through investment decisions that lead to long-term stagnant or glowing growth in production and exports, or even decline. Often enough, future supply destruction is the unintended or accepted consequence of an insistence on government control of natural resources. Currently, an estimated 80-90% of global oil reserves are controlled by national oil companies (NOCs), which are highly susceptible to being constrained by political objectives, even if these undermine long-term supply growth.

State-controlled production is frequently inefficient, relying on outdated technology and reserve management techniques. Russia, whose government has made it abundantly clear that it wants to maintain near absolute control over its energy resources. This power grab has curtailed foreign investment, and ultimately limited production as well. Russia’s oil industry stands as a testament to the dangers of political meddling in oil production. After the collapse of the Soviet Union, Russian production plummeted to only 6 mb/d in the mid-1990s, but then the efforts of private companies helped push production back to over 9 mb/d, achieving 10% annual growth rates in 2003 and 2004.1 However, with the subsequent expropriations of private enterprises such as Yukos, the production growth curve has flattened. Government control over production in Russia will also adversely impact the massive Shtokman natural gas field and Sakhlain-2 oil projects. President Putin has determined that tight government control of resources is more important than the greater revenue that would accrue from increased production achieved through cooperation with Western oil companies.

In an oil-dependent world facing increasingly tight supplies, the growing power of oil exporting countries and the shift in strategic calculations of other important countries have all added up to lessen U.S. diplomatic leverage.

Iran, which exports to the United States’ European and Asian allies, has threatened the use of the oil weapon to retaliate against efforts to constrain their nuclear program. The European Union relies on Middle Eastern oil, and Russian gas continues to complicate U.S. foreign policy efforts, especially when considering our efforts to stop Iran from developing nuclear weapons. China, with its rapidly growing dependence on foreign oil also blocks U.S. diplomatic initiatives in an effort to strengthen its own ties with oil exporters.

Given all these factors, it is imperative that the United States make energy security a top strategic priority. Toward that end, we should mobilize and leverage all of our national security resources, including our economic power, our investment markets, our technological products and our unsurpassed military strength. Curtailing demand is the most important security step we can take.

We need a comprehensive national security strategy for energy security. We must be prepared for sudden supply shocks triggered by terrorism or politics. We must promote greater diversity of fuel options while improving the efficiency of our Nation’s fleet.

Senator Pete V. Domenici (New Mexico). I think it is most beneficial that we put into perspective who owns access to the oil in the world today. It is rather frightening when you get just that picture before you …, to know how things have changed dramatically and how little of the oil of the world is owned by the American companies that we are constantly arguing with and how little these oil companies of America have access and/or control over these oils. I have had staff reduce the world’s oil to a chart that shows where we are, and there is no question that private investors are already at a disadvantage. The rise in national oil companies has decreased access to reserves through the use of strategic energy agreements between governments. U.S. companies are being squeezed out. Examples are the Chinese national oil company’s development of an energy production agreement in Sudan and Iran, Russia’s reclaiming of oil producing assets from Yukos to form a state oil company and just yesterday, Venezuelan President Hugo Chavez called for the end to foreign ownership of crude oil refineries in the Orinoco region. This activity further limits investment opportunities for investor-owned companies. These trends are doubly concerning, given the many producer nations, political instability, and the lack of a legal system for enforcement of contract rights resulting in only a sufficient capital investment in the infrastructure necessary to sustain existing production, much less new capital on line.

Senator Gordon H. Smith (Oregon): Hurricane Katrina showed how vulnerable the United States is to a domestic supply disruption. It also helped us to understand how geographically concentrated U.S. refining capacity has become. All of these factors should lead us to reexamine our energy security strategy. We cannot reduce our dependence on oil without aggressively addressing the transportation sector. Transportation accounts for 70 percent of our nation’s oil use, and the transportation sector is almost exclusively fueled by oil. CAFE standards for automobiles have been stagnant for more than a decade. In 2002, I joined with Senators Kerry and McCain to sponsor an amendment to the energy bill to increase CAFE standards to 36 miles per gallon by 2015. We were told at the time that this would harm the domestic auto industry and reduce consumer choice.

Senator Bernie Sanders (Vermont). [Note: I’ve included most of his testimony because he is now a candidate for President in 2016]

I am pleased to be a member of the Energy and Natural Resources Committee and look forward to the excellent work that this Committee will be doing to ensure a more sane energy policy for our country. Whether it is requiring an increased commitment to renewable sources of energy in the electricity sector or to ensuring appropriate royalty payments from drilling on our public lands, this Committee has a tremendous responsibility. The geopolitics of oil is a topic that none of us can afford to ignore and while I don’t agree with every idea put forward by today’s witnesses, I thank them for their time to address us this morning. What is most striking to me is that, in the prepared testimony, each of the witnesses discusses the dire need to increase efficiency in our transportation sector. I believe—in no uncertain terms—that our failure to increase mileage standards has let the American people down. As consumers look to make each and every dollar go further, they find that, despite the technology being available, their automobiles get the same, or worse—even lower, gas mileage than they did twenty years ago. Additionally, as we grapple with global warming, I believe we must do everything we can to get the most out of each gallon of fuel because the emissions from our cars are simply off the charts. In fact, in Vermont, vehicle emissions are the single largest source of greenhouse gas emissions. I hope, with the help of the witnesses, that we can begin moving forward by starting with a serious discussion of increasing CAFE standards.

Senator Byron L. Dorgan (North Dakota): Oil is critically important. We will always use fossil fuels, always need oil. We suck about 84 million barrels out of the earth a day. Here, in the United States, with our population, we use 1/4 of all the oil that is sucked out of this earth. We are overly dependent on foreign sources of oil, especially given the national security implications of that dependency, and yet I think we’re baby stepping on these issues.   When we passed the energy bill of 2005, I was proud of it. It moves us down the road, but we need to be much bolder and much, much more aggressive, and I think what we will hear today is about the national security implications of us not doing the right thing and not being bold enough.

Senator Ken Salazar (Colorado): I think that the energy issue, at the end of the day, is one of the very most important issues, perhaps one of the top two issues that face our world today

LINDA G. STUNTZ, on behalf of a Council on Foreign Relations Independent Task Force

Linda is a partner with Stuntz, Davis and Staffier and has been involved previously with the Department of Energy in a high position and, most recently, was part of the Council on Foreign Relations Task Force that worked up a report on the national security consequences of U.S. oil dependency.

It is an honor to be before you today to discuss the report prepared by an independent task force organized by the Council on Foreign Relations, released this past October, entitled, as you described, The National Security Consequences of U.S. Oil Dependency. Today, let me highlight four points from this report.

First, you will not find in this report support for the concept of energy independence for this country. As much as I know many of you on both sides of the aisle espouse this, it is, in fact, unrealistic. Barring Draconian measures, the United States will depend on imported oil for a significant fraction of its transportation fuel needs for the next several decades. Moreover, so long as we consume any oil, even if it is produced domestically, we will be affected by what happens in the global oil market, just as corn or other markets of that nature are affected. We cannot wall ourselves off for that market. Our allies are also dependent on this oil.

Second, the constraints on foreign policy caused by energy require greater integration of foreign policy and energy policy. The newspapers this morning and every morning are replete, whether in Asia, Africa, South America or even Europe, with incidents of energy and foreign policy intermingling, yet the task force was unanimous in the view that energy issues have not received sufficient attention in the formulation and implementation of U.S. foreign policy. Among other things, the task force recommends that an energy directorate be established at the National Security Council, similar to those that exist now, for counter-proliferation defense policy and international economics.

Third, and it was highlighted by Senator Domenici in his opening speech, one of things that I believe has changed since Senator Jackson and I and some of you first began looking at this very difficult challenge of energy security is the increasing role of national oil companies. The reality today is that national oil companies control some 3.4 of the world’s oil reserves, as best we can tell. Exxon ranks #14.

Fourth, in order to address the national security consequences of U.S. oil dependency, we need a comprehensive approach. And this will not be a surprise or news to this committee, but we need it all, we cannot focus on one or the other. We need to increase the efficiency of oil use, primarily in transportation fuels. We need to use alternative fuels. We need to diversify oil supplies, particularly outside the Persian Gulf, which includes in the United States. We need to make oil and gas infrastructure more efficient and secure. And we need to increase the investment in new energy technologies. The task force considered—and had a lively debate on—increasing the gasoline tax, increasing CAFE requirements and a tradable permit program for gasoline allowances. Again, it will probably be no surprise to you that while the task force unanimously believed we needed to do one or several of these things, we did not have an agreement on which one of these should be pursued.

Every 10 days, China is opening a coal plant with the capacity to serve a town the size of Dallas or San Antonio. Most of those coal plants are not controlled even as well as most of the plants in the United States. They don’t even have the base technology that we are putting on right now. A fifth of them are actually characterized as illegal because they haven’t been approved by the Federal Government of China.

ROBERT D. HORMATS, Vice Chairman, Goldman Sachs (International)

I was economic advisor to Dr. Henry Kissinger on the National Security Council staff in the mid 1970s when this country experienced its first energy crisis after the 1973 Yom Kippur War, and participated in his Middle Eastern shuttle diplomacy during the period that followed. At that time, I had high hopes that the Arab oil embargo, the sharp increase in the price of oil, and the longlines at gas stations would produce a bipartisan consensus on energy policy and jolt our nation into a bold and effective effort to reduce oil dependence and future vulnerability.

Let me make just a few points about the situation we face today. First is that we have a history in this country of going through periods of great crisis followed by periods of prolonged complacency and that has caused energy policy to be sort of light switch—on/ off. But when prices fell later in the decade, a sense of complacency set in. Then we were hit by another crisis that caused oil prices to spike at the end of the 1970s; that was triggered by the fall of the Shah of Iran and the Iranian Revolution. Complacency set in once again after that crisis receded and prices fell. Another oil crisis occurred in 1990 when Iraq invaded Kuwait, after which the sense of urgency about dramatic alterations in energy policy and use faded again. Decade after decade our dependence on foreign oil has risen. In the mid-1970s, 35% of this nation’s oil consumption was supplied by imports. Now, three decades later, it is 60%.

American dependence on potentially vulnerable oil supplies continues to grow, with little prospect that it will change—despite the fact that we are engaged in a War on Terrorism in which oil imports by the U.S. and other nations provide funds to nations hostile to the U.S. and countries friendly to us. It is often said that ‘‘9/ 11 changed everything!’’ Sadly, in the area of energy policy it hasn’t changed very much. American oil vulnerability continues unabated.

There are several national economic and security consequences of this situation:

  • If the situation in Iraq continues to deteriorate and other oil producing nations become more involved, the risks increase to oil supplies not only from disruptions in Iraq but also from greater tensions between the Sunni nations on the western side of the Persian Gulf and the Shiites on the eastern side, with oil facilities and shipments becoming increasingly vulnerable. Moreover, added western pressures on Iran over its nuclear program could lead to oil disruptions or threats thereof
  • The American economy remains highly vulnerable to supply disruptions in oil exporting nations; these could result from acts or terrorism, political instability, efforts to use oil as leverage, or natural calamities
  • High oil prices resulting from strong demand from countries such as the U.S. and other major importers give countries such as Iran and Venezuela added resources to take actions inimical to American interests
  • Oil-dependent friends and allies feel more vulnerable to the pressures and potential use of oil leverage from supplying countries and therefore are reluctant to side with the U.S. on key issues affecting those suppliers
  • Oil-related tensions and competition are likely to intensify—as countries such as China seek to lock up scarce supplies or make political deals to solidify long term supply relationships, or suppliers such as Russian and Iran use oil as leverage to extract political concessions from consumers.

My concerns about this untenable and dangerous situation led me—together with a group of other concerned citizens to join the Energy Security Leadership Council in an effort to press for greater and more resolute national action on this matter— and for an end to the divisive, highly polarized debate that has stymied genuine progress on many fundamental issues. The Council, a project of Securing America’s Future Energy (SAFE), is a nonpartisan group of business executives and retired military leaders. It recently unveiled a report entitled ‘‘Recommendations to the Nation on Reducing U.S. Oil Dependence.’’ (I will discuss a few of these later in my testimony, along with a number of recommendations that I believe can also contribute to progress in this area.) The members of the Council believe that America’s energy security is in a perilous state. Along with my fellow Council members, I am convinced that America’s leaders must move quickly and steadfastly to confront our high level of oil dependence as a profound national security challenge.

Energy policy really has not changed very much. We’re fighting a war on terrorism. We are spending money, lots of money, for oil. We’re heavily dependent on countries that are very unreliable suppliers. A large portion of money is spent by us and other importers, and goes to countries whose interests are hostile to those of the United States. Some of that money finds its way into terrorist hands. We should accept the fact that that is the case. So what we’re doing now is we’re fighting in a post-9/11 environment with a pre-9/11 energy policy. It is simply not sufficient to deal with the national security crisis that we face today. The crisis is a geopolitical one and the vulnerability of this country to disruptions— look what is happening in Nigeria today, kidnappings of people on these oil rigs. We have Venezuela making very tough statements about further nationalization. We have Russia using oil as a political lever. We have instability in the Middle East. If Iran deteriorates further in the relationship—that will affect oil. It has happened before. If Iraq deteriorates further and the civil war increases and other countries start getting involved, then you have additional tensions. If you have tensions between the Shiites on one side of the Persian Gulf and the Sunni on the other, that’s going to make transportation of oil all the more vulnerable. And therefore, we have to come up with a much bolder set of energy policies for national security reasons.

I think Linda has made a very good point: energy independence, at this point, is not possible, but we can manage our vulnerability a lot better than we are doing today and it’s the vulnerability that is the huge problem. Calls for ‘‘energy independence’’ offer a false promise to the American people. Even if the U.S. could substitute domestic energy for all foreign oil—a goal the Council believes to be impossible—American economic prosperity would still be linked to the health of a global economy dependent on international oil flows.

How do we do that? We have the capability, for instance, by insisting on tougher fuel standards for automobiles, to improve the efficiency with which we use oil. And it’s quite possible to do. It’s within the realm of technological possibility. Now there may be reasons why you can’t go as fast as we would like, but there should be the target of much greater energy fuel—oil fuel efficiency standards. The goal ought to be to reduce the efficiency—to improve the efficiency of the use of oil as a transportation fuel because, by and large, in this country, oil is a transportation fuel and if we can’t address that issue, we’re not going to address the overall vulnerability issue.

One key goal must be to make America’s prosperity less dependent on a commodity the production level of which responds only very slowly to changes in price. Combine this price inelastic supply with 1) the vulnerability of oil supplies to various types of disruption, 2) the fact that some countries see oil as a political as well as an economic commodity, and 3) the fact that much of the world’s production is in the hands of state owned oil companies, many of which use oil revenue for political or social ends rather than reinvest it in new production capacity, and you have the recipe for severe energy-related economic disorder.

By 2020, world energy demand is forecast to jump by 50% over 2000 levels, with most of the increase coming in developing countries. The safe and affordable delivery of all this energy is by no means assured. Even if resources turn out to be sufficient in the aggregate, their distribution will not map closely to the topography of demand. The resultant uncertainty of supply and upward pricing pressure will exacerbate international tensions stemming from non-energy issues. Oil provides only 40% of global energy, but, as the premier transportation fuel, it has emerged as the touchstone of the world’s energy outlook. On both economic and psychological grounds, oil price spikes threaten the prosperity of many nations, including many of the poorest on this planet. They also sow the seeds of tension between exporting and importing nations, among consuming nations, and among different groups within countries. Indeed, since so much oil is used for personal transportation, oil prices have an enormous impact on the pocketbooks of virtually every American family. Correspondingly, policy efforts that impact oil’s cost and availability must take into account the interests of the average American family and quickly become major political issues.

America’s Clear and Present Dangers

For much of the last century, surplus domestic oil production reduced U.S. vulnerability to oil disruptions elsewhere in the world. But America’s oil production is now dwarfed by current consumption. Thus, while the U.S. remains the third largest oil producer in the world, domestic production can satisfy barely 40% of its requirements.

The U.S. generates 28% of the world’s goods and services while consuming roughly a quarter of its oil production. This may seem like a balanced, even favorable energy equation, but closer inspection reveals a different story. Despite considerable progress toward more efficient energy use, America requires substantially more oil to create a dollar of Gross Domestic Product (GDP) than is the case in most other developed countries. Some of this differential in ‘‘oil intensity’’ can be attributed to our nation’s vast size, the dispersion of our population, and less reliance on public transportation. Global military obligations, which are inextricably linked to our commitment to secure the flow of oil for the benefit of all nations, further increase American consumption. But even with these extenuating factors, there can be little doubt that the U.S. can and must use energy far more efficiently.

America’s long-term supply and demand balance is no more encouraging. U.S. oil demand is expected to grow 24% over the next two decades, and even if new discoveries raise its current 3% share of global oil reserves, our nation will almost certainly still require substantial amounts of petroleum imports. Import dependence will also define energy security for our key allies and most of the world’s manufacturing nations. Unfortunately, the developed nations that consume most of the world’s oil are not in a good position to produce the fuels they need.

A large portion of the world’s oil reserves are owned by state-owned or controlled oil companies in non-O.E.C.D. countries. It is worth underscoring this point—especially because when oil prices were rising last summer there were many accusations, misguided in my view, that this was a conspiracy among the big oil majors, when in fact the six largest state oil companies have ten times the reserves of the top six privately owned companies. Some of these state companies are highly efficient and well run, but others are highly politicized and are not able to utilize their profits to increase production or modernize capacity. Because of the large state company role in the world’s oil markets, there is not a ‘‘free market’’ for oil. As a result, a substantial portion of production is politically influenced and production decisions and practices are frequently economically suboptimal.

With each passing year, the global oil trends now at work—rising consumption, reduced spare production capacity, politicized spending decisions, and potentially high levels of instability in key exporting countries—all increase the likelihood of an energy crisis. The odds in favor of a crisis are further heightened by the rise of terrorist movements bent on targeting critical elements of the world’s vulnerable oil production, processing, and delivery infrastructure.

Given today’s precarious balance between oil supply and demand, taking even a small amount of oil off the market could cause prices to rise dramatically. In Oil Shockwave, a cabinet-level oil crisis simulation conducted in 2005 by SAFE and the National Commission on Energy Policy (NCEP), a 4% global shortfall in daily oil supply—only 3.5 million barrels in a 84 million barrel daily market resulted in a 177% increase in the price of oil, to over $150 per barrel. The simulation was played out by men and women who have served in the highest ranks of the U.S. government; Robert M. Gates, our current Secretary of Defense, for example, filled the role of National Security Advisor. The hypothetical scenarios put before the participants were designed to simulate a decline in world oil production due to regional instability and to terrorism. The incidents were completely plausible, and some, such as unrest in Nigeria, have subsequently come to pass. But there was little these skilled officials could do to stop a gut-wrenching increase in the price of oil. Indeed, one of the major lessons of the simulation was that the Strategic Petroleum Reserve (SPR), the emergency supply of federally owned crude oil, offers only very limited protection against a major supply disruption. Emergency reserves cannot sustain the United States through a prolonged crisis, and it will be extremely difficult to reach political consensus on when it is appropriate to begin using them.

Even under normal conditions, oil dependence has severe economic consequences. In 2005, direct outlays for imported oil accounted for a third of the country’s $800 billion current account deficit. In 2006 prices, these outlays have gone still higher. By diverting funds away from domestic consumption and investment, oil imports put a drag on U.S. economic growth and undercut the nation’s long-term competitive position. Oil dependence also adds billions to our defense expenditures by making overseas protection of oil supplies a high strategic priority.

There Are No Silver-Bullet Solutions

Improving efficiency: In the view of the Council, the most important thing the U.S. can do to lessen its oil dependence in the near and medium-term is to utilize oil considerably more efficiently. With the goal of once again halving oil intensity— as in the 1980s and 1990s—in the space of two decades, Americans can do much to protect the economy against the effects of oil shocks that can be unleashed by forces beyond our control. Improved vehicle fuel efficiency is the single most important avenue for further cutting the nation’s oil intensity.

We must face the hard fact that in the U S. oil is primarily a transportation fuel; unless we can dramatically curb the use of oil in our cars and trucks, we will be unable to reduce our oil dependence. Reliance on a single non-substitutable input creates profound economic dangers. Currently the direction is not positive; through 2030 oil usage by SUVs and light duty trucks is expected to surge by roughly 77%. The transportation sector accounts for nearly 70% of all the oil the country uses; and oil fuels almost 97% of all transportation. With most of the vehicles on the nation’s roads operating at efficiency levels far below what is achievable with currently available technologies, there is a clear opportunity to realize sizable fuel economy gains without overall loss of safety or functional utility. We propose empowering the National Highway Traffic Safety Administration (NHTSA) to mandate annual fuel efficiency increases of 4%.

In his 1975 State of the Union address, President Ford recognized the energy dangers threatening the country. He expressed a ‘‘very deep belief in America’s capabilities,’’—its innovative capacity and technological skills to overcome its growing dependence on imported oil. He also rallied support for fuel efficiency standards. I share President Ford’s optimism in the capacity of Americans to respond to the challenge of growing energy dependence, and his belief that Americans will rally around tougher energy measures, if they are given strong leadership.

America has a long history of pulling together in the face of national security challenges. I am currently completing a book entitled The Price of Liberty: How America Pays for its Wars.

In all the major national security challenges of the twentieth century, Americans demonstrated a remarkable willingness to make patriotic wartime sacrifices. During World War I and World War II, American’s not only paid dramatically higher taxes but also participated in massive bond drives to mobilize billions of dollars to support out troops.

Roosevelt’s Secretary of the Treasury Henry Morgenthau, when asked about the significance of such drives, said that they were launched not only to raise massive amounts of funds, but also to respond to people who asked ‘‘What can I do to help.’’

Today, the answer to this question lies not in buying more bonds but in buying less gasoline. Since 9/11 there have been no major bond drives as in past wars—and only limited steps to reduce our dependence on oil. The time has come to recognize that energy security is central to the national security challenges of twenty-first century, and to present the American people with the unvarnished truth regarding how oil affects the struggle in which we are engaged. We must meet the threats we face in the same spirit as our parents and grandparents during past wars—with farsighted patriotism and willingness to compromise narrow partisan, ideological, philosophical and economic positions in the long-tern national interest.


FLYNT LEVERETT, Senior fellow & Director, Geopolitics of Energy Initiative, New America Foundation, Washington, DC;  visiting professor of Political Science at MIT

I will start with a very stark assessment and that is, in my view, during the next quarter century, the most profound challenges to America’s continued global leadership will flow from the strategic and political consequences of the structural shifts in global energy markets that previous witnesses have been laying out for you.

On both the supply and demand side of the global oil market, we have seen strategic and political responses to the kinds of structural shifts that Dr. Birol and others have described for you. On the supply side, we’ve seen the rise of what a lot of folks call ‘‘resource nationalism’’. Resource nationalism is often defined as national government with oil and gas resources asserting their ownership rights over those resources in ways that work against the interests of international energy companies, something like Mr. Chavez’s recent declaration about nationalizing projects to develop extra heavy crude in the Orinoco region. But there is another dimension to resource nationalism that I think is very important here and that is the use by energy suppliers of their status as suppliers in a tight market as a source of political leverage. Venezuela is a good example in this hemisphere, obviously Russia is an important example, but there are many others that you could lay out that are very important for American interests. Saudi Arabia, for example, using its unique status as the swing producer in the world oil market to cultivate a kind of alternative strategic partnership with China, as a hedge against a further deterioration in its traditional strategic partnership with the United States. This phenomenon, this aspect of resource nationalism will, I think, pose an increasingly serious set of challenges to American interests in coming years.

Resource nationalism and resource mercantilism pose significant challenges to American interests, each in its own way, but I would also point out that these two phenomena can intersect in some particularly challenging ways for the United States. One of the ways in which they intersect is in what I have described as a ‘‘new axis of oil’’, namely a loose coalition of states— energy-producing states and energy-importing states, loosely organized around a Sino-Russian axis. This axis of oil is bolstering Sino-Russian cooperation on a whole host of strategic issues and I believe this axis of oil is emerging as the principle counterweight to American hegemony in global affairs.

The axis of oil, this Sino-Russian axis of oil, has been quite successful over the last 2 to 3 years in essentially rolling back the projection of U.S. influence into central Asia following the September 11 terrorist attacks. Russia and China have cooperated in standing up the Shanghai Cooperation Organization, the world’s largest regional security organization and the only such organization in the world in which the United States is not a participant. Working together in the Shanghai Cooperation Organization, Russia and China have basically been able to lock us out of central Asia.

Iran’s resource base is truly impressive. If you take its gas reserves— the second largest in the world—convert them into barrels of oil equivalent, and add them to their oil reserves—also the world’s second largest—you basically have a situation in which the aggregate hydrocarbon reserves of Iran and the aggregate hydrocarbon reserves of Saudi Arabia are effectively the same. And each of those countries is significantly larger in terms of aggregate hydrocarbon reserves than Russia. What this means, given Iran’s low rate of production, is that Iran is basically the only major energy producing country in the world that has the resource potential to increase its production of both oil and natural gas by orders of magnitude in coming decades. But to do that, Iran is going to have to get a lot of investment and a lot of technology transfer.

I think that the question of the possibilities for Russian and Iranian cooperation on energy matters is an issue that has potentially very, very profound geopolitical and geostrategic implications for the United States. Russia and Iran together control almost half of the world’s proven reserves of natural gas. If those two countries are cooperating, coordinating in terms of the way they develop and market their gas exports, they could be potentially twice as influential in the global gas trade as Saudi Arabia is in the global oil trade. And I think that within the last 18 months, Russia and Iran have announced their intention to begin cooperating in this area. There is a highlevel Russian/Iranian working group set up to do this. A senior official of Gazprom chairs it on the Russian side, the deputy oil minister of Iran chairs it on the Iranian side, and Russia and Iran are discussing an increasingly wide array of potential energy initiatives, marketing projects and pipeline projects that would increase both Iranian and Russian influence in regional energy markets.

The potential for Russian and Chinese cooperation to develop Iran’s hydrocarbon resources, I think, the potential for that cooperation and its impact on American interests goes beyond Iran. Such cooperation has the potential, basically, to remake the geopolitics of all Eurasia; to establish Moscow as a leading energy supplier, not just to Europe, but also to Asia; to have Moscow as the major influence on energy trade in this part of the world and to consolidate the Sino-Russian axis of oil as the leading counterweight to American hegemony in regional and international affairs.

I think there needs to be a grand bargain between the United States and the Islamic Republic of Iran. My criticism of the Baker-Hamilton Iraq Study Group recommendations on engaging Iran is not that they go too far, but that they don’t go far enough. Unless there is a comprehensive deal between the United States and Iran in which all of the major bilateral differences between the U.S. and Iran are resolved in a package, not only will there be no diplomatic solution to the nuclear issue, but basically, the United States will lose the race for Iran that I described to you a few minutes ago. I think it is very important that the United States embrace a comprehensive wrap approach with Iran as an important foreign policy objective.

In my view, the most profound challenges to America’s global leadership during the next quarter century are not posed by the risk of strategic failure in Iraq, further proliferation of weapons of mass destruction, or the growth and consolidation of extremist forces in the Islamic world. Rather, the most profound challenges to U.S. preeminence during the next 25 years flow from the strategic and political consequences of ongoing structural shifts in global energy markets, especially the global oil market. Most notably, cooperation between China and Russia on energy matters is bolstering Sino-Russian cooperation on strategic issues, effectively creating a Sino-Russian ‘‘axis of oil’’ as the principal counterweight to America’s global hegemony.

FATIH BIROL, CHIEF ECONOMIST, HEAD OF THE ECONOMIC ANALYSIS DIVISION, INTERNATIONAL ENERGY AGENCY, PARIS, FRANCE. Looking at the next few decades, we think the world is facing twin energy-related threats. One is the increasing risk for energy security and the second one is the energy-related environmental concerns.

  1. The world is facing twin energy-related threats: that of not having adequate and secure supplies of energy at affordable prices and that of environmental harm caused by its use. The World Energy Outlook 2006 confirms that fossil-fuel demand and trade flows, and greenhouse-gas emissions would follow their current unsustainable paths through to 2030 in the absence of new government action—the underlying premise of the Reference Scenario. It also demonstrates, in an Alternative Policy Scenario, that a package of policies and measures that countries around the world are considering would, if implemented, significantly reduce the rate of increase in demand and emissions. Importantly, the economic cost of these policies would be more than outweighed by the economic benefits that would come from using and producing energy more efficiently.
  2. Oil demand grows by 1.3% per year through 2030 in the Reference Scenario, reaching 116 million barrels per day (mb/d) in 2030—up from 84 mb/ d in 2005. The pace of demand growth slackens progressively over the period. More than 70% of the increase in oil demand comes from developing countries (notably China and India), which see average annual demand growth of 2.5%.
  3. The transport sector absorbs most of the increase in global oil demand. In the OECD, oil use in other sectors barely increases at all. In developing countries too, transport contributes the bulk of the increase in oil demand. The lack of cost-effective substitutes for oil-based automotive fuels will make oil demand more rigid.
  4. Oil supply is increasingly dominated by a small number of major producers, most of them in the Middle East, where oil resources are concentrated. Non-OPEC production of conventional crude oil is set to peak within a decade. OPEC’s share of global supply grows significantly, from 40% now to 48% by 2030. Iran and Iraq have significant potential to expand their production, but Saudi Arabia remains by far the largest producer. The need for more transparent and comprehensive data on oil (and gas) reserves in all regions is a pressing concern.
  5. The oil industry needs to invest a total of $4.3 trillion (in year-2005 dollars) over the period 2005-2030, or $164 billion per year. The upstream sector accounts for the bulk of this. Almost three-quarters of upstream investments will be required to maintain existing capacity.
  6. A critical uncertainty is whether the substantial investments needed in the oil production sector in key Middle East countries will, in fact, be forthcoming. These governments could choose deliberately to develop production capacity more slowly than we project in our Reference Scenario. Or external factors such as capital shortages could prevent producers from investing as much in expanding capacity as they would like. As demonstrated by a Deferred Investment Case, slower growth in OPEC oil production drives up the international oil price and, with it, the price of gas.
  7. The new policies analyzed in the Alternative Policy Scenario halt the rise in OECD oil imports by 2015. OECD countries and developing Asia become more dependent on oil imports in 2030 compared to today, but markedly less so than in the Reference Scenario. Global oil demand reaches 103 mb/d in 2030 in the Alternative Policy Scenario—13 mb/d lower than in the Reference Scenario. Additional policy measures to promote improved fuel efficiency of cars and trucks, as well as a greater market share for biofuels, therefore have the effect of improving energy security.
  8. Our analysis demonstrates the urgency with which policy action is required. Each year of delay in implementing the policies analyzed would have a disproportionately larger effect on energy security. Yet there are formidable hurdles to be overcome. It will take considerable political will to push through the policies and measures in the Alternative Policy Scenario, many of which are likely to encounter resistance from some industry and consumer groups. Politicians need to spell out clearly the benefits to the economy and to society as a whole of the proposed measures. In most countries, the public is becoming familiar with the energy-security and environmental advantages of action to encourage more efficient energy use and to boost the share of renewables.

SUPPLY: Resources and Reserves

According to the Oil and Gas Journal, the world’s proven reserves2 of oil (crude oil, natural gas liquids, condensates and non-conventional oil) amounted to 1293 billion barrels3 at the end of 2005—an increase of 14.8 billion barrels, or 1.2%, over the previous year. Reserves are concentrated in the Middle East and North Africa (MENA), together accounting for 62% of the world total. Saudi Arabia, with the largest reserves of any country, holds a fifth. Of the twenty countries with the largest reserves, seven are in the MENA region (Figure 2). Canada has the least developed reserves, sufficient to sustain current production for more than 200 years. The world’s proven reserves, including non-conventional oil, could sustain current production levels for 42 years.

The amount of oil discovered in new oilfields has fallen sharply over the past four decades, because of reduced exploration activity in regions with the largest reserves and, until recently, a fall in the average size of fields discovered. These factors outweighed an increase in exploration success rates.

A lack of reliable information on production decline rates makes it difficult to project new gross capacity needs. A high natural decline rate—the speed at which output would decline in the absence of any additional investment to sustain production— increases the need to deploy technology at existing fields to raise recovery rates, to develop new reserves and to make new discoveries. Our analysis of capacity needs is based on estimates of year-on-year natural decline rates averaged over all currently producing fields in a given country or region. The rates assumed in our analysis vary over time and by location. They range from 2% per year to 11% per year, averaging 8% for the world over the projection period.5 Rates are generally lowest in regions with the best production prospects and the highest RIP ratios. For OPEC, they range from 2% to 7%. They are highest in mature OECD producing areas, where they average 11%.

The average quality of crude oil produced around the. world is expected to become heavier (lower API gravity) and more sour (higher sulfur content) over the Outlook period.6 This is driven by several factors, including the continuing decline in production from existing sweet (low-sulfur) crude oilfields, increased output of heavier crude oils in Russia, the Middle East and North Africa (Figure 7), and the projected growth of heavy non-conventional oil output. This trend, together with increasing demand for lighter oil products and increasing fuel-quality standards, is expected to increase the need for investment in upgrading facilities in refineries.

The availability of capital is unlikely to be a barrier to upstream investment in most cases. But opportunities and incentives to invest may be. Most privately-owned international oil and gas companies have large cash reserves and are able to borrow at good rates from capital markets when necessary for new projects. But those companies may not be able to invest as much as they would like because of restrictions on their access to oil and gas reserves in many resource-rich countries. Policies on foreign direct investment will be an important factor in determining how much upstream investment occurs and where. A large proportion of the world’s reserves of oil are found in countries where there are restrictions on foreign investment (Figure 10). Three countries—Kuwait, Mexico and Saudi Arabia—remain totally closed to upstream oil investment by foreign companies. Other countries are reasserting state control over the oil industry. Bolivia recently renationalized all its upstream assets. Venezuela effectively renationalized 565 kb/d of upstream assets in April 2006, when the state-owned oil company, PdVSA took over 115 kb/d of private production and took a majority stake in 25 marginal fields producing 450 kb/d after the government unilaterally switched service agreements from private to mixed public-private companies. The Russian government has tightened its strategic grip on oil and gas production and exports, effectively ruling out foreign ownership of large fields and keeping some companies, including Transneft, Gazprom and Rosneft, in majority state ownership. Several other countries, including Iran, Algeria and Qatar, limit investment to buy-back or production- sharing deals, whereby control over the reserves remains with the national oil company.

Even where it is in principle possible for international companies to invest, the licensing and fiscal terms or the general business climate may discourage investment. Most resource-rich countries have increased their tax take in the last few years as prices have risen. The stability of the upstream regime is an important factor in oil companies’ evaluation of investment opportunities. War or civil conflict may also deter companies from investing. No major oil company has yet decided to invest in Iraq. Geopolitical tensions in other parts of the Middle East and in other regions may discourage or prevent inward investment in upstream developments and related LNG and export-pipeline projects.

National oil companies, especially in OPEC countries, have generally increased their capital spending rapidly in recent years in response to dwindling spare capacity and the increased financial incentive from higher international oil prices. But there is no guarantee that future investment in those countries will be large enough to boost capacity sufficiently to meet the projected call on their oil in the longer term. OPEC producers generally are concerned that overinvestment could lead to a sharp increase in spare capacity and excessive downward pressure on prices. Sharp increases in development costs are adding to the arguments for delaying new upstream projects. For example, two planned GTL plants in Qatar were put on hold by the government in 2005 in response to soaring costs and concerns about the long-term sustainability of production from the North field. An over-cautious approach to investment would result in shortfalls in capacity expansion.

Environmental policies and regulations will increasingly affect opportunities for investment in, and the cost of, new oil projects. Many countries have placed restrictions on where drilling can take place because of concerns about the harmful effects on the environment. In the United States, for example, drilling has not been allowed on large swathes of US federal onshore lands—such as the Arctic National Wildlife Refuge (ANWR)—and offshore coastal zones for many years.7 Even where drilling is allowed, environmental regulations and policies impose restrictions, driving up capital costs and causing delays. The likelihood of further changes in environmental regulations is a major source of uncertainty for investment.

Local public resistance to the siting of large-scale, obtrusive facilities, such as oil refineries and GTL plants, is a major barrier to investment in many countries, especially in the OECD. The not-in-my-backyard (NIMBY) syndrome makes future investments uncertain. It is all but impossible to obtain planning approval for a new refinery in many OECD countries, though capacity expansions at existing sites are still possible. The risk of future liabilities related to site remediation and plant emissions can also discourage investment in oil facilities. The prospect of public opposition may deter oil companies from embarking on controversial projects. Up to now, NIMBY issues have been less of a barrier in the developing world.

Technological advances offer the prospect of lower finding and production costs for oil and gas, and opening up new opportunities for drilling. But operators often prefer to use proven, older technology on expensive projects to limit the risk of technical problems. This can slow the deployment of new technology, so that it can take decades for innovative technology to be widely deployed, unless the direct cost savings are clearly worth the risk. This was the case with the rotary steerable motor system, which has finally become the norm for drilling oil and gas wells. These systems were initially thought to be less reliable and more expensive, even though they could drill at double or even triple the rate of penetration of previous drilling systems. The slow take-up of technology means that there are still many regions where application of the most advanced technologies available could make a big impact by lowering costs, increasing production and improving recovery factors. For example, horizontal drilling, which increases access to and maximizes the recovery of hydrocarbons, is rarely used in Russia.

Unless major new discoveries are made in new locations, the average size of large-scale projects and their share in total upstream investment could fall after the end of the current decade. That could drive up unit costs and, depending on prices and upstream-taxation policies, constrain capital spending. Capital spending may shift towards more technically challenging projects, including those in arctic regions and in ultra-deep water. The uncertainties over unit costs and lead times of such projects add to the uncertainty about upstream investment in the medium to long term.

The Reference Scenario presents a sobering vision of the next two-and-a-half decades, as the major oil-consuming regions—including the United States—become even more reliant on imports, often from distant, unstable parts of the world along routes that are vulnerable to disruption. In July 2005, G8 leaders, meeting at Gleneagles with the leaders of several major developing countries and heads of international organizations, including the IEA, recognized that current energy trends are unsustainable.

In the Alternative Policy Scenario, the implementation of more aggressive policies and measures significantly curbs the growth in total primary and final energy demand— a reduction of about 10% relative to the Reference Scenario. That saving is roughly equal to the current energy demand of China. Demand still grows, by 37% between 2004 and 2030, but more slowly: 1.2% annually against 1.6% in the Reference Scenario. The reduction in the use of fossil fuels such as oil is even more marked than the reduction in primary energy demand (Figure 13). It results from the introduction of more efficient technologies and switching to carbon-free energy sources. Nonetheless, fossil fuels still account for 77% of primary energy demand by 2030 (compared with 81% in the Reference Scenario).

By 2015, demand reaches 95 mb/d, a reduction of almost 5 mb/ d on the Reference Scenario.

We would like to know the amount of oil left in [the Middle East] as all the numbers show that the bulk of the oil in the future will need to come from those countries.

Saudi Arabia is a key player and will remain so for several years to come and the Saudis have the highest reserves in the world. We do believe that Saudi Arabia has enough oil to meet the growth in global oil demand. However, we would like to be sure how much oil is there to make everybody feel better and give more confidence to the investor. Another issue which is as crucial is that the growth which will come from Saudi Arabia will not be mainly as a function of their reserves but as a function of their willingness to increase the production capacity. Saudi Arabia has the reserves, Saudi Arabia has the money to transform these reserves to production, but whether or not in the future Saudi Arabia will increase the production as they did in the past, as much as the world demands from them, or they will leave their oil for the next generations. And Saudi Arabia is differently— they will decide what they are going to do. But it is also the consumers’ right to recognize that one day, production from those countries in which we do not have excess, free, extra capital, to go directly into production, may change their policies and this may have serious implications for the consumers. The structure of the oil market is changing, Mr. Chairman. In the past, the money could have access to many oil deposits in the North Sea, the Gulf of Mexico, but in the future, it will not be the case. Therefore, how much oil will come will be decided by a very few number of national oil companies. And again, market conditions may not be the primary determinant when they are making those decisions. So, from that point of view, there are two major uncertainties: one, whether or not we will have the reserves and the money we’ll need in the future, and two, it would be very good to have a more transparency on the reserves in all Middle East countries and the rest of the world.

SENATOR DOMENICI. I don’t know what we have to do to convince both ourselves and the American people that we must change and do things differently.

SENATOR SMITH (ALABAMA). I think our focus needs to be domestically and then just have a really good military capacity to deal with this. When it comes to Iran, sitting down with them, they made it very clear what they would want from us and that is essentially a military domination of the Middle East. That is a horrifying prospect. If I was an Israeli, I know what that means: I’m gone, I’m exterminated. And I don’t think we can accede to that in the name of energy cooperation. So I just wanted to say that.

Senator SESSIONS. It gives them [oil producing nations like Russia and Iran] the ability to increase benefits for th[eir] citizens by a small amount and use the extra to invest in military ventures and bad behavior, and it seems to be absolutely happening And I’m part a caucus with Senators Joe Lieberman and Lindsay Graham and a number of others that says we should treat the energy question as a matter of national security, and I think some of the comments made here today are real chilling.

[The last 20 pages are questions from senators for the witnesses, but their replies are not included]


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Congressional hearings on why the Inland water way system is falling apart

[There are extracts from 2 hearings below.  Alice Friedemann. www.energyskeptic.com]

U.S. SENATE. Jan 31, 2013. Harbor maintenance trust fund & the need to invest in the nation’s ports. S. HRG. 113-578. Hearing before the Committee on Environment & public works. U.S. Senate 113th congress. 93 pages.


Today’s hearing will examine the role of the Harbor Maintenance Trust Fund in supporting commerce at our Nation’s ports. The Harbor Maintenance Trust Fund is the primary source of Federal investment to maintain America’s ports. The Trust Fund is financed through a fee on the value of cargo imported through coastal and Great Lakes ports. According to the American Society of Civil Engineers, if funding continues at current levels, by 2040 the United States will face a shortfall of nearly $28 billion to meet the dredging needs of the Nation’s ports. As we will hear from our witnesses today, this funding gap can have significant economic consequences. Increasing investment in ports and reforming the Harbor Maintenance Trust Fund will be critical components of the next Water Resources Development Act, known as WRDA. Senator Vitter and I have already begun working together on this vital legislation, which supports water resources infrastructure nationwide. WRDA authorizes the projects and programs of the U.S. Army Corps of Engineers and provides many benefits to the American people, including expanding and maintaining navigation routes for commerce.

Continued maintenance of port facilities is critical for the commerce and jobs that rely on these hubs, and that is why we must increase investment from the Harbor Maintenance Trust Fund. Currently, the Trust Fund collects more revenues than are annually spent for maintaining our ports. In fact, the Fiscal Year 2013 budget, the Obama administration estimated that the Trust Fund would receive $1.8 billion, but the Corps budget request was only $848 million. This leaves a growing surplus at a time when many of the Nation’s ports are not maintained to their authorized depths and widths.

This is something that has gone on with every administration. They do not spend the funds in the Trust Fund the way they are meant to be spent. Significant challenges remain in working to ensure the revenues collected in the Harbor Maintenance Trust Fund are fully expended.


I certainly want to underscore your comments about how our Nation’s ports and waterways are grossly underfunded for routine operation and maintenance, and one big reason is the misallocation of Harbor Maintenance Trust Fund revenues. It is a pretty simple story. Revenue into the Harbor Maintenance Trust Fund has increased steadily over the past decade, minus a one-time decrease in Fiscal Year 2009. The Fund currently collects about $1.8 billion a year in revenue. However, even though all of that money clearly, under law, is supposed to be used only for designated purposes with regard to harbor maintenance, even though that is clearly true, the Administration only spends roughly half that amount for harbor maintenance. What does that mean? Well, some people say that means we have an unspent balance of $8 billion. It really doesn’t mean that; it is really worse than that, because that money isn’t sitting anywhere. There is no pile of cash; that money is gone. What it really means is that the other money is stolen and spent on other completely unrelated purposes, directly contrary to the statute setting up the Harbor Maintenance Trust Fund and the revenue to go into it. Meanwhile, what is going on with our infrastructure? You know, if all of our needs were being met, if we were fully dredging our crucial waterways and harbors, that might be understandable. But, of course, that is not the case. According to a recent analysis from the Corps itself, fully authorized channel dimensions are available less than an average of 35 percent of the time at the 59 highest use, harbors and waterways, and those are the harbors and waterways that basically get the best treatment. So there that fully authorized dimension and depth is available only 35 percent of the time. Every time a vessel’s draft is decreased by one foot on the lower Mississippi because of under-maintained waterways, this costs shippers about $1 million against the value of their cargo. So that is a tax on shippers; that is a tax on commerce, and it slows down the economy and holds us back from job creation and economic growth.

Senator Inhofe (OKLAHOMA)

Harbors and inland waterways are vital to the economic health of our country. In my home State of Oklahoma, over 90 percent of the grain that is shipped on barges eventually finds its way to New Orleans to be exported. If the harbor in New Orleans is not properly maintained, shipping from Oklahoma will suffer. And vice versa—for harbors to gain the economic benefit of shipping from places like Oklahoma, our inland waterways must also be properly maintained. As everyone here knows, only about half of the annual revenue in the Harbor Maintenance Trust Fund is spent as intended—on critical maintenance dredging. But because of the current structure of budgetary allocations, we simply cannot afford to allow funding for our inland waterways and ports to be redirected—it, too, needs a source of stable revenue. The only reasonable solution is increased funding for the system as a whole. The Inland Waterways Trust Fund helps fund the 18 locks and dams on the McClellan-Kerr Arkansas River Navigation System, but it is woefully underfunded. In 2012, over 2.7 million tons of cargo shipped from the Port of Catoosa, with over 12 million tons being shipped on MKARNS, but the system could function much more efficiently and productively if it was deepened from its current 9-foot depth to the authorized 12 feet, and if hours of service on the locks are not further reduced.


The Port of Lewiston, is located at the confluence of the Snake and Clearwater Rivers in the city of Lewiston. For farmers and other businesses in the west, the Port of Lewiston provides a critical link through the Snake and Columbia Rivers to the Port of Portland and ultimately to the Pacific Ocean. However, the Port of Lewiston, like other ports, faces considerable challenges with meeting shipping needs. Despite a large surplus in the Harbor Maintenance Trust Fund, which has already been discussed, harbors across the United States are presently under-maintained. Again, the statistics that have already been presented show that the U.S. Army Corps of Engineers estimates that the full channel dimensions of the Nation’s busiest 59 ports are available less than 35 percent of the time. We too, in Idaho, are very interested and concerned with the management of the Harbor Maintenance Trust Fund. We have seen, just as an example from Idaho, that the draft restrictions in 2011 and 2012, due to the Corps’ inability to maintain the deep draft portion of the Columbia River, have been significant impacts on our economy. For every inch of draft that is lost due to the silted-in channel, vessels are unable to load 358,000 pounds of wheat. This is just one example of how important it is that we properly utilize the funds in the Harbor Maintenance Trust Fund. Second, Idaho is also very interested in the Inland Waterways Trust Fund concerns. There are eight locks between the Pacific Ocean and the Port of Lewiston, and we need to have the adequate support for the maintenance of these locks and the facilities to allow for the traffic to reach the port and to return back to the Pacific Ocean.

Each day the condition of our water infrastructure results in significant losses and damages from broken water and sewer mains, sewage overflows and other symptoms of water infrastructure that is reaching the end of its useful life; and with these challenges and the others I have already mentioned in mind, as this Committee is well aware, a national investment in water infrastructure projects would create jobs, repair crumbling infrastructure, and provide significant protection for public health and the environment. A strong focus on improving the financing structure of our Nation’s water infrastructure is greatly needed.


I think you are hearing the general story of the significant challenges in maintaining levees and jetties and harbor dredging and locks, and how frustrating it is that we have funds that are raised specifically for maintenance, and in this case harbor maintenance, and they are not being spent in that fashion. Now, Oregon is a coastal State, so I go to town after town after town where industry depends upon the success of those harbors and the maintenance of the jetties; and not only is it important to commerce moving back and forth, it is important to our fishing vessels, it is important to our recreational coastal industry, and it imposes not just an issue of commerce, but an issue of safety, because when the dredging is not maintained and the jetties are not maintained, you can have very dangerous entries from the ocean. So how can I possibly justify that we have funds that have been raised for a specific purpose, commerce is at stake, safety is at stake, and we are not spending it in this fashion? I can’t justify it. I want to see this policy changed. I so much applaud the Chair and Ranking Member for bringing this bill forward and I, like my colleague from New Mexico, apologize because I have a conflict to attend to, but I certainly look forward to your comments. I will be following up and hope that we can get to the point that we are spending these funds in the appropriate place.


the Harbor Maintenance Trust Fund should be fully used, but I also agree with our witnesses who emphasize that the Trust Fund should be used to boost funding for the Corps of Engineers.

Appropriations should not be taken from other Corps of Engineers programs due to the potential increased funding from the Harbor Maintenance Trust Fund.

Another concern I have is how we move forward on equitable return of HMT dollars. Arkansas is an inland State, but we have significant water infrastructure. Our State, as many other States like it, receives just a tiny portion of the Trust Fund dollars, but these funds are critical. While I understand the importance of equitable return, we need to ensure that Arkansas’s infrastructure and similar States, that that infrastructure is maintained. Expanding the potential uses of Trust Fund dollars may be a balanced approach, but we must avoid an inflexible framework, such as a rigid formula, which would abandon infrastructure States like Arkansas.


The Army Corps of Engineers provides support for safe, reliable, highly cost-effective and environmentally sustainable waterborne transportation systems, investing over $1.7 billion annually, more than one-third of the total budget of the Civil Works program, to study, construct, replace, rehabilitate, operate, and maintain commercial navigation infrastructure across this Country. The Nation’s ports handle over 2 billion tons of commerce annually, including over 70% of the imported oil and more than 48 percent of goods purchased by American consumers. The Administration understands that our ports are an important part of the Nation’s infrastructure and has formed an Interagency Task Force on Ports to develop a strategy for investment in our ports and related infrastructure. Maintaining these ports and making targeted investments in their improvement can lower shipping costs for U.S. exports and imports. The work of the task force will reflect a strategic, multi-modal view of the Nation’s investment priorities for the infrastructure that supports the movement of freight through our ports, including the protections for life, safety, and property during transport, as well as protections for affected communities and for sustaining our ecosystem. The Harbor Maintenance Tax and the Harbor Maintenance Trust Fund were established by the Water Resources Development Act of 1986. The harbor maintenance tax is an ad valorem fee on the value of commercial cargo loaded or unloaded on vessels using federally maintained harbors. An amount equivalent to the revenue collected is deposited in the Harbor Maintenance Trust Fund and is then available to finance certain costs, subject to the congressional appropriations process. For the Civil Works Program, the Harbor Maintenance Trust Fund is authorized to be used to finance up to 100 percent of the Corps’ eligible operation and maintenance expenditures for commercial navigation at all Federal coastal and inland harbors within the United States. Expenditures from the Harbor Maintenance Trust Fund are also authorized to be used to recover the Federal share of construction costs for dredged material placement facilities, including beneficial uses associated with the operation and maintenance of Federal commercial navigation projects. The Harbor Maintenance Trust Fund is also authorized to be used to finance operation and maintenance costs of the U.S. portion of the St. Lawrence Seaway.

Harbor Maintenance Tax receipts in Fiscal Year 2012 were $1.54 billion, and the interest earned was $47.3 million. The balance in the Harbor Maintenance Trust Fund at the end of Fiscal Year 2012 was $6.95 billion. An increasing portion of Civil Works funding in recent years has been devoted to harbor maintenance. The President’s 2013 budget request for the Corps included $848 million for the Harbor Maintenance Trust Fund to support the maintenance of coastal harbors and their channels and related works, the most ever requested by any president. This is a significant increase over the level in the Fiscal Year 2012 budget, which was $758 million; this all at a time when many programs government-wide are being reduced in order to put the Nation on a sustainable fiscal path. Our investments in coastal port maintenance are directed primarily at providing operational capabilities and efficiencies. To make the best use of these funds, the Corps evaluates and establishes priorities using objective criteria. These criteria include transportation cost savings, risk reduction, and improved reliability, all relative to the cost. Consequently, maintenance work generally is focused more on the most heavily used commercial channels, those with 10 million tons of cargo a year or more, which together carry about 90 percent of the total commercial cargo by tonnage traveling through our coastal ports. The amount proposed in the Fiscal Year 2013 budget is an appropriate level, considering the other responsibilities of the Corps for inland navigation, flood risk management, aquatic ecosystem restoration, hydropower, and other Civil Works Program areas. The Corps is working to develop better analytical tools to help determine whether additional spending in this area is warranted based on the economic and safety return. Dredging costs continue to rise due to increases in the cost of fuel, steel, labor, and changes in methods of disposal of dredge material. We recognize that this presents challenges in maintaining commercial navigation projects. The pending improvements to the Panama Canal will increase the draft of vessels transiting the Canal to 50 feet. On our Atlantic Coast we now have two 50-foot deep ports capable of receiving these ships, Norfolk and Baltimore. The Corps expects to complete the dredging work for deepening the Port of New York-New Jersey to 50 feet in fiscal year 2015. The Corps is also working with the Port of Miami, which is financing a project, to deepen the Federal channel to 50 feet. On the West Coast, the Ports of L.A., Long Beach, Oakland, Seattle, and Tacoma all have channel depths of 50 feet or greater. In addition to the ongoing work, the Corps is also working with seven ports on the Atlantic and Gulf Coasts to evaluate proposals to deepen or widen those channels.

Senator BOXER. You know, you stay away from the bigger notion, bigger issue here, which is is it right to collect fees and then not spend them on this purpose that they are supposed to be used for, and I don’t blame you for staying away from that because, in essence, you don’t really have control over that; the Administration does and prior administrations did, and we do, and we intend to fix it to the greatest extent that we can. Now, the Corps has estimated that the Nation’s 59 busiest ports have access to their full channel dimensions only 35 percent of the time. These ports are critical for commerce and international trade. Restrictions on commerce as a result of inadequate port maintenance can have significant consequences. In fact, a recent report by the American Society of Civil Engineers, which we will hear about on our second panel, indicates that failure to adequately maintain our ports could result in a variety of economic impacts.

Do you agree that failure to invest in port maintenance could have economic consequences that we must seek to avoid?

Ms. DARCY. the receipts go directly into the Harbor Maintenance Trust Fund through the Treasury and then the Bureau of Public Debt, which manages 18 different trust funds across the Government, then is the dispenser of those funds when our agency says we have been appropriated this much money and that is what comes out of the Fund.  The balance of the funds are invested and accumulate interest, and it is up to the Bureau of Public Debt as to how those funds then are used.

Senator VITTER. If there is this balance of $6.95 billion, what vault can I go to and look at it? That is what I am asking. Because it doesn’t exist. So where can I look at that balance of almost $7 billion?

Ms. DARCY. Again, those are the Federal investments in securities, for the most part, I understand, and then the interest that accrues on that is what gets you to that balance. Senator VITTER. Well, again, this is a big fiction, and I think the first important part of this conversation is to get beyond the fiction. It is the same fiction as the Social Security Trust Fund, because when you go and look at that balance, basically this is what you find, IOU $6.95 billion. It is gone, it is spent for unrelated purposes, and that is wrong when it is authorized for specific uses under the law. In looking at the overall budget for the Corps of Engineers, we have to manage for all of the missions within the Corps, we operate under a cap, and we know that if you increase one mission, there must be a decrease somewhere else within the program. As I said in my statement, over one-third of our budget, $1.7 billion, is spent on navigation, and that additional money that does not come out of the Harbor Maintenance Trust Fund is spent on other studies or construction, because the Harbor Maintenance Trust Fund does not fund construction.

Senator BOOZMAN. So you mention the cap, which is a concern, and you also mention that we are going to be increasing the money spent from the Harbor Maintenance Trust Fund. So where is that coming from, is that new money or is that money that you are essentially shuffling around, so that something else under the cap is going to suffer?

Ms. DARCY. The 2013 budget request which includes $848 million is $90 million more than Fiscal Year 2012. Within our program we had to make a decision as to how to balance programs, because we are still under the $4.7 billion program. We did put more money on activities reimbursed from the Harbor Maintenance Trust Fund, so some of the other programs like some of our other operation and maintenance activities were reduced. Although operation and maintenance has also increased in our overall budget over the last couple of years. We would have to take decreases in some other programs, including some of our CAP programs, which are our small project programs. Again, the overall program has to be balanced across all the business lines within our budget.

Senator BOOZMAN. So I guess that is really the real problem. It doesn’t matter how much we put into the Harbor Maintenance Trust Fund; the reality is it really wouldn’t be any additional new money.

Ms. DARCY. No. But also within the budget process, when the appropriations committees get their 302(b) allocations, there is a cap in there, and there is Army Corps of Engineers within that 302(b), there is the Nuclear Program, there is the Energy Program. So the balance within that allocation would have to either be increased in order to accommodate increases across all the programs.

MICHAEL R. CHRISTENSEN, Deputy Executive Director of Development, Port of Los Angeles; Chair, California Marine Affairs & Navigation Conference

The Port of Los Angeles, in conjunction with our neighbor, the Port of Long Beach, handles over 40 percent of all the containerized goods that come into the United States, worth approximately $311 billion. This cargo supports about 900,000 regional jobs, nearly $40 billion in annual wages and tax revenues, and nationally the goods that come through the port complex of Southern California support also about 3.5 million jobs throughout the United States. We are not tax supported; instead, our revenues are all derived from fees and from other shipping service revenue.

The maintenance that is funded by HMT supports a well-functioning navigation system that includes the ports and harbors that accommodate a wide variety of commodities: containers, bulk goods, agriculture products, automobiles, fisheries, and also serve these facilities of service critical harbors of refuge. The system not only supports jobs in operation and maintenance, but facilitates trade that supports jobs throughout the supply chain throughout the United States, reduces the transportation costs for American businesses, and ultimately keeps the prices lower for American consumers. For this reason, the California ports support the following: No. 1, full utilization of HMT revenues for operations and maintenance purposes; No. 2, the prioritization of HMT funds for use on traditional O&M purposes, including maintenance of Federal navigation channels, disposal sites, selected in-water projects such as breakwaters and jetties, and studies; No. 3, more equitable return of HMT funds to the systems of ports of California; and, No. 4, a cost- share formula for maintenance that reflects the current cargo fleet. First, we believe HMT should be fully used for O&M purposes. Appropriations from the HMTF have lagged behind receipts for several years, leaving a surplus and deferring maintenance on our Nation’s system of ports and harbors. Achievement of full use of the HMT should be additive in nature. That is, in a given fiscal year, the guarantee of full utilization should not be achieved by taking funds from other U.S. Army Corps priorities.

We support a more equitable allocation framework within WRDA. Even if HMT funds are fully utilized for O&M, we believe efforts should be made to increase the funding return to systems that contribute large amounts to the Harbor Maintenance Trust Fund. One of the reasons we believe in this approach is because the users, not the ports, pay into the harbor maintenance tax. The users of the California port systems, for example, have reasonable expectation that the money they pay would be returned to the systems that they use.

JAMES K. LYONS, Director & CEO, Alabama State Port Authority

Mobile is amongst the 90% of the Nation’s top 50 ports in foreign trade commerce that require regular maintenance dredging. In total, dredged ports move nearly 93 percent of all waterborne commerce by weight annually. The 35% availability is a very real figure, something that we can attest to from Mobile, and in talking to my fellow port directors in other ports, I believe this is a very real number. As an example, between 2006, after we finished the dredging cycle that included supplemental funding that came as a result of Hurricane Katrina, and 2011, Mobile had only half of our authorized width in much of our 30-mile-long channel. These conditions caused numerous groundings, forced restrictions in vessel traffic, and, in short, cost the shippers using our port a great deal of time and money. The budget versus the appropriation in Mobile is, again, very real, just as it is. We saw the figures in the chart that Senator Sessions put up. Mobile’s 2012 budget was $22.6 million, but we really need $28 million to fully maintain our authorized width and depth. So enough money is not being appropriated in the Mobile harbor project, and the same applies to many of our other projects that require dredging. These poorly maintained harbors increase the cost for all port users, reduce U.S. global competitiveness, and exacerbate the maintenance dredging backlog, all of which adversely impact the U.S. tax base and the job market. Aside from dredging backlogs and funding shortfalls, we are deeply concerned with how the Nation’s ports will be expanded, funded, and maintained in the current fiscal climate. As Congress considers requests for use of the Trust Fund to resolve the dredging conundrum, we ask Congress to consider the long-term relevance and economic impact of ports within the context of re-examining the base of all major Federal spending and tax programs. There is legitimate need for port investment to serve larger vessels transiting most trade lanes. Any Federal project investments will ultimately draw on the trust as deepened and widened channels are brought online. We recognize the link between fee collections and expenditures is complicated. Increased maintenance spending on harbors will impact the Federal deficit unless spending in other areas is decreased or other collections are increased. We also understand guaranteed funding for dredging, and the budget protects dredging obligations from competing interests with revenue sources of type.

MIKE LORINO, President, Associated Branch Pilots

The Harbor Maintenance Trust Fund is not a Louisiana issue, it is a Nation issue. It is an ad valorem tax for dredging jetties, breakwaters, and it is being abused. Seven million dollars is just being moved somewhere else.

The Mississippi River touches 31 States and two Canadian provinces. We have five deepwater ports, the largest complex in the world. Not in the United States; in the world. Last year, my association that I represent, we did 12,000 ships in the Mississippi River. There was 40,000 movements of vessels from the mouth of the river to Baton Rouge, 40,000 in 1 year. It is unbelievable. Thirty percent of the Nation’s oil, 60 percent of the Nation’s grain is shipped out of the Mississippi River system. If we would shut down the Mississippi River, and that has happened a few times, it is $295 million a day for the Country, and grows exponentially after the fourth day. A hundred percent of the channel helps us maintain cost effectiveness in the world market, $0.13 per bushel saving over highways or rail when dimensions are 100 percent. Narrow channels hinder our ability to compete globally. What happens there, a ship will come in to load cargo and he can’t get it all on that ship. So one would think, well, we will send it to the West Coast. That works for 1 year. After that we cannot compete with Brazil and Argentina. Now our prices are gone. Our farmers in the heartland lose that business. It is not acceptable when we have this money coming in. A closed Mississippi River system would dramatically affect gas prices, grain prices, all exports and imports. After our Hurricane Katrina, gas prices went up overnight because we had the refineries on the river. We couldn’t get fuel oil out; we couldn’t get aviation oil out. It is unbelievable. We need this. Someone mentioned about environmental. That is gigantic. We had an oil spill down there with BP. We have tankers coming in the Mississippi River system with 600,000 barrels of oil on one ship. If that ship runs ground and puts a hole, we have another BP in the Mississippi River system. But the travesty for that is very simple: that ship is paying. It is importing here, paying that tax, and here he could run aground and have another problem after he is paying money to come into the United States. That is unacceptable, ladies and gentlemen. Current draft at the present time is 45 by 700 feet. Channel width is crucial. Last year we were down to 100 feet from 750. We had to have one-way traffic.

The cost for the Mississippi River for the last 5 years, we have been underfunded by approximately $50 million a year. Fifty million a year. You know what I have to look for, and it is a shame in our great Country? I have to look for a catastrophe to put a supplemental on there to get funding.

Safety is a huge, huge factor. Chairman, you had an incident out there in California a few years ago. You know what happens when oil is dropped in the water: everybody is concerned; especially a pilot, especially the owners. We can’t have that. It happens sometimes with human error. It happens sometimes with mechanical. But it is not acceptable to have it happen when we have money coming in to keep our channels and ports open to project dimensions. The Administration said they would like to double exports. How can we double exports when I can’t load what we have today? It is impossible. I am just a pilot.

This is a problem that can be fixed with no new taxes. The money is being collected.


The United States has approximately 300 commercial ports, 12,000 miles of inland and intercoastal waterways, and 240 lock chambers which carry more than 70 percent of the U.S. imports.

For this system to remain competitive, U.S. marine ports and inland waterways will require investment in the coming decades beyond the $14 billion currently expected to be spent. According to the ASCE’s Failure to Act Economic Study, aging infrastructure for marine ports and inland waterways threatens more than 1 million U.S. jobs. Additionally, between now and 2020, investment needs in the marine ports and inland waterways sector will total $30 billion nationwide. With planned expenditures only expected to be about $14 billion, a total Federal investment gap of nearly $16 billion remains. Meanwhile, the costs attributed to delays in the Nation’s inland waterways system were $33 billion in 2010, the cost is expected to increase to nearly $49 billion by 2020.

Fiscal Year 2013, the Obama administration requested $839 million to be appropriated from the Harbor Maintenance Trust Fund. This amount equals only 50 percent of the total estimated revenues in the Trust Fund, and nowhere near the estimated needs, which, according to the Army Corps of Engineers, is between $1.3 billion and $1.6 billion annually.

This troubling trend toward reduced investments has led to ever- greater balances in the Trust Fund, with the unexpended balance growing to more than $6 billion by September 2013, according to the Office of Management and Budget. Therefore, the Committee should include a provision in the Water Resources Development Act requiring the total of all appropriations from the Harbor Maintenance Trust Fund be equal to all revenues received by the Trust Fund that same year.


I come at this issue with a particular history and a particular context, and particularly when I hear Mr. Lorino and his wonderful voice and the message that he brings from the Mississippi and the Gulf Coast about the urgency of their problems, and that is that not too long ago in Congress we passed a piece of legislation that conferred an enormous multibillion dollar benefit along the Gulf Coast, and we did so as the result of an agreement that was reached that the bulk of the benefit was going to flow to the Gulf Coast, but that there would be a small portion that would accrue to the benefit of all coastal and Great Lakes States. After the agreement that allowed that to go forward was reached, the part that went to the benefit of all coastal and Great Lakes States was stripped out. An agreement was made and an agreement was broken. I am inclined to, and I want to, support enhanced traffic on the Mississippi River. I want to support the protection and growth of the port in Louisiana and, frankly, in Los Angeles and Alaska, and everywhere else. But the past bargain has to be honored for me to be very enthusiastic about going forward with further benefit that goes to the Gulf and to the Mississippi, and I just want to make that point.

Senator BOXER. Well, we are going to make another effort. There may be a way we can do something for the smaller ports here that really gives them an opportunity, because when you listen to Senator Whitehouse talk about his State, his State is in jeopardy right now, we know that, because of what is happening with the rising sea levels. He just needs to have some attention paid. In the last WRDA bill he was knew, I remember it. We really didn’t do what we should do. By the way, just saying to colleagues who are here, we had a really hard time drafting this bill because there are no more earmarks, and we have to take care of our States. So the way we did it here is to make sure that any project that had a complete Corps report which was sent down from the Corps would get funded without naming any projects or getting into all that. This could be very well the last WRDA bill that we can figure out how to do without naming projects after this one it is going to get increasingly more difficult.

Senator BOOZMAN. We need to establish some integrity before we protect it and go forward, much like the Highway Trust Fund and the Aviation Trust Fund. It is difficult to get done, but we can at least reach agreement. The more difficult thing is, once you have the trust fund, how do you divvy it up, realizing that it is system-wide? Los Angeles is remarkable in the sense that you have all this high- value stuff coming in there. You are creating about, I think, over 13% of the revenue that comes in, and because of the nature of your port you need more than what you are getting, but you are not getting very much of that 13% out. Some of our other ports through no fault of their own, are in situations where there is a lot more silting; there is just a lot more need for dredging and things, and that is the difference in the East Coast and the South. It is just the way it is. Then the other thing my ports that lead into the Mississippi River that ultimately come out and create some of this traffic, how do you do all that?

Mr. CHRISTENSEN. Even the Port of Stockton is suffering because of lack of maintenance funding. They have shoaling that means that iron ore ships loaded in Stockton cannot leave full, they have to leave light-loaded; they go to Oakland and then they get topped off. That is extremely inefficient.

Senator BOXER. I wanted to ask you about beneficial uses of dredge material. In your testimony you raised the possibility that increased spending from the Harbor Maintenance Trust Fund could create additional opportunities for beneficial use of dredge materials, such as wetlands restoration, and it was mentioned by Senator Cardin. Could you elaborate on some of the beneficial uses of dredge material that might be realized if we increased investment in dredging navigation channels?

Mr. LORINO. Beneficial use in the State of Louisiana is a very tough issue because of money. As I discussed a few minutes ago, we have $83 million to spend, and that is picking up sediment that comes down every year. The State would love us to use that for beneficial use. We would love to use that for beneficial use. But we are barely keeping our channel open. To use it for beneficial use, we have to transport it further. That would take time. There is not enough dredges to do that at the present time. So we have this conflict that is going back and forth. What I would like to see, if we could, and we are looking at a 50-foot channel also on the Mississippi River. Someone mentioned on the East Coast about the port study to get the 50 feet. They left out the bulk port, and that is very important. The Mississippi River is a bulk port. But if we could dredge, we could use a cutter head dredge and build the coast down in Plaquemines Parish that was devastated by Katrina.


June 10, 2008. S. HRG. 110–1165 Keeping America Moving: A review of national strategies for efficient freight movement. 74 pages.



Today we’re going to take a closer look at how our Nation moves its freight by ship, truck, train, and barge, and the challenges that we must overcome to keep that freight and our economy moving in the future. Our country has one of the best freight transportation systems in the world. It’s the backbone of our economy. It carries the products that Americans rely on, such as food, clothing, toys, things that go on store shelves. Raw materials like coal, lumber, fuel and iron required to manufacture all kinds of goods are also moved as freight. Just-in-time delivery and real-time tracking of shipments have greatly reduced the need for companies to hold huge inventories because we can count on goods being there when needed.

But our economy is threatened by the current state of the transportation infrastructure and its inability to meet future demands. 25% of our Nation’s bridges are functionally deficient. Even when these bridges are repaired, our highways along with our ports and railroads will be overwhelmed. Congestion on our roads already costs our country nearly $80 billion a year. On the rails, some trains take a day to just cross the City of Chicago.

To keep getting the goods we need in the future, we’ve got to invest in our transportation infrastructure right now. Building roads will not solve all of our problems and in some places it’s not even possible.

Trains and barges can reduce highway congestion and wear and tear on our roads and bridges. They’re also more energy efficient than trucks, which will aid our fight against global warming, and help us become more energy independent. We need to encourage these efficiencies to the maximum extent possible. The Federal Government has to step up and play a leadership role in planning our future transportation network, one which takes these benefits into account.

One gallon of diesel can carry a ton of freight if it goes by truck 155 miles, by rail 413 miles, and by barge 576 miles. This tells you about the significant part of what we’ve got to do and the problem that we have if we don’t take advantage of these time-saving and value-saving changes.



I’ve seen the tremendous potential for biofuels in our state, but then see that we have a transportation system that’s actually worn down from the increase in biofuels and from the weight of these new products, and yet we aren’t keeping up.



The Northwest ports ship 90 million tons of cargo worth $60 billion. The Columbia River is the Nation’s number one gateway for the export of wheat and barley. Seattle and Tacoma form the country’s third largest gateway for containerized cargo. A typical barge can carry 1,500 tons on the Mississippi and 3,500 tons on the Columbia and Snake Rivers. That compares with 100 tons by rail car or 29 tons per truck. For the Columbia River, loading a typical grain ship with 55,000 tons of wheat for export requires four barge tows or 550 rail cars or 1,900 trucks.

Since 1789, the Federal Government has exerted control over navigation channels and channel improvements. In 1824, Congress delegated authority over the Nation’s navigation system to the U.S. Army Corps of Engineers.

Operations and maintenance and new construction of navigation projects are funded annually in the Energy and Water Development Appropriations bill. Since 1978 there has been a user fee on the Nation’s inland waterways, the Inland Waterways User Fee. In 1986, Congress established a user fee for deep draft coastal ports and harbors, the Harbor Maintenance Tax.

Money collected every year

  • $1.5 billion inland and deep draft user fees put into the Harbor Maintenance Trust fund. But only $900 million is expended. The surplus of collections over expenditures is over $4 billion. The GAO reports that the surplus is expected to grow to $8 billion by 2011. Rather than being used for their intended purpose, at least $500 million of these user fees is instead used to balance the Federal budget. The Harbor Maintenance Tax was established to collect fees to provide 100% of the cost of operations and maintenance, primarily dredging, of the Nation’s deep draft and coastal ports and harbors.
  • $21 billion Customs duties
  • $80 million Inland Waterways Fuel Tax to provide for 50% of the cost of new construction and rehabilitation of locks on the Nation’s inland waterways. It collects 20 cents per gallon of fuel used by towboats on the inland waterways.

Despite the collection of these fees, navigation needs are not being met. There is a significant backlog of maintenance and new construction.

The Inland Waterways Trust Fund had a surplus for many years, but now, expenditures are projected to surpass collections in 2009. The Administration has proposed instituting a new inland waterway tax which would replace the fuel tax with a lockage fee for each barge. The proposal would increase the user tax approximately 4-fold for barging on the Columbia and Snake Rivers. PNWA opposes this new tax.

Despite collections far exceeding expenditures, the Administration does not propose sufficient funding to maintain the existing navigation system or to meet future needs. For decades, during both Republican and Democratic administrations, we have had to look to Congress for increases over and above the inadequate Administration budget proposals.

Unfortunately, having money in a Federal trust fund does not mean that the money is actually available to be spent for its designated purpose. That is wrong. User fees were instituted to meet a specific funding need. The funds collected from navigation user fees must be spent to meet navigation needs. Congress has the authority to make this happen. We urge Congress to exercise that authority.

We encourage Congress to reinvigorate our Nation’s navigation infrastructure by funding navigation at levels that match the overall collection of user taxes. That is what is necessary to meet our Nation’s vital economic needs. That would equate to an annual increase of $500 million nationally.

Pacific Northwest examples

As an example of how this affects the Pacific Northwest, I have attached a copy of PNWA’s appropriations request for FY 2009. We track 32 navigation projects from Humboldt Bay in California, up the Oregon Coast, along the entire length of the Columbia Snake River System in Oregon, Washington and Idaho, to the Ports of Seattle and Tacoma and the northern reaches of the Puget Sound in Washington. Of those 32 navigation projects, 29 are in need of additional funding. In other words, the Administration’s budget proposal provides adequate funding for only three of our region’s 32 navigation projects. Additional funding is needed in all categories . . . general investigations, new construction and routine operations and maintenance. Here are a few examples.

On the Columbia Snake River System, Congressional adds are needed to maintain authorized channel depth throughout the Columbia and Lower Willamette project. Two of our eight locks need Congressional adds for routine operations and maintenance. Five need adds for major maintenance and repairs. One needs additional funding for dredging to maintain authorized channel depth. Oregon’s coastal ports need funds added for routine dredging to maintain their navigation channels and for jetty repairs. In Puget Sound, the Lake Washington Ship Canal needs a Congressional add to meet Endangered Species Act requirements. More funding is needed for the Elliott Bay Seawall study in Seattle. In California, Humboldt Bay needs funding to complete a long term sediment management feasibility study. Congress has responded in past years. Those hard fought increases have been important, and very much appreciated, but they have not been sufficient to prevent navigation infrastructure from further deteriorating.

PNWA supports full funding for these critical projects. These ports, home to fishing fleets, marinas and significant commercial and recreational facilities, are critical to the economic survival of their communities. Many have small populations, and the ports provide employment for a significant proportion of community.

Mr. VANSELOW. For both Republican and Democratic administrations we’ve had the problem that the Administration in the President’s budget underfunds those collections dramatically. Again, we’re at $4 billion-plus today. It will be growing by approximately a billion dollars a year over the next few years.

Senator SMITH. Well, my friend the Chairman—it’s easy to pick on the Bush Administration. We had the same problem with the Clinton Administration. This isn’t a Republican or Democratic problem.

Senator LAUTENBERG. He said that and I heard it. I was disappointed to hear it.

Senator SMITH. This is money that we are taking. We’re already collecting enough taxes and we’re just simply spending it on other general fund issues. But the point is the inefficiencies that flow from this, the energy waste that comes from this, is a bipartisan shame and I think we ought to fix it. my take-home to this is that we have not a Republican problem, not a Democratic problem, not a tax collection problem. We have a tax allocation problem.

Senator LAUTENBERG. I wanted to ask this question generally. Some have suggested that we could reduce truck traffic on our highways by using barges and ships to move freight between two U.S. ports on marine highways. But a shipment from overseas that then travels between these two U.S. ports faces double taxation because it pays the Federal Harbor Maintenance Tax twice. Now, might removing this tax for the domestic portion of this shipment provide incentive for these so-called short-sea shipping moves to get more trucks off the road?

Mr. VANSELOW. If you don’t mind, Mr. Chairman, I’m going to use your question to speak a little more broadly about the Harbor Maintenance Tax. First, industry does not object to a tax. We do believe that it is necessary to fund navigation. These are all Federal channels. They are all maintained by the U.S. Army Corps of Engineers. They are all appropriated by Congress, and it is the user fee that should be paying for that. The user fee does have some issues. One we’ve talked about, the surplus. Others, we have had an issue at our north and south borders, where Seattle and Tacoma, for example, are competing with Vancouver, B.C., and they are advertising no Harbor Maintenance Tax here, trying to woo cargo away from U.S. ports. This is cargo destined to U.S. importers, but moving through a foreign country to get there. So there are other issues. We do believe that we do need to take care of those kinds of movements. If a cargo is taxed once coming into the United States, that ought to be all that it is taxed.

One of the issues that we have is it is the largest ports in the country that need the ability to exercise short-sea shipping because of their capacity constraints. We have a problem through OMB and administration priorities, it is the largest ports in the country that are the top priority for getting funding for expenditure out of that Harbor Maintenance Tax. The smaller ports, which could be the feeder ports, are the ones that Senator Smith just remarked are zero in the Administration’s budget proposal. We have to come to Congress to ask for more. So if we could more broadly spend that—it’s not just L.A. and Long Beach that needs money. Their overflow opportunities go to Oxnard and Port Hueneme and elsewhere on the California coast. We have the same issues in the Pacific Northwest.




Posted in Congressional Record U.S., Ships and Barges | Leave a comment

2006 Summary of two of nine Australian Senate hearings on Peak Oil

[ Someday historians will want to know what politicians knew about the energy crisis and when they knew it, probably to blame them for doing nothing, even though there’s not much they can do. I’ve read what I can find in the United States congressional record and from what I’ve seen so far, it  Australia has gone much further in exploring the issues of Peak Oil – though perhaps similar research is buried in secret Homeland Security or Closed Session hearings. Since I can’t keep up with U.S. energy policy, I never got around to reviewing the other 7 hearings.  Alice Friedemann ]

2006 Summary of two of nine Australian Senate hearings on Peak Oil


Official Committee Hansard

Senate Rural & Regional Affairs & Transport References Committee

Australia’s future oil supply and alternative transport fuels

Australia’s future oil supply and alternative transport fuels, with particular reference to:m projections of oil production and demand in Australia and globally and the implications for availability and pricing of transport fuels in Australia; potential of new sources of oil and alternative transport fuels to meet a significant share of Australia’s fuel demands, taking into account technological developments and environmental and economic costs; flow-on economic and social impacts in Australia from continuing rises in the price of transport fuel and potential reductions in oil supply; andoptions for reducing Australia’s transport fuel demands.

BENNETT, Dr David, Founder, Sustainable Transport Coalition BEVERIDGE, Mr Andrew, Project Manager, Commercialisation, Office of Industry and Innovation, University of Western Australia

BOWRAN, Dr David, Grains Industry Development Director, Department of Agriculture and Food, Western Australia

FLEAY, Mr Brian Jesse, Private capacity.

HARRIES, Professor David, Director, Research Institute for Sustainable Energy.

HEAD, Mr Glen Michael, Director, Perth Fuel Cell Bus Trial and Transport Sustainability,

Department for Planning and Infrastructure, Western Australia

IRESON, Mr Gary, Director, Gas and Power, Wesfarmers Energy, and President, LPG Australia

RICE, Mr David, Principal Network Planning Office, Department for Planning and Infrastructure

ROBINSON, Mr Bruce, Convenor, ASPO Australia

ROSSER, Mr Matthew, Chair, Sustainable Energy Association, Western Australia

UPTON, Mr Michael Leslie, Manager, Vehicle Policy, Royal Automobile Club, Western Australia

WOOLERSON, Mr Tim, Bus Fleet Manager, Public Transport Authority

WORTH, Dr David John, Convenor, Sustainable Transport Coalition


Mr. Robinson – There are large numbers of solutions as to how we can do things better—taking your second point about how to do it better. The clearly sensible thing to do is to put up the fuel tax, which I hope we come to later. The clearly sensible thing to do as a politician is to avoid mentioning that. The only way we can do that is to engage the community. We had petrol rationing during the war. If people understand the situation then, firstly, they will think of a lot of ways that they can lower their own oil vulnerability. They can do their own risk assessment. There will be a whole growth industry of consultants who can go around and help people go through that—and ASPO Australia is hoping to be part of that, because no-one else is. Also if people understand they can look at things as people have done in wartime and other times to change the situation.

It starts at a sensible, professional level—not just saying that $3 a liter is unacceptable, which we heard a community service organization say. We have to accept the scenario that these things might happen and we have to have a plan B. We might have something like the hurricane that hit New Orleans, and at federal, state and local levels the US was shown worldwide to be completely bloody useless. They had rows of buses sitting in a lake when there was no transport to take people out from nursing homes. We are going down that road but if, from this Senate inquiry, we can engage the community there are all sorts of plan Bs from oil vulnerability assessments. That is crucial. We cannot just go back to talking about whether we do biodiesel or fish and chip shop oil.

Mr Head—I would like to respond to both senators’ questions about market and market failure and then lead into a potential government response to that. One of the concerns is that there is massive investment at the moment in the status quo. We have our transport companies investing in their production plant for 10 to 15 years out and airline companies investing 20 years out. We know that any societal change to a new technology has very long lead times. We have discussed natural gas for vehicles, LNG and CNG, and these lead times are significant and substantial. That means that the companies and the markets that the economists are relying on to take the lead are going to play out their existing hand of cards for as long as they possibly can. I respectfully suggest that they might not want to look at a different set of cards until retail prices have doubled or tripled.

As a taxpayer, I would like someone in the political sphere to stand up and say, ‘This is the future that is coming—whether it is today, whether it is tomorrow, it is coming.’ We can deal with that when it arises, at the point where we will be paying $1 billion per year every single year, or we can perhaps invest a few billion dollars up front and make sure that never happens. You will only get a rational analysis of that from the taxpayers and the voters if they are informed.

This brings it back to the points that have already been raised about oil vulnerability maps and the level of public engagement we need. We need this like we have never needed it before. We have to be innovative. We have to not go to people with information but engage them in an intellectual way and also at an emotional level. People have to understand the consequences. For all those reasons we cannot rely on the markets. The government does need to take a strong lead.

Prof. Harries—I liken our current situation with oil to the situation we were in with electricity going back many decades. We had monopoly providers and there was very little planning. We virtually said: ‘What did we do before? Let us build another coal-fired power station.’ Oil has been a far greater problem because we have relied on very large monopoly oil producers from overseas and we have felt (a) that we had very little capacity to anything and (b) there is very little need. One of the things that have exacerbated that problem is that at the state government policy level there is actually very little in terms of transport policy. No-one owns the transport policy agenda in this state, like they do stationary energy. There is no office for sustainable transport policy.

We are facing massive uncertainty. I am personally very reluctant to look at crystal balls and guess what fuel prices are going to be. I think we have to accept that we have got huge uncertainty. We are behind the eight ball in that we have not had the planning systems in place to help us deal with that. The sensible strategy—and I have heard some of them around the table— is to start putting ourselves in a position where we can start planning. That means not just informing the public and working with groups. It also means—and this is very dear to my heart—understanding what we are going to need to have a very flexible approach to be able to deal with that uncertainty. That is going to go right across the board. How can we help companies develop the liquefied natural gas infrastructure they need? What training are we going to need? What skills are we going to need? What information are we going to need to be able to help us move when we need to move?

My plea is that we are going to have to look at our information needs and how we can address them. As politicians you have a very unenviable task because of that uncertainty and because of the limited planning capability we have. It is going to be very hard for you to engage the public—‘Hey, we have a problem; let’s do something.’ I think we are going to have to take it step by step. We need to look at what we are missing—what are the gaps. We need to do a real SWOT planning analysis of what we need to know.

Mr Rice—We are working on producing oil vulnerability maps for Sydney, Melbourne, and Perth. Are they vulnerable because they do not have access to public transport? In which case, we can start long-term strategic planning.

Mr Fleay—There is some real landmark guidance as to how to go. The first thing I want to deal with is how in all of the discussion here people have come up with problems and things that need to be done. The problem with all of those things is that they impact on all people and all businesses in different ways and on different time scales. There is an inherent complexity in them and all sorts of feedback loops and the like, such that you cannot use a top-down management approach. The very nature of such systems is that no one person can fully understand them. This is some of the modern thinking that arises from the so-called chaos theory. That means that you need a process whereby you can engage all the stakeholders and the public in this process to deal with those things. It was done successfully with the Network City plan, which was quite a significant effort. It has also been done on smaller scales. Basically it involves getting various stakeholders with their different viewpoints to state their case—people giving an overview of things and the like. With the Network City planning, there were 140 tables with eight people each, each with a computer. This enabled good, close dialogue between the people on a table which could then be fed into the whole group. All sorts of solutions emerge from that.

I was also involved in a similar thing on a smaller scale at Geraldton when there was a conflict between road trains and residents. At the end of that meeting, even though there were strong differences, we looked at what it would be like if we continued the way we were and what it would be like if we went down a different pathway. At various stages in the process each side had to argue the other’s case. It reached a point at the end where everybody, all of the 70 people involved, agreed that we could not carry on as we were and that we had to change, and there was a perspective on doing so. This is the way forward. What governments have to do is not manage and come up with solutions but give leadership of this kind in order to get an informed population and to unleash the creativity of people to find solutions. We cannot do it any other way. This is the way forward.

It has to be a continuing process. The essence of it is, I think, that it combines in one process people cooperating and competing at the same time. The two are not mutually exclusive; they are complementary. It is finding that mix that is absolutely essential to seeing the way forward here. We cannot move forward before that, particularly if we start bringing the peak oil into it. If we start to say, ‘It looks as though we’ve got to reduce our use of oil by this amount,’ it puts a perspective on it that enables us to make the change. You have the potential in that for everybody to see that everybody is making adjustments and to see it as just and equitable. That is critical.

In connection with the question of trade, coming back to the theories of economists and economics the so-called law of competitive advantage, which dates back to the early 19th century, is based on the premise that rather than being self-sufficient countries should specialize on what they can do best and trade, which of course means increased transport. That is the basis of all free trade and even interstate trade—if you think of each state in this country as being a bit like a country. Ever since the early 19th century, the cost of transport has been diminishing. Initially it was coal fired, then oil came in in the early 20th century. Oil was significantly superior as a transport fuel, especially with the very cheap oil from the giant oil fields which dominated in that period. My view is that that period has come to an end, and therefore we have to start thinking of a focus on being more self-sufficient as a strategy into the 21st century. The old view is losing its validity. However, that is a very complex question because of the great deal of interdependence that occurs around the world. Just to give you an indication, Japan was nearly self-sufficient in grain in 1950, but as a consequence of its industrial development it now imports about 70 per cent of its grain. A similar thing applies to South Korea and so on.

So a huge period of readjustment has to take place, but nobody is giving much thought to that at the moment. I mention in my submission that it is something we need to start thinking about, and we need to start a dialogue with the economists about the deficiencies in their theories regarding the way they handle energy. That must be a part of this. I also mention that it raises the question of the current dependence of food production and the whole food chain to households on fossil fuel energy—mainly petroleum. I also throw in that modern industrial agriculture has been described as a way of using land to convert petroleum into food. I deal with that in my submission. We need to know important information about where all the embodied energy in all these steps is so that we can have a clear picture of which things are the critical ones to tackle first and so we can create a long-term strategy. My view is that the most important use for the remaining oil—the first priority—is that food supply and food chain, for obvious reasons.

Dr. Bennett – I want to move on to alternative fuels. I take a particular interest in biofuels. We recently had a conference, at which Senator Milne spoke, on bioenergy and biofuels. At that conference, the speaker from BP Australia stated that BP would not touch palm oil. This is one of the moral hazards of biofuels. The fact is that the increasing demand for biofuels is now a significant hazard in the preservation of biodiversity and tropical rainforests around the world. Similar activities are taking place in relation to tropical rainforests and sugar cane plantations. It amounts to the fact that the more we make demands on the plant kingdom of this earth in terms of both food and fuel, the more we are going to do damage to it. The situation is that one rates human food first, animal food second and fuel third. It is disturbing to see the diversion of human and animal food into fuel. It seems to me that one of the actions that government can take is to make no more concessions and no more subsidies for the production of biofuels.

CHAIR—Stunned silence.

Mr Rice—We have a problem with obesity—why not turn that into transport, particularly walking and cycling. Again, do not overlook those for personal transport. About half of our trips in Perth—and Perth is a very spread out city—are less than five kilometers long. We could save a huge amount of fuel, we could have big health benefits and we could have social benefits with more eyes on the streets for a relatively little cost. We are talking about the ‘no regrets’ option. We are talking about how you as politicians are going to get some of these things in place. It is not going to be by just saying nasty things like, ‘You’ll have to cope with a high increase in fuel.’ It is going to be by saying some useful things as well, like how this is going to benefit people.

If we look at social changes, it is now commonplace to wear seatbelts and it is not commonplace anymore for thinking people to smoke. It may be not commonplace in the future for thinking people to drive V8s unless they absolutely have to. There is an encouragement thing. There is a health thing. There are a lot of pluses in this, particularly if you adopt that broader overall sustainability view of what government is all about. If you do not govern for sustainability, why are you governing at all?

Senator MILNE—I wanted to follow up on the issue of China, because it is very difficult to even contemplate the scale of the global impacts of China and India combined but China primarily. Lester Brown in his book Plan B basically says that at its rate of growth China will absorb virtually all the cereal and grain crops of the whole planet. What else is anyone else going to eat? Plus, they are in the black—America is in the red—and they can afford to buy up as much food-producing land as is necessary… His conclusion is that the current economic model does not work for China and that, as it does not work for China, it does not work for the rest of the world. It is pretty profound to try and take in the scale of the impact. On this question of liquid natural gas, I have seen all the stuff in recent times about Australia touting its liquid natural gas to the US, to China and to anyone who will buy it. I am interested in the collective view here on whether it is appropriate for Australia to be selling—and I understand the WTO rules; let us just put those aside—liquid natural gas?

Mr Ireson—In response to whether it is appropriate to be exporting the LNG that we have: I think the reality is that, without the export income, these kinds of investments would not be undertaken in the first place. The scale of investment that is required to develop these resources is very hard to get your head around. For a country like Australia, without the interest from the oil majors and their seeing this is a country that they want to develop because it has free trade and certainty in terms of taxation treatment and the like, we would not have the developments. Without the developments, we would not have the domestic access to the natural gas that I was talking about earlier that in fact now gives us a competitive advantage against imported diesel. So I think we have to be very careful that we do not isolate ourselves. At the end of the day, it is business on a global scale that we are talking about and it is very hard to be isolated from that.

Mr Head—I am going to be a bit controversial, and Gary may wish to come back on this one. According to data from our Department of Industry and Resources—don’t get hung up on the figures; it is the magnitudes we are looking at here—we have 80 to 130 years worth of natural gas supplies. That is at current levels of use, which we know is not going to happen: demand is going to increase. If we were to translate a significant proportion of our transport task to natural gas, that duration, that window of opportunity, would reduce right back down to between 20 and 50 years, notwithstanding that the peak is going to occur somewhere halfway along that period. With the time lags for introducing new technologies and getting societies to make that transition, it will take us 20 years to get to the point where we are all using natural gas. And then what do we do? We say: ‘Shit, natural gas is running out; we’ll have to do something. We’ll have to introduce the new technology now so it’ll be ready in 20 years time.’ So it kind of makes you think that it might be worthwhile leapfrogging some technologies which we have a pretty good idea are problematic from the point of view of a long-term solution to supply and which also have the greenhouse gas and climate implications. Gary’s point about developing export markets and local markets for it—I cannot see a justification for that.

Mr Fleay—I dealt with this question of alternative fuel in one part of my submission. I finished up with a chart showing the energy-profit ratio on a vertical axis and increasing economic effectiveness on a horizontal axis. The energy-profit ratio is the energy content of the fuel divided by the energy used to get it. The higher that figure, the more useful the fuel. There is a difference in effectiveness. We are never going to see a coal-fired airplane, for example. It is that sort of picture. This chart gives a picture on the basis of the information I have available.

What comes out in that picture is that the petroleum products that have been taken from giant oil fields stand out above everything else. Nothing else can match them. It would be useful to look at that. But we do need a lot more information in this country. A lot of work needs to be done to find out what the energy-profit ratios of our various fuels are to update that figure. This is an important task so that we are able to sort the wheat from the chaff, know what you can and cannot do and know what can be used for a transition to help us to get to one point. In this sense, everything that everybody says has some role somewhere in it, including using natural gas as a bridging fuel for transport while we make a lot of other changes. This is the essential point.

Hydrogen is not an energy source—it is an energy carrier. You have to manufacture it. When you look at that aspect of it—and you obviously cannot in the long term think of using a fossil fuel to manufacture it—you find that, with the problems of storing it and the energy needed to compress it and so forth, the prospect of hydrogen being a successful transport fuel is quite remote. You have to have the right approach to make the right sort of analysis. This is important to develop.

Mr. Robinson — There is a book called The Hype About Hydrogen which echoes Brian’s point that we need a source for hydrogen, whether we make it from coal or gas or nuclear power. There is no foreseeable source of hydrogen. So we cannot talk about the transition to a hydrogen economy. The hardest thing is not storing the hydrogen but finding it or getting it or making it first. As to the biofuel thing that we were talking about, for instance, if we took all of Australia’s wheat crop, which is on average 20 million tonnes per annum, and turned all of that into ethanol, we would get some nine per cent or 10 per cent of Australia’s oil usage. There would be no bickies in the parliamentary tea rooms and no bread in Woolies. We would not be exporting any wheat around the world. So biofuels have very serious scale limitations. In terms of alternative fuels, I think it is quite clear that conservation is the best alternative fuel—that is, not using it rather than replacing it.

Dr Bennett—In my personal submission I make the point that, for defense reasons, Australia has to do something about its long-term oil resources. I am not quite sure that natural gas is the thing but, if you think back through the wars of the 20th century, they were all essentially about oil. Hitler was stopped on his way to the Caspian Sea in Stalingrad and on his way to the Middle East at El Alamein. China is already pumping oil into the ground as a strategic resource. As far as we could gather from the appropriate government committee, Australia is bound by some international regulation that we have to have 90 days of supply, and most of that has been in the Bass Strait oil pipelines rather than in a standard resource. It seems to me that we have to start thinking very quickly about having a resource. Whether we have that resource as an untapped oilfield, or as an oilfield that has been refilled with oil which has been purchased on the world market, is not up to me to say.

Mr Rosser—I just want to pick up a couple of points on the previous topic. I was at the Farmers Federation conference two weeks ago. The conference was entitled ‘Fuelling the future’. The farmers were very keen to stand up and say that they had no moral obligation to supply foods, that they would sell to the highest bidder and if the highest bidder was going to be fuel then so be it, because, when grain hits low record levels, no-one feels a moral obligation to pay them a fair price for their product. They were as one; there was unanimous consensus in that room. I suppose it is something you could only understand by being a primary producer.

Mr Upton—I would like to issue a word of caution about imposing extra taxes and so on. They are obviously a way of changing responses but, no matter how much tax you put on something, you cannot make it happen if the research, the knowledge or the will is not there. I am thinking about what happened in California towards the end of the nineties. They tried to push the introduction of battery electric cars by a whole range of incentives, but the technology was not ready. While manufacturers made electric cars and some people used electric cars, it did not go any further than that because the technology was not at a point where it was usable. I am cautioning that, before taxation is used to change things, you have to do the research to make sure that what you are trying to make happen can happen.

Mr Fleay—To reinforce again what I said about the failure of top-down management processes in these circumstances: imposing taxes and a lot of things of that kind have that character about them because they impact on all sorts of people in different ways. In fact, I agree with Mike Upton. That is why this approach is the key to going forward: to learn something from the lessons that the Department of Planning and Infrastructure have applied here, not because they are perfect but because of their potential if we go down that path. I noticed Senator Sterle said he has a background with the Transport Workers Union. I cannot think of one area of workers who are going to be more seriously impacted in this area. The whole business about mass distance charging for trucks is a classic example of this. That is why you have to have this bottom-up approach where all the stakeholders are involved and you reach just outputs so that they see all the changes that everybody has to make and all the things they have to give up in order to gain something fair and equitable. With all the sorts of issues that we have here, that can only happen by bottom-up participation. Everything that everybody has said has a role to play in this. There is not anything that is totally wrong or totally right. Because of this complexity, you can only handle it in this way.

Mr. Head — [In answer to what the barriers were to more fuel-efficient cars]/ It is our role to support local Australian industries and we have local car makers who have committed to a six-cylinder vehicle platform for the foreseeable future—in other words, eight to 20 years. They are committed to rolling out models based on that power plant and that drive train. That leaves us at a point where we politically have to stick our hands up and say: ‘We’re not going to support local manufacturers. We’re going to import what we think are the right vehicles. Tough for you guys.’ So that is one of the barriers.

Mr Fleay—I assume that demand management in transport is part of the agenda for the topic we are discussing. I would like to say something here about the TravelSmart program and its potential. As a preface, I spent my life working in the water industry here, where we have been battling for 30 years to deal with the question of resource limitations. It is my view, in the context of what we are talking about, that the Water Corporation here now sets an example for all corporations insofar as its commercial advertising pleads with its customers to buy less of its product. For those senators who are not familiar with the TravelSmart program, which has an international reputation and has been copied around Australia, it uses a direct-marketing approach. People are approached individually in their houses to review the way they use their cars as opposed to the alternatives of public transport, walking and cycling. It is a dialogue to change their pattern. It is, at a modest level, a very positive result for the people who have participated in terms of reduced car use and increased use of public transport, walking and cycling. Not only that but the increased revenue from public transport alone has paid for the cost of the program in about 18 months or two years. It also has a very high cost-benefit ratio, which includes the health benefits of increased exercise.

This is the small beginning of transport management in the transport business which needs to reach the stage that the water industry has reached. However, if the question of future oil supplies were introduced into this, insofar as people go out, talk to others about what can and cannot be done and say, ‘Here is what you can do,’ there is enormous potential for empowering people as a part of this general process of getting understanding and creating the climate for the right sort of change. I do not think we should underestimate this. It is an area where the transport industry is way backward but where the water industry in this country, and particularly here, has created a change of culture due to the drastic impact of climate change.

Mr. Robinson — Andrew mentioned location specific fuel taxes. This was done in South Australia when the South Australian government had legislative control of what we call the fuel franchise levy. ASPO Australia is suggesting a smart card—a flexible, tradable, allocation pricing system which can handle emergencies and the location specific things. People who live near a train station and an urban city should get less of the low tax petrol. We are taking a model from the water industry in Perth. Domestic water, the amount for basic household necessities, is quite cheap. As you use more and more in a household, you pay more and more incrementally for the units. Those sorts of things can be done. A lot of those things can be done, rather than just going on with business as usual with the fringe benefits tax whereby everyone in Canberra is driving up and done freeways and lending their cars out so they get over the March rush, or whatever it is called, to get over 40,000 kilometers. Those things are just stupid and perverse and they are no more market distorting than putting the price of petrol up, particularly in an incremental way whereby people can see where it is going. It is going into the health system, it is going into defence, it is going into all these sorts of things that we need. We need to be following Dr Samsam Bakhtiari’s thing. We need to be building Noah’s ark, where people said, ‘There is probably something coming; we need to have the ark well planned and under construction.’ It is bloody hard to build an ark under water. If we wait until peak oil hits us, then we are not going to have the time or the resources to do this.

Mr Rice—Yes. Leach Highway is an issue to us—a huge one. First of all, within the time scale that we have been talking about, and in the time scale of political governments, 100 years or so is what we are really dealing in, so any guidance or direction we can get is really useful. For instance, if we are talking about a mixture of personal transport and freight transport, my logic says the trucks are going to get bigger because they will be more fuel efficient; the cars are going to get smaller because they will be more fuel efficient. There is a safety issue—does that impact on the way we design our roads, for instance? That is a fairly simple one. A more complex one is how we can save fuel in urban freight transport. The answer is not to put more on rail. That is a part of the answer and our government is trying to do that. We have a target of getting from about three per cent to 30 per cent of our containers coming from the Fremantle inner harbour from rail in the past to rail in the future. But that is going to make a small difference.

What they are also doing is looking at using our roads more sensibly and, implicitly, using our fuel more sensibly by booking the trucks that come in and out of the Fremantle terminal relative to the containers, because surveys have found that a lot of trucks are going in empty to pick up a container and bring it out and they are passing trucks that are doing exactly the opposite. Obviously, there are some improvements that can be made. How do you make those improvements? You need data and you need some level of control. The problems that we are getting with data relate to some extent to the free market forces where competition is good and then the data becomes commercial-in-confidence and we cannot get it. So there is a bigger issue there.

I believe that in an intelligent future the government as a whole—call it Big Brother if you like—is going to need to have some influence on the availability of data, whether it is for personal trips so that we can group more trips together or whether it is for the clumping of bits of freight so that we move away from lots of small, just-in-time deliveries to some efficient, medium sized deliveries. This is going to have an impact on warehousing because the central distribution systems that are the current rage, and are logistically reasonably efficient because we have got very cheap fuel, are going to have to change. I believe people are going to have to do more warehousing in their businesses again, like they used to. There are a lot of things that we can do but we have got to get the intelligence about it in order to be able to, and we have got to get some leadership.

There was a very interesting survey that I read some years ago about politicians and leadership and how far in front of the community they were. The thesis was that the politicians were in front of the community, therefore they modified their expectations in parliament and cut them back quite a lot. The survey found that, yes, that was true—but the bite was that the politicians were only a tiny little bit in front of the community and they thought they were a long way in front of the community. So I am saying: have courage, but also be realistic. We can all talk about these things and the greenhouse effect and so on, but if this inquiry is going to have any impact whatsoever you need to build upon some synergies to get through.

One of the synergies that you can build upon is COAG’s interest at the moment in urban congestion and congestion management. If we can better manage congestion we can better manage fuel. We did a survey in Perth recently—it was a statistically valid survey—in which we asked people: what kind of problems do you see coming from traffic in your area? To our surprise the answer was, clearly, congestion. You say if you come from Sydney or Melbourne that we do not have any congestion, but that was the current perception of the voters. So there is something in congestion management that can be combined with environmental improvement, better use of our roads, something that the community wants and fuel saving, all together. So look for those synergies and pick the low-hanging fruit first.

Dr Worth—I want to come back to my hobbyhorse about government involvement. A lot of what we have heard in the last period on this topic has been about what things government can do and the need for that. A lot of it comes back to market failure, that there is just not enough information for markets to operate efficiently. The point I want to make about why governments need to get involved is around the speed of change. Markets take a long time to move. It took us 17 years to move the car fleet in Australia from leaded fuel to unleaded. The price of oil has tripled in three or four years. I get a sense that people think that it will stop, but it could double in the next year or 18 months. That is a real reason for governments to get involved, to look at demand management as the simplest and cheapest way of cutting fuel use.

CHAIR—We will go around the room now with concluding statements. What is the key thing you would like us to go away from this hearing with today?

Prof. Harries—Underlying everything I have said is the need for us to get information to do research to be able to manage the uncertainty and, as David Worth has said, the problems. Markets do not happen overnight. You have got to actually help the system happen. What we are on about here is trying to make a smooth transition to alternative markets and alternative ways of doing things—and to do that we need information.

Mr Rice—Grab some inspiration. Govern for sustainability. Why else would you govern?

Mr Robinson—It is highly probable, as people have discussed, that there are lots of things we can do to adapt, particularly if we start thinking in advance. A lot of them are very positive for health and the economy. I would like to congratulate the Senate for starting the process. It is an enormous quantum leap in Australia. We should all be trying, particularly in the opportunity with the Senate, to engage the community and decision makers about peak oil.

Dr Bowran—I would like to see appropriate sectoral strategies so that you have actually got a framework to know which parts are going to go forward with particular types of innovations.

Mr Beveridge—First of all we need a national strategy—and that is where the government can play a really crucial part—but one that can be implemented locally, which is key. I see the government as a catalyst for change. It is clear today that we have got a lot of passion from the stakeholders, which is fantastic. We all ought to be congratulated for providing that passion, which is really good. That should be harnessed. We really need to take decisive action because the clock is ticking.

Mr Fleay—The central theme of your report should be issues I have been hammering about engagement of people, providing leadership and participation and avoiding top-down management approaches. That approach, which has shown some benefit here locally—but it is more a question of what it can potentially become than what it has been so far—is the key to pulling together all the points that people have made and being able to engage with people and to get change. If you can get it to a certain point, positive feedback will take place and it will gain its momentum.

Mr Upton—I would say, like others, that it is important to do get the information and do the research, to determine what is practical—you have to be pragmatic about these things—and to convince the public. Work with the credible stakeholders that can help you to convince the public what the real issues are and how we can all work together to solve those.

Dr Bennett—I would like to go back to a point that Brian Fleay made: agriculture these days is a process of converting oil to food. Some of the modelling activity by the department of agriculture indicates that in the eastern wheat belt, where there is a significant energy input, it is very likely that, as oil prices rise and climate change proceeds, there will be a process of overshoot and collapse, and that might be the case with a number of other parts of the economy. If you think that, on a world basis, the fact that the use of oil in agriculture has probably allowed the increase of the world population to go from two billion to six billion, then the prospect for the world human population as a consequence of what we are facing is dire.


Official Committee Hansard

Senate Rural & Regional Affairs & Transport References Committee

Australia’s future oil supply and alternative transport fuels



Australia’s future oil supply and alternative transport fuels, with particular reference to:

  1. projections of oil production and demand in Australia and globally and the implications for availability and pricing of transport fuels in Australia;
  2. potential of new sources of oil and alternative transport fuels to meet a significant share of Australia’s fuel demands, taking into account technological developments and environmental and economic costs;
  3. flow-on economic and social impacts in Australia from continuing rises in the price of transport fuel and potential reductions in oil supply; and
  4. options for reducing Australia’s transport fuel demands.


BENNETT, Dr David, Founder, Sustainable Transport Coalition

BEVERIDGE, Mr Andrew, Project Manager, Commercialisation, Office of Industry and Innovation, University of Western Australia

CREEMERS, Mr Alexander Henricus Maria, Private capacity

DeLANDGRAFFT, Mr Trevor Frederick, President, Western Australian Farmers Federation

FLEAY, Mr Brian Jesse, Private capacity

GRIFFITHS, Dr Cedric Mills, Theme Leader, Maintaining Australian Oil Self Sufficiency,

CSIRO Petroleum, Commonwealth Scientific and Industrial Research Organisation

HARDWICK, Mr Ross, Executive Officer, Western Australian Farmers Federation

HARRIES, Professor David, Director, Research Institute for Sustainable Energy, Murdoch University.

HEAD, Mr Glen Michael, Director, Perth Fuel Cell Bus Trial and Transport Sustainability, Department for Planning and Infrastructure, Western Australia

NEWMAN, Professor Peter William Geoffrey, Director, Institute for Sustainability and Technology Policy, Murdoch University

PYTTE, Mr Anthony Mark, Australia Country Manager, Sasol Chevron Consulting Ltd

RICE, Mr David, Principal Network Planning Officer, Department for Planning and Infrastructure, Western Australia

ROBINSON, Mr Bruce, Convenor, Australian Association for the Study of Peak Oil and Gas

RONALDS, Dr Beverley Frances, Chief, CSIRO Petroleum, Commonwealth Scientific and Industrial Research Organization

SAMNAKAY, Mr Iqbal, Policy Officer, Transport, Department for Planning and Infrastructure, Western Australia

SCHLAPFER, Dr August, Lecturer, Energy Studies, School of Science and Engineering, Murdoch University

SELWOOD, Mr Richard Neil, Chief Executive Officer, Natural Fuels Australia Ltd

WORTH, Dr David John, Convenor, Sustainable Transport Coalition

Robinson – We will not be in the majority in saying this, but we feel that the fuel price should go up, that there should be a fuel tax escalator along the lines of Margaret Thatcher’s, and that a smartcard, a tradeable fuel allocation system, should be ready in the event of sudden oil shortages. Also, there should be a sensible, rational allocation. I got here today by catching the train. I walked 200 or 300 metres across one road, caught a train here and walked across one or two more roads. Not everyone in the Australian community can do this. People in the farming community cannot do this. So the requirement for fuel varies. I refer to people working on nightshifts in hospitals, and people running farms and businesses. Not everyone can have all the fuel that they will need in the future, if there are fuel shortages—and, certainly, that is what we predict.

Fleay – I want to make one comment about biofuels. I am very concerned about some of the propositions that came up about using some microbiological product to take all the waste—to virtually strip the land bare of all so-called wastes—and convert it to ethanol as a way of getting resource. This has a disastrous impact on soil, because the organic content of the soil is extremely important in providing the environment for the great mass of invertebrate organisms and other things that are critical to soil fertility. This process is, in effect, mining the soil. I have put in a recommendation about having a rigorous approach to assessing these alternative fuels. This includes finding the energy input and energy output and, where you are doing it from crops, including the impact of the process on the soils. We cannot afford to diminish the property of our soils.


One of the problems that wasn’t dealt with yesterday is the process of funding of transport, federal-state relationships and the whole tax system. The fact that roads are funded from taxes is, in effect, a sort of subsidy, whereas funding for rail is through borrowed funds on which there is interest. This is a very lopsided thing; it is very unbalanced.

Studies done throughout history have found that over the last 2,000 years cities in general are about an hour wide—that is to say, people are prepared to spend about an hour each day traveling to and from work. If people were walking, that determined the size of the city and so forth.

Mr Robinson—I am concerned that the climate change people do not mention oil depletion and they have scenarios that are unrealistic for the amount of oil. I think it would be really useful if climate change and oil depletion matters for Australia and internationally were looked at together, because a lot of the mitigation and annotation are the same. There certainly should be energy taxes, but we should not tax just carbon, because carbon from oil and natural gas is more valuable than carbon from coal. It should not just be on an atom basis. In a climate change sense they are valuable but, in a resource depletion sense, carbon atoms in oil are much more valuable than carbon atoms in coal.

Mr Kilsby— My own background is in transport engineering and urban planning. I would like to highlight some submissions that the urban planning and transport group made to you. There are a couple of points on transport and a couple of points on urban planning that I would particularly like to draw to your attention. On transport the key points that we wanted to make are that while the oil position is a national issue it is in the cities where there are more possibilities of limiting or moderating the demand for oil than in rural and regional areas. Urban transport planning is an issue that the Commonwealth government ought to take rather more interest in it than it has to date, if only to make sure that as much oil as possible is available in rural and regional areas.

Another key point on transport, as you have just heard, is that the most vulnerable transport mode will be aviation because what alternatives to oil are there for fuel in planes? There is nothing on the horizon there and, by extension, the parts of the economy that rely on a thriving aviation sector—particularly the tourism industry—are also very vulnerable.

Road transport is quite vulnerable, although perhaps not to the same extent as aviation, because road vehicles require a portable, energy dense fuel. That is why petrol and diesel are the fuels of choice. It would take decades to establish the infrastructure and the vehicle fleet to take advantage of any

alternatives. And that is decades, as you have heard, that we have not got and alternatives that we have not really got either.

The other two main modes are rail transport and sea transport. They are possibly the least vulnerable because a railway locomotive is essentially a rolling power station on rails and a ship is a floating power station. In both cases there is a wider choice of energy sources available, mainly because the power plants are larger than for road vehicles or for aircraft.

On urban planning there are two points we want to highlight. One is that there are many people who have no option but to use their cars to get around. These people tend to live in the outer areas of our cities. The two gentlemen from Griffith University, who will follow me, I think, will make this abundantly clear. It seems to me that the provision of alternatives in such areas should be a priority for government. By that I mean the development of adequate public transport networks, of bicycle networks and of pedestrian networks. The second point on urban planning is that if we are faced with a physical decline of oil in the future—not just higher prices—then it is going to be necessary to establish clear priorities for the use of a more limited amount of oil. Put crudely, as you heard, this could involve a choice between feeding people and letting them drive to work. We will not have the energy resources to make drastic changes when it becomes evident that we have a problem. The sooner planning for a decline starts, the better.

We do not have time on our side, as I think Dr Bakhtiari amply showed.

On the committee’s specific terms of reference, going to oil availability, I would say that there will be less oil available in future and it will cost more. ASPO does not claim to have a crystal ball or that the future will unfold the way we expect it to, but we do say that this is a significant risk to urban transport and, hence, to the national economy. There are well-established risk management techniques which we think should be used. The risk of there being less oil is at least as significant as the risk of terrorist attack, for instance. There are no alternative fuels in sight that will completely replace oil for transport. There will be many flow-on economic and social impacts. I think the greatest community anger will arise from those places where alternatives to cars could have been provided but were not. Those are basically the outer areas of our cities.

Options for reducing fuel demand are mainly urban, possibly from technological development, but all the others—that is, the development of public transport and other policies that I would call business as usual, such as demand management techniques and economic measures—even though we would probably have to apply them in a different way to business as usual outcomes, would have effects in the cities rather than in the rural and regional areas. But, given that there is only a finite amount of oil to go around, applying them in the cities would ensure that there is in the areas where alternatives cannot be provided more oil to go around than there would otherwise be. I think that is as much as I wanted to say.

Mr Kilsby—I was living in the Netherlands when the first oil shock happened in 1973…the Netherlands scarcely missed a beat because they had an alternative in place. The alternative was mainly bicycle networks, which are very good in Holland. The Dutch enjoyed it so much that when the oil started flowing again they considered adopting the ‘carless Sunday’ as a feature of national life rather than an emergency measure, which was why it was introduced. That taught me that the more prepared you are and the more alternatives there are in place the better off you are likely to be when such a catastrophe occurs.

Senator MILNE—Thank you for your submission. It certainly flows on from a lot of other submissions we have had from various local governments on the whole issue of a rapid transition to public transport. One of the big issues for Australian cities is that the most vulnerable live the greater distance from the centre of the city and that there has been a lack of planning for that.   My next question relates particularly to the tourism industry and the agricultural sector, both of which are going to be severely adversely impacted upon by rising prices and oil depletion. What about the aviation sector? At the moment air fares do not reflect the real cost of flying anyone anywhere. Have you done any predictive modeling on the point at which that cannot continue?

Mr Kilsby—No, I have not.

Senator MILNE—Do you have any thoughts about impacts on tourism generally? Have you modeled that or looked at that around the country?

Mr Kilsby—I am currently doing some work in Cairns, for instance, in Far North Queensland. I think it would be hard to find an Australian town that is more dependent on the tourism economy and on people arriving by plane.

Senator MILNE—Can you spell that out a bit more? What we heard this morning was that the new generation of huge global aircraft, the A380s, is unlikely to ever be economic because of the fuel costs. When you say that people will not arrive in Australia by air, do you want to expand on your thinking about that?

Mr Kilsby—My thinking is very much governed by what I am currently doing in Cairns. Most fuel in Cairns—because it is a long way from the refinery, which is in Brisbane—has to be imported by ship, and they currently import more oil for the airport than they import petrol and diesel product for the whole of Far North Queensland. It struck me that the airport is really much like a coaling station, in the days when ships used to run on coal. There are no local fuel resources at all. It all has to be refined in Brisbane and brought up to Cairns by ship. If that becomes less possible in future, then a large part of the economy of that city is going to collapse, because it is geared around servicing tourists. The tourists either drive—and it is a long, long way from anywhere else to get up there—or they come in by plane from Asia, because that is one of the first stops that they make.

Senator MILNE—Do you know of any other work, apart from that which you are doing, where tourism hubs that are more remote and dependent on air travel for their viability are looking at these projections? It would be good to have some specific examples of regional economies that are going to be significantly affected in the short term because of aviation fuel prices and availability.

Mr Kilsby—I am not aware that the aviation industry is even contemplating a shortage of fuel at the moment.

Mr Kilsby—The growth of corn and so on that you need to produce the ethanol and biodiesel requires energy of its own, and it requires land as well. I suspect that the conflict between the land and the energy that you need to supply the additives to petrol and the need for alternative uses of those lands [i.e. food] and energy will be something that you have to consider.

Senator WEBBER—I want to pursue what Senator Joyce was talking about. All of our state economies are very different. I am from Western Australia, and we have the same issue of getting fuel from Perth into the north-west, only then the fuel is used to exploit our resource sector. I am not sure that biodiesels or anything else is an alternative for large haul packs in iron ore mines and what have you. And we do not have a large tourism sector there; it is purely a resource sector. I do not know of many tourists who go to Port Hedland. So that is an issue: all state economies are different, as is what confronts them.

You said in your opening remarks that you felt the need for more Commonwealth government interest in the development of urban transport. Has your organization given any thought to how you think that can be developed? I know that every time we talk about the Commonwealth government spending more money on any particular part of our state economies, there is usually a fight afterwards and then an ad hoc arrangement over the shared responsibilities of state and federal governments. Obviously we need an overall plan, so do you have any other views about how we can organize that?

Mr Kilsby—It seems to me that climate change presents quite a good model for that. The Australian Greenhouse Office is a national office that tried to collect expertise in one place, and the fuel crisis that we are heading for is probably of similar magnitude. So something like an Australian fuel office in central government would probably be the way to go as far as we can see.

Senator WEBBER-There is another issue that I want to pursue. We have had a discussion today about the fact that one of the issues we need to look at is increased use of public transport and the incentives we need to ensure people do that. There has been discussion about the free public transport network that we have in the CBD of Perth. There are other discussions about subsidising public transport. What do you think we need to do to make it more attractive? We have discussed this at previous hearings, overdevelopment and maintaining modern infrastructure to make sure it is reliable and that sort of stuff. What do you think? And if it is about subsidising the use of public transport, then who should pay, as it is seen as a state government responsibility?

Mr Kilsby—In terms of making it more attractive, there are probably three transport sectors. There are private and public sectors, but they both require motors, and there is also the unmotorized sector, which, at the moment, would not make much of a dent in the oil requirement because it only affects the shorter spectrum of trip making. It seems to me that with good urban planning we could perhaps do things to shorten the trip length, and then the third element would become more attractive as well. It is in those outer areas that transport is most difficult to provide. Sydney is clearly the largest Australian city and it is a long way to the CBD from where we are putting people in new houses now. There are probably two million people living out in Western Sydney at the moment, and the only public transport that is being provided of any significance is trains to bring them into the CBD. I think that the Department of Planning in the New South Wales government has an excellent idea in the metropolitan strategy where they are trying to introduce regional cities within Sydney to reduce the amount of trip making that goes on in terms of person kilometers.

Senator STERLE—I refer to page 4 of your submission and the recommendation that states: ‘7. That taxation and fiscal policy instruments should encourage sustainable transport.’ Could you explain that?


Mr Kilsby—At the moment, I think the taxation instruments actually encourage the opposite to sustainable transport with the FBT arrangements and so on. I know that in Canada they have recently introduced a system whereby travel to work by public transport is allowable as a tax expense. It is really that sort of thing that we had in mind.

Senator STERLE—I have had a lot of conversation with the pro-rail lobby. I do not want to talk about freight on trains because I do not think we will ever get common ground on that; I want to talk about public transport on trains. I cannot speak for Sydney, but I can speak for where I come from. We are just putting in a brand new railway 70 kilometers down to Mandurah. It is going to be wonderful—it really will be—but we have had a wonderful train system in Western Australia for a number of years to the northern suburbs and out to the east and to the west. But I still cannot find anything that says we have it right. How can we attract patronage onto public transport? I hear the pro-rail lobby say, ‘Throw a heap of money at us and give us the infrastructure,’ and I have seen some great planning for future suburbs. But we have rail and people are not using it. Why do you think that is? I know you have mentioned costings and all that. Are you suggesting that if we offer free transport people would get on the trains?

Mr Kilsby—No, I am not suggesting that. What I am suggesting is that we concentrate more on local transport, especially in the outer areas because at the moment we are offering people the alternative of traveling quite long distances to central areas, which is where activity tends to be concentrated in our cities, and I think, certainly in Sydney, that we have grown beyond that point. The rail network that Sydney has is probably the most extensive in Australia, but it is very old and you cannot fight your way onto a train at peak times; they are completely crowded, and they are going quite a long way into the CBD. It strikes me that we have to think a little beyond the niche market of getting people traveling to the CBD and start thinking about the more dispersed travel that happens in outer areas of our cities.

Senator STERLE—This is where I get confused. Do you mean putting in extra railway lines to service other suburbs?

Mr Kilsby—That would certainly help, but it probably takes 10 years to get a new railway line implemented and I suspect that is time we do not have. There are alternatives in producing alternatives to cars, and we already have some of these in Sydney. We have a busway that is about to open from the north-west growth area, which is about 40 kilometres from the CBD, to take people down to Parramatta, which is a lot closer than the CBD. We propose to build a railway line from there, starting in 2017, which is a long way away at the moment.

Senator STERLE—I am a bit confused: are you talking about integrating both forms of public transport—rail and bus?

Mr Kilsby—Yes.

Senator STERLE—I just had this vision that we were talking about railway lines and spurs and branching into the suburbs where the housing is already—that sort of stuff.

Mr Kilsby—No, I do not see that that would help very much.

Senator STERLE—But is it realistic?

Mr Kilsby—No.

Senator JOYCE—You talked about the development of railway lines. Do you have any comments on the fact that in some places in New South Wales they are actually ripping up railway lines and sealing the roads so that they can put all the heavy transport back on the road? Surely that is completely counterintuitive to where it is all heading at the moment—for instance, with the branch lines out in the regional areas that move such things as the wheat crop. I can quote you one example: the Baradine to Gwabegar line. They are closing that line down and transport of all the grain produce will go back on the roads. Surely this is completely against the whole inclination. Do you feel that the government—especially the state government—is lacking in capacity to effectively organize itself to make the moving of heavy goods on rail possible? Are people giving up on it? Do you have any views on that?

Mr Kilsby—That is mainly a freight problem. Australia’s rail infrastructure for freight probably falls into two classes. On the one hand, there are some world-class facilities for the bulk export lines and for interstate containerized traffic. On the other hand, things like the grain lines that you mentioned are in a pretty woeful state. I would like to see these developed further.

Senator JOYCE—Once people get something on a truck, they keep it on a truck, and that exacerbates the problem. It is the ability for rail to organize the collection of produce and things like that that are at the crux of the issue. Do you have any views on how rail could better organize itself to be an effective competitor in the transport industry rather than just being there?

Mr Kilsby—I think that would boil down to the economics of particular cases.

Senator JOYCE—Why is rail so ineffective in the transport market in New South Wales and Queensland?

Mr Kilsby—Because they concentrate on particular markets where they do have a competitive advantage. One of those is the long-distance containerized market. Certainly in urban areas there is virtually no freight that moves by rail. It goes from Melbourne to Sydney by rail, but there is very little that moves around within Sydney by rail.

Senator MILNE—We have a national obesity crisis and a national diabetes crisis and we have people paying huge amounts of money to go to gyms. We have the potential to move people by bicycle, but we have very little in the way of safe bicycle facilities. Everywhere we have been, people have said to us that safety is a big disincentive to their riding. The other thing is a bit like gas: you need a transitional fuel from cars to bikes. One of those is electricity. We have seen huge bureaucratic resistance to electric bikes and small electric cars, like the Riva and so on. Can you give any insight into why you think the bureaucracies are so reluctant to license electric bikes and small electric cars in Australia?

Mr Kilsby—I would support the introduction of a low-energy sector. I think that it is one thing that we in Australia are lacking. There is nothing between a bicycle and a car, effectively, whereas if you go overseas—certainly to Europe or developing countries—you see that most people move around on some sort of moped or light motorbike, which we do not have. I cannot really comment on why the bureaucracy are so hostile to that, other than to say that they are probably following their charters or their terms of reference, which say that they have to manage the road system in the interests of the people who are on it at the moment.

Senator MILNE—That is true to some extent, although there is an attempt to have the Riva car registered in Australia and that is being resisted furiously by the bureaucracy on safety grounds. Yet these vehicles are in the EU, in London and all over the place. Apparently they do not meet our safety standards, even though we have an MOU with the EU. As far as I can tell, what we are seeing everywhere is a huge bureaucratic resistance. Some would argue it is political; maybe it is. It is something I want to pursue. We have a chicken and egg situation. We do need safe bicycle lanes, but we also need to have some form of transition in terms of electric bikes. Anyway, I will leave it there.

DODSON, Dr Jago, Research Fellow, Urban Research Program, Griffith University

SIPE, Dr Neil Gavin, Head of School, School of Environmental Planning, Griffith University

Dr Dodson—We have made a written submission to the inquiry, which was effectively a covering letter describing some research that we at the Urban Research Program at Griffith University in Brisbane have been undertaking regarding the potential distribution of adverse impacts arising from the socioeconomic costs of rising fuel prices. This report was sent to the committee. I do not know whether you have all seen it; perhaps you have.

CHAIR—Yes, we have. I must say that a number of people also have been quoting your research to us. Dr Dodson—Since that came out in December 2005, we have received quite a lot of media coverage of it, so we suspect that a few people have read it. We will run very quickly through that. Since you have all read it, we will not dwell too extensively on it. We have just recently completed another research paper which examines specifically the impact of rising fuel prices on households with mortgages, and we will also report to you today briefly some outcomes of that.

We believe our original paper Oil vulnerability in the Australian city was the first attempt in Australia to really comprehend on a very close spatial neighborhood scale the likely distribution of urban impacts of rising fuel prices. This research builds to some extent on research interests that both Dr Sipe and I have had over many years in terms of the distribution of socioeconomic opportunity in Australian cities and the connections between socioeconomic status and access to transport services. This is a continuation of research we have had a longstanding interest in.

The first study we undertook was an attempt to understand the distribution of the socioeconomic impacts of rising fuel costs. We became aware that there were very few data sets that were able to illuminate the issue at a very fine level of spatial detail. Therefore we decided to create an oil vulnerability index, as we term it, based on ABS census data. That is not ideal data to use for this kind of research; however, we feel that as a first cut piece of investigation by academics in Australia, it is worthy of some attention by the committee. Subsequently we have also submitted it to a refereed international urban research journal. The referees were unanimous in agreeing that it should be published and reported to the scholarly community, so we feel confident that our approach has some validity.

In our index, effectively we combined what we describe as an indexed indicator of car dependence, which is the variable within the census of the mode of travel used for the journey to work, with the proportion of households within a given locality that have two cars or more. We decided that together those two variables were a good indicator of the level of car dependence experienced by households. We then combined that with the ABS socioeconomic index for areas, which is the measure the ABS uses to describe socioeconomic status. So together we felt that car dependence and socioeconomic status were useful markers of the likely vulnerability experienced by localities to rising fuel costs on the basis that, if you have high levels of car dependence, your fuel costs are going up and you are of modest or low socioeconomic status, then your capacity to absorb that rising price relative to your income is probably far reduced.

Moving to the results, our initial study investigated Brisbane, Sydney and Melbourne. The choice of cities was largely due to time constraints in our own research schedules. We have focused solely on the major cities in Australia, using the definition of the urban areas for these cities provided by the ABS. I have just outlined the way the ratings are done. On these diagrams, the areas in red and yellow are the most vulnerable; those in green and dark green are the least vulnerable. On the image that you see before you, the inner city areas tend to be less vulnerable in our measure to rising fuel prices and it is the outer suburban areas, particularly those in the growth corridors of Brisbane, which are most vulnerable. If we look at Sydney next, a comparable effect is seen in Sydney, although there is some centralization within the western suburbs. But you can see high vulnerability areas extending along the north-west and south-west growth corridors with lower oil vulnerability concentrated within the CBD and, to some extent, the areas immediately around the CBD and on the North Shore.

In Melbourne there is a comparable effect, particularly with the growth corridors in former industrial areas or areas that have had a high concentration of industrial employment which has since been heavily restructured over recent decades. They have structural unemployment in some of those localities to the west, north and south-east of Melbourne but also with relatively poor provision of public transport in those localities. So combined, you have high car dependence and relatively low socioeconomic status, which contributes to the patterns of oil vulnerability we have presented. As with the other cities, the inner city and middle suburban areas appear to be exhibiting the lower levels of vulnerability to rising fuel costs.

In our first study, we attempted to chart the population numbers within these different categories by oil vulnerability rating: the higher on the scale, the more vulnerable they are. This slide shows Brisbane. If we go to Sydney, there is a similar distribution, and in Melbourne too. You can see there is some variation in the distribution of oil vulnerabilities between these cities.

We have just counted those in the highest vulnerability categories in numbers of population. These people are likely to be experiencing the worst socioeconomic impacts of rising fuel costs. There are, however, a large number in the moderate vulnerability areas who may also be highly impacted.

In our next study, which came out about a week ago, on mortgage and oil vulnerability in the Australian city, we used a similar method of indexing. But, in this study, we have combined ABS census data on car dependence with data on the proportion of households with mortgages and on income this time around. We decided that, for assessing the impact of rising fuel prices on these households, income was a better measure than socioeconomic status—largely because those at the very lowest end of the socioeconomic spectrum were less likely to be homeowners.

The reason we chose to specifically investigate mortgage vulnerability is that it is apparent that the Reserve Bank of Australia is now conceiving of the inflationary impacts of rising fuel costs as a key issue that it needs to address through its control of the interest rate settings. The recent rate rise that came through, I think, in early June was indicative of this perceived relationship that the Reserve Bank sees and is now seeking to address. We felt that there is potential for not only rising fuel costs to impact on households but also rising mortgage costs as interest rates go up. We see this as a twin vulnerability, particularly given that there may be some inflexibility in the labor market in terms of the ability of incomes to rise commensurate to the increases in transport and interest rate costs.

This is our index, called a VAMPIRE—vulnerability assessment for mortgages, petrol, interest rate expenditure. Again, similar to the patterns of vulnerability shown in the socioeconomic oil vulnerability in the size that we showed previously, this study shows a much more widespread distribution of vulnerability in many more areas that have higher vulnerability status. We have done five cities this time. It is primarily those in the outer growth corridors of Brisbane. It is the western suburbs of the Gold Coast, away from the coastline. In Sydney, again, it is in the outer western suburbs along the growth corridors. By comparison, the inner city, the North Shore and inner south-east are relatively less vulnerable. In Melbourne, it is far more distributed in a broad arc right around the outside of Melbourne, compared to the previous assessment of socioeconomic vulnerability, which was fairly tightly concentrated. This is far more general. In Perth, again, you see that phenomenon of a lower vulnerability in a city with a much higher vulnerability arc around the outer and middle suburbs.

The reasons we see these patterns in Australian cities, we feel, are primarily related to the operation of housing markets which tend to provide the cheaper and newer housing in outer suburban and fringe localities. Households seeking to purchase a home for the first time are more likely to locate in those areas, and those on modest and lower incomes who are seeking home ownership are also more likely to locate in those areas because of the way that the housing market is structured.

However, this means that they run into the problem of the relatively poor provision of public transport services in fringe and outer suburban areas compared to the inner-city localities. This is a problem of historic government underinvestment in public transport infrastructure and services in the outer suburbs. This dates back to the shift in Australian transport planning practice that occurred after the Second World War, when planners began to move away from the previous Australian model of largely transit oriented development based around the existing rail and tramway lines to modes of urban development based on the private motor car and the provision of roads and major freeways.

The result is that public transport services have not kept up with growth. The highest quality public transport services are situated within the inner cities. Those on the fringe experience a far lower quality of service in terms of the frequency of services, the hours of operation, the days of operation and, importantly, the connectivity between not only individual modes but also between modes.

In the best public transport services in the world you find a high level of integration between modes, with central planning to ensure that, for example, buses connect to rail stations that give passengers time enough to transfer. The heavy rail system will convey them at high speed to another connection point and then transfer them to another local bus service to take them to where they want to go. In large part that type of public transport service does not exist in Australian cities. It does exist in some localities, but to a large extent the outer and fringe suburbs are poorly served by public transport. We see that as the key point of vulnerability in the context of the rising fuel prices in Australian cities.

In terms of our suggestions or recommendations regarding improvements to public transport, we think there needs to be dedicated public transport statutory type authorities within each state government that stand alone and are independent from the immediate departmental control of state bureaucracies. We also feel there should be strong federal government interest and involvement in public transport planning, coordination and funding. There is some opportunity for partnership arrangements between the federal government and the states. I will leave that to you to contemplate.

In particular, suburban public transport and circumferential public transport routes is required. The majority of public transport heavy rail and bus services in Australian cities are radially focused—that is, they travel from the outer suburbs into the CBD. There is a paucity of public transport services that travel around the outer suburbs that provide the quality of service found within inner and radial areas. We see some scope for expansion of rail services to new fringe estates, particularly in the growth corridor areas of Brisbane, Sydney and Melbourne. For example, Rowville in Melbourne’s outer south-east was promised a train line in 1969. They have been waiting almost 40 years for that to materialize. They are still waiting. Now they are facing rising fuel prices. We see some scope for those rail lines that have been planned for many decades in a lot of instances but have not materialized to be introduced and completed.

There was some discussion in the earlier presentation about how one might finance public transport. If you look at the total transport budget that state governments currently expend, there is actually multiple billions of dollars available for transport. The trouble is that most of it is currently dedicated to providing major road infrastructure such as freeways and tunnels. If you add in tollways, the sums are in the multiple billions. If those projects were postponed—they do not need to be cancelled; they can just be postponed in the budgetary process—that money could be transferred to the funding of specifically local scale public transport services to make sure that the outer suburbs have as high a quality of service as those in the inner city.

We feel that there would then be a high level of amelioration of the oil vulnerability and the mortgage vulnerability that we have described. Should oil prices decline in the future then it would be possible to still revisit further road construction and road projects. However, if it did turn out that a peak oil scenario did happen then Australian cities would be protected, at least partly, in terms of the personal-private cost of transport by provision of improved public transport services.

Finally, we perceive a need to improve local-scale amenity in terms of walking and cycling and access to local shopping trips so that households, in responding to rising fuel prices, are able, even if they do not make all their trips by public transport, to start to cut out a few of those minor local trips that might save them money over time. Those primarily involve walking to the local shops and to employment and other services.

Senator WEBBER—That raises a lot of questions actually. Dr Dodson, you spoke about road expenditure versus provision of local public transport. I am from Perth, so I was very pleased to see that there was something about that.

Dr Dodson—Perth is somewhat of an exception to this general rule.

Senator WEBBER—Absolutely, and we will get to our train line in a minute. In fact, that is what I wanted to say. In Perth, we have got fast-developing suburban corridors. It is relatively cheap to build roads because of our sand base, as opposed to a lot of the other challenges around on this side of the country. What do you mean by the provision of local public transport in terms of that swap from developing roads to developing local public transport? It is much cheaper for me to build a major road or extend the freeway to allow people to get into the city to work than it is to build the train line. It is quicker. Surely, it is not necessarily an either/or, if I am going to allow the city to keep developing. It has to be both. I cannot leave them out there not being able to get anywhere.

Dr Dodson—That is certainly the case. However, given the concern that has been expressed to this committee about rising fuel prices, there is strong potential that there will be less demand for those radial roads that provide access to the CBD. In the future, people will be making fewer trips; therefore, the existing road space potentially would have less traffic on it and there would be greater demand for public transport if fuel prices continue to rise. The problem at the moment is that Australian cities do not have particularly good public transport services in those outer suburban areas, so there is a lack of good examples or models with which to expand upon.

However, there is enormous scope, we believe, for provision of local bus services within local suburban areas that would connect to higher frequency arterial bus services and to rail services, where they exist, with timed connections. They would be timed to arrive a few minutes before the train departs so passengers have time to transfer and get ready for the train and then passengers offloading from the train have time to get onto the bus that ferries them to their local area. We feel those kinds of services would be critical in a scenario where fuel prices were markedly higher than they currently are in order to provide metropolitan access to households, particularly in the outer suburbs.

Dr Sipe—I would just add that we are not really talking about not spending money on roads; we are talking about having more of a balance. In south-east Queensland with the latest regional plan, basically about 20 per cent of the transport funds are spent for public transport and 80 per cent is for roads. Some of those roads are not necessarily to service newly developing areas.

They are trying to move traffic faster through the city by spending $3 billion on a tunnel. We would really question whether, in 10 years, there is going to be anybody who can afford to pay the toll and the fuel to use the tunnel. It is really that issue of bringing things a little bit more into balance, because clearly at this point in time the roads lobby is in charge.

Dr Dodson—It is worth noting that, in Australian cities where public transport is provided at a high level of service quality and interconnectivity, people will use it. In our research report we mention the member for Wentworth, Malcolm Turnbull, who has recently achieved the ability to use his parliamentary vehicle allowance to purchase a yearly public transport ticket. We found it curious that, while Mr Turnbull is one of Australia’s richest citizens, he would deliberately choose to use public transport. The reason he is able to make that choice is that the high-quality services are there. He can get around inner city Sydney easily and efficiently. The newspaper quoted him saying that it is more efficient to use public transport in Sydney. He has that choice because he lives in an electorate where those services exist. Households in the outer areas of Sydney, where that level of quality does not exist, do not have that choice.

Senator WEBBER—That brings me to another point, which is the socioeconomic argument around that. We were having a discussion before about the incentives we need to give people to use public transport. Some people in Victoria and other places have talked about perhaps making it free. It seems to me that, if you accept what you say about the current infrastructure—and it is absolutely right—you are therefore subsidizing the rich.

If you are going to make it free—and most of the infrastructure is in the inner city, where people are fairly affluent—you are not really helping those in the northern suburbs in my home town or in the western suburbs here.

Dr Dodson—I might respond to that by suggesting that there is a subtlety to that observation in the sense that the processes of housing market restructuring in Australian cities over the last two or three decades have resulted in the gentrification of the inner city. Wealthier households have returned to the inner city, after a couple of decades in the 1950s, the 1960s and the early 1970s when they began to depart the inner city. If you look at it in the sense of a subsidy, it is based on a combination of existing infrastructure, housing market change and labor market change. As we point out in our paper, there is a serious inequity when you have your lowest and most modest income households in localities on the fringe, where now they are facing high transport costs. That is a serious social equity issue that we feel that governments should address through their transport policies.

Senator WEBBER—I notice one of your recommendations was to encourage more local access to employment services. Given the urban and suburban sprawl that we have, how do we do that? I do not know of many outer metropolitan areas that want an industrial estate next to them. To make this work, you need large-scale employment. The corner shop cannot employ that many people.

Dr Dodson—You can provide access to industrial areas through the provision of high-quality public transport. That is how industrial areas serviced their labor needs historically until the development of the private motor car. In terms of local services, the postwar period in Australian cities saw a shift away from high streets and local shopping strips towards regional, car based shopping malls. In conditions of rising fuel prices, we would suggest that there may be greater opportunities for providers of services and retailers on the local scale, where they previously would not have been particularly competitive relative to the regional shopping malls. Now that the costs of travel to those regional services are increasing, as fuel prices rise, the relative competitiveness of those local services may increase.

We see that there is an opportunity to support that kind of travel behavior through making local trips by walking and cycling far more pleasant than they typically are for those living in outer suburban estates—where there may not be cycle facilities, where the footpaths may be poorly developed or where there may be limited shading. All of those local amenities that encourage people or support walking and cycling need to be considered and provided in areas where they are insufficient.

Dr Sipe—With development over the past couple of decades, developers in new housing estates have not been providing local retail. There may be a shopping mall but local retail is missing. In Western Sydney in a lot of these areas governments have allowed people to set up shops out of their homes because this need is basically not being provided. In the US it has gone to the extreme where developers are now subsidizing corner shops and local retail rather than putting in a golf course, because they view it as something that is lacking. They support it even though the money is not there in the initial years of a new development to make it financially viable.

Senator WEBBER—I accept a great deal of what you have to say, but where does that leave people in regional Australia? There are lots of towns in my home state where there is not a lot of local employment and people basically live on some form of social security. There is no public transport and they are paying $1.75 a liter for petrol. What do we do to address those kinds of social problems?

Dr Dodson—That is a question we have not undertaken an enormous amount of research into. However, we have recently submitted a grant application to a federal government agency to examine that issue. I think that issue needs to be contemplated within the much larger issue of the impact of rising fuel prices on productive and socioeconomic structures within rural and regional Australia. I see the transition from relatively cheap motor fuel that can drive truck based freight haulage to a greater emphasis on rail as a likely outcome. Although we have not done the research to demonstrate it, we see that as a likely scenario where fuel prices continue to rise or stay at high levels. Therefore the socioeconomic impact on individuals and households needs to be understood within that broader context. There is a possibility that transport systems and settlement patterns in regional and rural areas may undergo significant restructuring in order to better align settlement patterns with the rail infrastructure. That is a potentially stark or extreme depiction, but I think in a forum like this there needs to be debate about what is going to happen with rising fuel prices. I cannot offer any specific solution in that regard, however.

Senator MILNE—Congratulations on this work. It is long overdue. It is great to have something of this kind in the public arena. It is terrific. I have a couple of issues. The first one is the spatial expansion of cities. The frustration I have in this argument is that we can talk about the need to provide public transport, we can talk about the need for transport around the circumference of suburbs but, the minute you put that in, developers and local government see the opportunity to expand another 10 kilometers or 15 kilometers beyond that. That is our problem. Every time we try and anticipate need, people then see it as potential to develop further. Where is there any emphasis in the country on containment of the physical size of cities so that we can start providing adequate transport and adequate services into the future, given the carbon constraints and the oil price and depletion issues we are facing?

Dr Dodson—The issue of urban expansion in terms of infrastructure has been of great concern to governments for the last 30 years—since the original oil shocks in the 1970s. Many state governments have put in place urban consolidation policies to encourage higher density development within existing urban areas, although those have been fairly uneven and partially applied. There has been extensive urbanization in greenfield sites since that period.

Dr Sipe—I guess the most recent example is in south-east Queensland, where, with the regional planning effort over the past couple of years, they have established an urban footprint. I guess we will have to see to what extent—

Senator MILNE—They adhere to it.

Dr Sipe—Right. There were a few areas that had not been decided on and some of those have flipped from nondevelopment into the development realm. We are hoping that this provides some containment on that issue of expansion.

Senator MILNE—The other big issue, and you mention it in your submission, is this. If we were to persuade the federal government to work in a cooperative way with the states and to start seriously investing in public transport provision as a way of dealing with this issue, with the productivity of cities, with congestion, with health issues, with climate change et cetera, financing would become the major issue. If people pick up the argument they are then going to ask, ‘How do you propose we pay for this?’ Have you looked at any financing models that would fit with the fact that we are a federation of states and that local government has the planning provisions and opportunities as well? How far advanced are you on that? That is the key question. If we can get to the persuasion, which I think we are going to have to get to because the circumstances are upon us, how do we pay for it?

Dr Dodson—Our suggestion, as we have outlined today, would be to shift the balance in existing states funding from roads towards public transport, walking and cycling. There is probably some scope for that to occur at the federal level as well. Around $7 billion to $8 billion is spent in federal road funding. A lot of that goes to rural and regional areas, so it would probably not be appropriate to transfer that to public transport provision—although perhaps some sort of regional public transport coach or train network assistance might be worth contemplating. However, I think there would be some significant scope for the use of some of those federal road funds in partnering arrangements or co-financing arrangements with states to identify areas of high public transport need within Australian cities and to plan and coordinate the rollout of new, high-quality services to those localities. As we suggested, it would probably require a dedicated federal government agency to undertake the research, analysis and planning to determine what measures would be the most appropriate in any given locality or circumstance.

Dr Sipe—The only thing I would add is this. As you can tell, I am not from these parts. I come from America. There seems to be a reluctance on the part of both the Commonwealth and the state and local governments to incur any debt in providing public facilities. I see that this is an untapped resource. A lot of these facilities should not be paid for by existing taxpayers. There is an intergenerational issue. They should be paid for over the 20 or 30 years of the life of the project. It seems that governments want to be debt free, and I am not sure that that is necessarily a good thing. Maybe the US is not the best example, having gone to the other extreme, but I think there is some middle ground there in financing projects over a period of time using revenues from public transport or toll roads. I think that is a much better way of doing things than these public-private partnerships that we have seen around Australia.

Senator JOYCE—I want to follow up on one question that Senator Milne put to you. Do you have any idea of the ideal size for a city? As an outsider, as someone who does not live in a city, I came down here the other day and I saw a bus driving around with nobody in it. I thought, ‘Well, that just goes to show that you can have cheap transport that nobody uses.’ What we see as investment in transport infrastructure might just exacerbate the problems that are already there. In your study, do you talk about an ideal size for a city or can cities just get as big as they like?

Dr Dodson—The question of an ideal size of a city is one that exercised the minds of a number of urban researchers in Australia in the 1960s and 1970s; I am not sure that it was ever resolved. The result was the decentralization program under the Whitlam government, which sought to shift population to regional areas such as, I believe, Bathurst-Orange in New South Wales, Albury-Wodonga and parts of Victoria. I am not sure whether they had a program in Queensland or other states. I would not wish to comment too much on the success of those programs. I do not think they are perceived as having had a dramatic impact on changing the rate of growth of Australian capital cities. There may be some scope in the future to revisit questions of decentralization of urban populations to rural and regional centers. We certainly have not done

any analysis or investigation of that type of policy. The problems would be in providing employment and other services in such localities to make it feasible.

Senator JOYCE—I will put the question on its head, then. Do you feel that, with unplanned transport infrastructure in place, there is the potential to exacerbate transport problems for an area and create more red areas? I am thinking about the south-east corner of Queensland, obviously. Wouldn’t an ad hoc growth to an area basically exacerbate problems that are going to be almost impossible to fix because there would be houses where you wanted to put transport infrastructure?

Dr Dodson—That comes down to a question of good planning. Until the postwar period, housing development occurred effectively in unison with rail and tramways. It was after the postwar period that the private motor car gave households and individuals the capacity to travel almost anywhere at will within the city, and that enabled the extensive, often low-density, development you see in, for example, the North Beaudesert shire area of south-east Queensland. Our view would be that well-coordinated and well-planned development with a strong public transport component to it can ameliorate those problems, but it will not necessarily solve them universally and provide some utopian type of urbanization.

Senator JOYCE—What is the cost of fixing the problem that is already there? The houses are already there; the roads are already there. If you want to put in a rail infrastructure, you are going to have to start moving houses and roads and changing everything around. Have you done any costing of your potential loss because the planning process was not proper and in place at the start? A lot of this is a nirvana; it is never going to happen because the cost of putting in new rail networks will be prohibitive.

Dr Dodson—Perhaps yes and perhaps no. I note that the Queensland government is currently expending large sums of money in putting road tunnels through the centre of Brisbane. It is building a number of bus lanes that go through existing inner city localities, many of which have far higher real estate values than those out on the fringe. In terms of the cost of providing new fixed route infrastructure for public or even road transport, I am not sure that the cost of purchasing the corridors and lines for that is necessarily prohibitive. It does not seem to be at the moment.

CHAIR—There are also other forms of public transport, too, like light rail. I understand that that is much less disruptive and you can move a lot of people. Have those things been factored into your equation?

Dr Dodson—In some areas there are opportunities for upgrading underutilized rail infrastructures. There are a couple of train lines in south-east Queensland that are underutilized that could potentially be upgraded. But also simply providing bus services that operate in a coordinated way across outer suburban areas would, in many cases, provide a sufficient level of service that would match or be comparable to a rail service if it were planned, well coordinated and operated efficiently.

Senator JOYCE—What are you going to use as motivation? Once someone jumps in their car to drive to the train station, how are you going to encourage them to get out? It is the same issue that people have in regional areas where, once they put stuff on a truck to get it to a railhead, they say, ‘Don’t bother stopping; keep going.’ It is the same idea with the car: once they jump in the car to drive to the train station and they have the radio going, how are you going to encourage them to get out?

Dr Dodson—The way to do it is to provide the highest possible quality of service that you can so it makes it easy and efficient for them to do it. That level of service exists in many instances in the inner areas of Australian cities, and a high proportion of households and individuals use it. It is the lack of service and the poor quality of service in the outer-suburban areas that prevent people from using public transport, in my opinion. The rising price of motor vehicle travel will be a strong motivational element in encouraging people to use public transport. But the trouble is that it needs to be there and it needs to be of high quality so that they can use it.

Senator JOYCE—I was interested that you were looking at Brisbane. Brisbane is a unique town in that it is hilly and therefore you will need tunnels or bridges in order to get around the place. Because houses are parked on the sides of hills in places like Waterworks Road, there will be an immense capital cost in trying to set up the infrastructure—unless you move the roads, because the roads follow the accessible paths in the lower areas of the topography. Is there a sense that the cost of this is going to be astronomical, as opposed to better planning and getting people to live in areas where the cost of this infrastructure would not be so great?

Dr Sipe—That is what they are trying to do with the regional plan.

Senator JOYCE—Yes, they are moving them but they are just moving them down the street. They are moving them to Ipswich when they should be moving them over the hill and far away.

Dr Dodson—There does not seem to be an immense topographical constraint to the provision of existing public transport services. Buses could easily run along the large arterial roads and the major roads that already exist throughout south-east Queensland. The trouble is that existing government planning is focused on not impeding motor vehicle traffic. In the case of the eastern suburbs of Brisbane, we have Old Cleveland Road, which is a major arterial road, yet the government is now planning to tunnel a busway to provide public transport under that road for approximately 25 kilometers out to the eastern suburb of Capalaba. From my perspective, you can always use existing road space for buses. So there is a question about the opportunity cost of using tunneling, which is going to cost billions of dollars, to provide that service when you could use the existing road service and coordinate services with the regional rail network, and then have plenty of money left over to provide very high-quality local suburban bus services for those in the outer suburbs who are going to be most affected by rising fuel prices. I am not particularly concerned about topography being an impediment to improving public transport.

Dr Sipe—There have been a number of questions about getting people to use public transport. The evidence we have been able to put together over the last six to nine months suggests that that is not going to be a problem, that the price of fuel will take care of that. The real question is: are the public transport companies and authorities planning for this? For example, in Brisbane they basically now publish how many buses go past the bus stop because they are full. The problem is not getting people on; it is providing the capacity. That is what we see as the real problem. Who is building buses? What happens if every city in the world decides it needs 100 more buses?

CHAIR—We are not going to have enough carriages on the Perth trains. Come peak hour now, we are packed in like sardines because we do not have enough carriages on our trains.

Dr Sipe—So who is looking out for this? Somebody should be thinking, ‘If all the cities in Australia are facing this problem, what about all the cities in other parts of the world?’ I have not read that General Motors is going to give up building Hummers and begin to build train carriages and buses.


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Bakhtiari addresses Peak Oil before the Australian Senate Committee in 2006

[Australia has done a great deal to educate their public and leaders about the issue of Peak Oil, far more than the United States (2040 hits on peak oil in their parliamentary system). Whether that will make a difference given the lack of alternative energy resources to replace oil, and the likelihood China will invade Australia for resources when the U.S. military is immobilized from lack of fuel, remains to be seen.  Alice Friedemann, www.energyskeptic.com ]

July 26, 2006. Bakhtiari on Australia’s future oil supply and alternative transport fuels. Parliament of Australia.

I’ve only snipped out what I found of interest from the above file, so if at times the speakers seem disjointed, it’s my fault.

Dr Bakhtiari has recently retired as a senior advisor for the National Iranian Oil Company in Tehran and has written several books and more than 65 papers on the Iranian and international oil and gas industry.

Dr Samsam Bakhtiari—I will begin with a short opening statement for you to consider. Crude oil is a commodity unlike any other. It is simultaneously a strategic raw material, a unique industrial feedstock and the most essential of fuels. It is also the most conveniently and widely traded form of energy and therefore the swing element in the world’s energy mix. It is no wonder that the price of crude oil is the most important figure quoted daily worldwide. Its relevance could well rise significantly in the near future as the impact of peak oil or, in other words, the peaking of global crude oil production, becomes evident to all and sundry.

At present, worldwide crude oil output is stagnant at around 81 million barrels a day, give or take one million barrels. OPEC’s 11 member countries are now limited to a maximum of 31 million barrels per day, having produced only 29.35 million barrels in May 2006, and the so-called non-OPEC countries, which represent the rest of the world, are capped at 50 million barrels per day. Thus the world now produces and consumes some 30 billion barrels in each single year.

Most of the world’s major producers are struggling to keep oil production on an even keel, especially both the OPEC and non-OPEC champions—that is, Saudi Arabia and Russia—which are both producing some nine million barrels a day at present while facing almost insurmountable problems to avoid declines in the near future. Moreover, most of the world’s super giant oilfields are now getting old and some of them have entered terminal decline. Suffice it to mention the three largest ones: Saudi Arabia’s Ghawar, Mexico’s Cantarell and Kuwait’s Greater Burgan oilfields, which are surely but steadily going downhill. The last super giant to be discovered was the Kashagan oilfield in the north Caspian Sea offshore from Kazakhstan back in 1999, and it is now scheduled to begin initial production in 2008-09.


Not only have discoveries of super giants dwindled to nil in the 21st century but yearly oil finds have plummeted to between four and six billion barrels a year. There is little hope that this trend will be reversed in the near future because most of the planet’s petroleum provinces have now been explored for petroleum and there is only one last frontier area remaining—that of Antarctica, with its pristine wilderness and its population of some 20 million penguins.

The decline of global oil production seems now irreversible. It is bound to occur over a number of transitions, the first of which I have called transition 1, which has just begun in 2006. Transition 1 has a very benign gradient of decline, and it will take months before one notices it at all. But transition 2 will be far steeper, and each successive transition will show more pronounced declining gradients. My WOCAP model has predicted that over the next 14 years present global production of 81 million barrels per day will decrease by roughly 32 per cent, down to around 55 million barrels per day by the year 2020.

Thus in the face of peak oil and its multiple consequences, which are bound to impact upon almost all aspects of our human standards of life, it seems imperative to get prepared to face all the inevitable shockwaves resulting from that. Preparation should be carried out on individual, familial, societal and national levels as soon as possible. Every preparative step taken today will prove far cheaper than any step taken tomorrow. I thank you for your attention during my opening statement, and I am ready now to try, to the best of my abilities, to reply to any questions that you have.

CHAIR—In the first set of questions, can we concentrate on the issue of peak oil itself and defining that, and then we will move on to the other issues.

Senator JOYCE—Thank you very much, Mr Samsam Bakhtiari. I have been a follower of you for a while; I have been one of your quiet fans. With regard to Hubbard’s peak, within the Ghawar oilfields and the Cantarell oilfields, can you explain to us some of the signs that these oilfields are running out of oil? I am talking about gaseous inertia or water inertia. What do you believe are the key indicators that these oilfields are past peak production?

Dr Samsam Bakhtiari—The super giant oilfields are all very great oilfields. Today you have 40 per cent of world production in these super giants. Managing a super giant is a very difficult procedure. The larger the super giant, the more difficult it is. I will firstly state the case of Ghawar. Why? Because it is the largest oilfield in the world by far. At the beginning, it was estimated that it had in 1952—that is when it came on stream, which is some 54 years ago— some 70 billion barrels of recoverable oil. That was 54 years ago. In the meantime, much of that has been already recovered. The situation for Ghawar today is that you have two major problems. It is still producing, we think, between four and 4½ million barrels every single day, but in order to produce that much oil much needs to be done. I will show you two points, if you allow me.


What is happening today is that they are injecting eight million barrels of sea water every single day. What do they get out? This is very schematic. They get 12.5 million barrels of liquid out of the field and they split that into eight million barrels of water and 4.5 million barrels of oil. The water that they are injecting is increasing constantly.

The last information I have is that it has grown now to nine million barrels, but I did not have time to check. These figures are very approximate, because we do not know exactly what is going on. But it is roughly of that magnitude. So when they say that Ghawar crude is cheap, it is certainly not cheap any more, because you have to do all this enormous processing. You have these huge pipelines which come from the sea and an enormous compressor re-injecting that water under the oil column and pushing the column up. That is one point. There are problems. If you did not have problems you would not need to do all that.

They have done something else. Usually in all these supergiants you drill vertical wells and you take out the oil from the vertical wells by the pressure either of the gas or the water. That is how it is mostly in the four supergiants in Iran. But in the 1990s there was a new technology called horizontal wells. In Ghawar they thought that instead of relying on the vertical wells they would drill horizontal wells. Horizontal wells are both a blessing and a curse. Why?

Let me show you roughly how this works. You have a cap here. Here you have the oil. On top you have the gas and below you have the water. Naturally this is very schematic. A vertical well comes here in the middle of the oil column and you get your oil by either the pressure of the water beneath or the pressure of the gas from the top. With the gas here you say that this field is gas driven. Most of the Iranian fields are gas driven. Ghawar is water driven. It is either/or, but sometimes, very rarely, both.

The horizontal well is different. It comes down like this and then it goes horizontally for a few kilometers. The horizontal well is a blessing because you can get to the exact middle of the oil structure and so take out your oil more easily. But there is a very great danger with horizontal wells. They tell us that in Ghawar today there are 220, roughly, horizontal wells. The great danger of the horizontal well is that when the water reaches the well it is dead. So one day in the future at Ghawar, the water level will eventually reach the horizontal well.

It is happening but not on a large scale. When it happens on a large scale then Ghawar is going to collapse and you will have a cliff in the production of Ghawar. When you have a cliff there, the whole Saudi production system is going to fall apart. If that happens, we will start hearing bells ringing all over the place, and the price of oil is going to go through the roof.

Senator JOYCE—I have heard you say before that China are prepared to pay any price for oil. Therefore, if they are prepared to pay any price for oil, they are prepared to go anywhere to get it. I got myself into a lot of trouble by suggesting that countries would exploit the Antarctica. If China were prepared to pay any price for oil, which means they would be prepared to go anywhere to get it, and if there were areas of territorial dispute, is there the possibility that oil would be found in the Antarctic continent?

Dr Samsam Bakhtiari—I have studied oil reserves for the past 40 years, from when it was a very new science. In the beginning, there were a few specialists who were not very good, and then came the greatest specialist of oil reserves. He began working for a petrol consultant in the 1990s and, in 1995-96, established what is in my opinion the best set of oil reserves in the world.

These are the oil reserves of Dr Colin Campbell. I think these reserves are the best. I have been able to prove not only that these reserves adapted very well to my model but also that they correlate the production of the 11 OPEC countries in a satisfactory way. So I have adopted them.

Dr Campbell is of the opinion that the total endowment for conventional oil of the planet is around 1,900 billion barrels. I think this is the best number that we have at present. I have been working with that number for the past seven or eight years. Out of that number of 1,900 billion barrels, Dr Campbell is of the opinion that for the two polar sectors, the Arctic and Antarctica, you should have roughly 52 billion barrels. I think that Dr Campbell splits that number roughly half and half between the two poles.


As you know, exploration in the Arctic began in 1995-96—and this exploration is now growing faster and faster. They have given to a research team of the USGS and the Geological Survey of Denmark a joint research project to explore the tectonics and oil sources of the Arctic. Their report should be out next year, 2007, which is the International Polar Year. Antarctica is today the last frontier for the petroleum oil industry. Whether the oil industry is going to go there, I certainly do not know. I know from the very early studies I have made that it is going to be very difficult—firstly, because of the conditions in Antarctica. For seven months of the year it is dark—and you are more aware of the temperatures than I am. Senator Joyce, I believe you have lately been down there on a four-week trip and have seen things first-hand. So it is certainly not something for tomorrow, because conditions are not ready yet. As you know, it is very difficult to drill in ice—and there is an icecap of at least 2,000 metres that you have to drill through before you get to the lower tectonics. But maybe one day, when the price of oil goes up to $200 or $300 a barrel, some oil companies will decide to try their hand there. That could be a possibility. I hope it will not happen. But some governments will have their backs to the wall and in suburbia there will be unrest over petrol. Many things could happen—among them, drilling in the Southern Ocean or Antarctica.

Senator JOYCE—I said it would be in the next 10 to 30 years. Do you think that is the time frame for the price of oil to go up to $200 or $300 a barrel? I note you have stated that you believe the production of oil will start to fall off to around 55 million barrels a day.

Dr Samsam Bakhtiari—Yes—in 2020.

Senator JOYCE—So that is within a time frame of 10 to 30 years. When will people start exploring new areas?

Dr Samsam Bakhtiari—It is extremely difficult to forecast precisely the price of oil in the future. I can see a range of $100 to $150 not very far into the future.

Senator JOYCE—That is $100 to $150 a barrel?

Dr Samsam Bakhtiari—Yes, this we are certainly going to get to. In my opinion, we could get there very easily. We are a couple of hurricanes or some geopolitical problems or a war away from having a worse problem than we have today. There you could go very easily, but after that where can this price go? I am studying that right now, and I have not reached a conclusion yet. There must be some outer limit, and I am beginning to think that maybe the outer limit could be $300 per barrel. I am not so sure yet, because we are entering a brand new era in human history, an era we have not been prepared for at all. For the past six generations, we have been used to having cheap oil always available whenever we wanted it, more or less. Today, in 2006, all of this is beginning to change. We are entering an era in which we know nothing much, where we have a brand new set of rules. I am trying to find out what these new rules are. I have already reached two or three new rules. One of the new rules, in my opinion, is that there will be in the very near future nothing like business as usual. In my opinion, nothing is usual from now on for any of the countries involved. And the lower you are in the pile, the worse it is going to get.

Senator JOYCE—You also made the statement that steps made today are cheaper than steps made tomorrow. With regard to mitigating or alleviating the crisis that would be caused by an oil shortage or a price of oil that is completely prohibitive to the development of industry and the fundamental freedom of people to drive around, what steps do you envisage would be worthwhile taking today? And without loading your answer, can you refer to issues such as the production of a biorenewable fuel industry, the development of ethanol as a fuel alternative and biodiesels, and alternative forms of combustible material that can be used in internal combustion engines.

Dr Samsam Bakhtiari—Allow me to take your questions one by one. I said that steps needed to be taken, because now I am thinking that the price is going to go up. There is no other way. Now let me open a parenthesis: the price might go down tomorrow to $55, but it will come back up again. So you will have in this period a high level of volatility, but eventually it will go to very great heights—maybe to $200, maybe to $300. As long as you have price driven oil, I think it is a very good thing whatever this price is, because one day you will have a question of availability. You will be ready to pay any price, but there will not be any oil.

I remind you that oil is a very special commodity, which is something that is very difficult to realize today. For example, you have no free market in oil. Naturally, you can go to the NYMEX stock exchange and buy as many barrels as you want at the price of $74 now, but these are paper barrels. If you try to buy 10,000 barrels a day of real oil, of genuine barrels, you will have enormous problems getting that much oil on a regular and sustainable basis. So that is one of the problems that we will encounter in the medium term.

Any step you take today is to your advantage. I will give you one example. The city of Perth in Western Australia has free buses. I have been on these free buses. It is a fantastic service. Maybe today it is still too early. It might not be very economical but it is a marvelous step for the future, because one day it will pay enormous dividends, in my opinion. Also, they have a very light rail service going around 140 kilometers of their coast, and this links all of the suburbs. One day this light rail service will save all these suburbs. I was asked about this yesterday. I think that Western Australia is at the forefront of the world in terms of steps being taken. And Australia is at the forefront today of the other countries, because the other countries do not know anything at all and are not willing to prepare. So the faster these new decisions are put in place, I think it will be of benefit to any society, especially societies with suburbs.

Senator JOYCE—You said it is not really a perfect market. Yes, you can go to the New York Stock Exchange and buy oil, but it is paper oil; you are not buying the actual product. You have also talked about how the price of oil will possibly go to a horizon of about $300 a barrel. Of course, that would mean we would be paying about $6 a liter or something like that for fuel for our car, which obviously means we could not afford to fill up. Do you feel the major oil companies have the intention to exploit an arrangement which has the world paying $200 to $300 a barrel for oil? Obviously it would be in their financial interests to get to that position, because it is maximizing the returns on their stock on hand. Their stock on hand is the oil in the ground, and obviously there is a great financial windfall for them to keep the predominant means of internal combustion a mineral based oil product. The question I am asking is: will the oil companies drive the intention for people to continually use oil and be quite prepared to profit from a market of $200 to $300 a barrel? Will they ride us out to the very end? Will their intentions be to ride this cash flow window to its completion?

Dr Samsam Bakhtiari—I do not think it is in the interests of the oil companies for the price to go very high. I think they are very well satisfied with the present price, but I think it will not be in their hands. It will not be in the hands of the companies, it will not be in the hands of the oil producers. I can see Saudi Arabia and others being very worried by prices that are too high, but I do not think any one of these players can do anything about it.

When there is not enough oil, first you will have to raise its price and then you will have the problem of its availability. There may be some kind of worldwide rationing—I do not know. I am trying to look at the future but the future I am talking about, as you mentioned, might be beyond 2020. Maybe beyond 2020 we will have some reasonable idea. What will happen after that is very difficult to predict. I do not think the oil companies would like such a scenario at all. They will be forced—

Senator JOYCE—Who can afford oil at $200 a barrel? Who would be using it?

Dr Samsam Bakhtiari—I think the Chinese are ready to pay anything for oil. I agree with you that it will be very difficult.

Senator MILNE—Recently we had the head of BP in Australia talking about their statistical review. They take at face value the claims, particularly of Middle Eastern countries, about the extent of their reserves. We are aware that a few years ago these countries readjusted their reserves, yet there were no new discoveries that would have justified that. This is a really critical question to ask because it goes to the heart of the argument. Could you give us your frank appraisal of the Saudi reserves, in particular, and the Middle Eastern reserves, generally, and the extent to which they have been inflated for political and economic purposes et cetera and do not reflect what is actually there?

Dr Samsam Bakhtiari—Most reviews of the reserves of the major Middle Eastern countries today, especially the BP Statistical Review of World Energy, mention reserves amounting to between 600 billion to 700 billion barrels. These are official reserve figures—in other words, the countries involved say that they have so much oil reserves available. The Oil and Gas Journal and BP take these reserves at face value. As you mentioned, in the 1980s these reserves were revised upwards. For example, in 1988 Saudi Arabia, which had reserves of 160 billion barrels, suddenly took these up to 260 billion barrels. Since 1989, it has kept this number of 260 billion barrels; there has been no change to it up to this day. So, for 17 years, it as if they have not produced anything.

In Dr Campbell’s opinion—and it is also my personal opinion—the reserves of the Middle East are roughly one half of what is officially said and presented. In other words, there should only be between 300 billion and 350 billion barrels of oil. This is the best figure I have come up with. I and Dr Campbell, as a rule of thumb, divide the official reserves by two to get a number that we believe is the actual amount of the reserves in these countries. Does that answer your question?

Senator MILNE—It certainly does. Can you go on to tell us what your view is of the US Geological Survey and its accuracy in terms of the reserves?

Dr Samsam Bakhtiari—Every institution gives its own numbers, and we can only compare theirs to ours. You can see that the reserves given by the USGS, which is an endowment for the world of over 3,200 million reserves, is much, much higher than the numbers we are using, of only 1,900 million. Of course, we can not accept such reserves as realistic, as we cannot accept the projections of certain institutions like the International Energy Agency in Paris, which predicts that the world will be consuming 118 million barrels per day in the year 2030 as realistic, because I cannot see how the world can get over 81 or, say, 82 per day right now, let alone in the future. I believe we are in decline. So you have an enormous discrepancy between what these institutions publish and what we believe in, whether it is in reserves or whether it is in production of crude oil per day.

Senator MILNE—Given what you have said about the fact that the Middle Eastern reserves are probably half of what they say they are, and given what you have just said about the US survey, how are we going to tell? Given that the Saudis and the other Middle Eastern countries keep on saying that their reserves are the same—and they have been saying they are the same for all these years whilst production has kept on going—how are we going to know? What indications are there going to be so that we can revise the estimates to be more accurate? If they are half of what they say they are, then the shock in the share markets et cetera everywhere around the world will be huge. You mentioned before that they may not be able to manipulate it forever because of the horizontal wells and the step change that will occur. Is that the main indication—when one of the wells goes kaput? Or what will happen, in your view?

Dr Samsam Bakhtiari—From an outsider’s point of view, you have two ways of following what will happen. One is the price. The second is the production. If the production for the next couple of years remains stagnant, then it will mean the institutions that are predicting production of over 100 or 110 are wrong. By the way, the future is always predicted wrongly. So that is one basis. The other way of following this is by the price. If you see the price returning to $50 and staying there, it will mean that we were wrong. But, if you see the price continuing to increase, it will prove that we have been right.

So these are the two ways you can follow the story, but I will return to the French philosopher Pascal. He said the best way may be to take a bet and bet that we are right, because the ones who bet that way have not much to lose. If we are wrong, everything is going to be fine. But, if we are right, I think the ones who took precautions will be very much rewarded in the future.

Senator MILNE—What do you regard as the most authoritative estimate of world reserves? You have spoken about Colin Campbell. Is there anything that you would refer to or would you argue that that is the most accurate assessment?

Dr Samsam Bakhtiari—No, I certainly believe it is the most accurate. I have studied almost all, not all, of the reserve sets that I have been given or that I have come by. I can assure you that my personal archive is a very complete one. I have met almost everybody in this industry—and especially those at the world petroleum congresses, which were the Olympics of oil and were held every four years; before the internet age, at least—and I really think that the 1,900 billion barrels in Dr Campbell’s set of data are the very best that you could find in the world today. I cannot imagine that we will have any better set in the future, especially given that Dr Campbell with Mr Jean Laherrere, a petrol consultant, have done very impressive research on almost all the oil provinces on the planet.

Joyce—Is that 1,900 billion barrels of recoverable oil from now to the end?

Dr Samsam Bakhtiari—1,900 billion barrels total is the estimate of convention oil. You have the non-conventional, which include, among others—

Senator JOYCE—Shale oil.

Dr Samsam Bakhtiari—the tar sands, the shale oil and the heavy oil of Venezuela and Orinoco and all these kinds of oils, which are classified by Dr Campbell as non-conventional.

Senator WEBBER—I want to continue to explore the impact of price. Obviously the higher the price, the greater the impact on consumer behavior. In my home state of Western Australia, the higher price is making fields that were seen to be unprofitable worth developing. For example, we have all known that the Browse field has been there for a long time and now Woodside are looking at developing it. Could you give us an understanding of how an increase in price may bring other oilfields onto the market?

Dr Samsam Bakhtiari—I am sorry, I did not understand your question.

Senator WEBBER—I am asking about the relationship between the increase in the price and the increase in the development of fields that were previously seen as unprofitable. Does the increased price mean that there will be an increase in exploration with the result that new fields may come on stream?

Dr Samsam Bakhtiari—Yes, I understand now. Many people are of the idea that with the price increasing you will have new fields that before were not very profitable. Now, we will certainly see some of these factors coming into play. For example, you have exactly what you mentioned in the North Sea: small fields with reserves of 50 million to 100 million barrels of recoverable reserve were left by the wayside in the 1980s and 1990s, when it was not at all profitable to go and develop these fields with prices of $9 or $10 per barrel. These fields might very well be developed now at prices above $70. This will certainly happen not only in the North Sea but maybe also in America, where there are very small fields that now are going to be profitable and will be developed.

In my opinion, however all these are developed in the future, it will have very little impact on either peak oil or world production. It might make a change of, say, half a million barrels in total, not more, and half a million barrels will have very little impact. It will just shift the production curve upwards a bit but it will have very little impact. The reason is this: if you look at the US curve of decline, which was correctly predicted by Dr King Hubbert in 1956 and which peaked in 1970, it has been steadily coming down—but for the addition of Alaska. Alaska just shifted it a bit but it made no difference on the peak. It has been declining continuously since, notwithstanding the developments in exploration, exploitation and all the new technologies and the new investment that were possible at prices of $36 in the early 1980s. So I think that neither investment nor new technology will have any significant impact on the process of transition that we have entered.

Senator STERLE—Can you explain the claimed inadequacies of optimistic official agency predictions of oil production? We have had submissions from oil agencies that have told us that it is very rosy out there because they are spending lots of shareholders’ money—that is how rosy it is. Your report and your figures and Dr Campbell’s figures are at completely the opposite end of the spectrum. Can you explain how the oil agencies could be so far removed from your studies and be so different?

Dr Samsam Bakhtiari—Maybe one explanation could be that they are interested parties and we are disinterested parties. If you hear some people saying today that the price of oil is going to drop to $25 in the near future, and I think it is almost impossible for such a thing to happen unless there is a major catastrophe on a global scale. Maybe they are saying this because they want to grow and buy smaller oil companies. They might say that they will buy at $30 because the price is going to fall to $25, so $30 is a very good price and would be a very good price to pay a small company. And there are other problems. Nobody likes the idea of peak oil. Firstly, you have the politicians. Naturally, a politician will never say that there is such a thing as peak oil. It is suicide to give bad news so a politician will never do that. He will always say, ‘The IEA says that we will be having 118 million barrels in 2030 so why worry?’

Secondly, you have the media. The media does not like peak oil. Why? There is no sponsorship for peak oil. The oil companies do not like peak oil because you should not say that your soup is cold; you should always say that it is very hot and very tasty, yes? So nobody wants to hear of this phenomenon of peak oil. I believe that some of the institutions—I will not name them; they are here and maybe you can guess which ones they are—are saying these things to act as a protection for some politicians who can say: ‘Because these institutions are saying these things, then we follow them. We do not follow Campbell and others.’

Senator JOYCE—It could also inhibit the development of a biorenewable fuel industry too. If they say there is a lot of alternative product around, then they do not need a biorenewable fuel industry.

Dr Samsam Bakhtiari—I do not believe that there are alternatives around. In my opinion there is no alternative to crude oil. There is nothing that can replace it, and this is the problem the world is facing today. There are no alternatives and I will try to explain very briefly why.

In general economics we are taught a very basic rule. When the price goes up, demand comes down, and you have the marvelous figure of Professor Sam Wilson to explain exactly how this works. For crude oil this does not work at all. We were always taught that when the price doubles demand will come down by something. In the past two years the price has tripled and demand has not come down by anything. How far can we go? Nobody knows. I think that it will take three digits—at least over $110 or $120—for us to start seeing demand maybe coming down.

Why? Firstly, you have no way of preserving oil products easily—no way at all. We are all used to the car and we want to drive that car as far as we can possibly pay for it. Even at prices of $1.40 per liter for petrol you are beginning to have problems in the population economically, so what will it be like when the prices are much higher than that? $1.40 per liter is one of the cheapest prices in the Western world. It is just a little above fuel prices in California today so it is very cheap.

Not only do you not have preservation, you do not have any means of substitution, and I will come back to your previous question on alternatives. There is no alternative to crude oil. For the ones who believe that GTL is going to be an alternative, I am sorry to say that this is not a fact.

Today you have only 85,000 barrels per day of GTL capacity in the world. I do not think you will ever have much more than that, and 85,000 is nothing. It is a drop of water in an ocean. The latest GTL plant has just been started in Qatar and I do not know how it is going to fare. It makes 34,000 barrels. It is an enormous plant. I think it cost one and a half billion dollars at least. It has two enormous reactors. If anything goes wrong with these reactors—my God, I do not know what is going to happen! So that is for GTL.

You have coal to liquid. The only coal to liquid plant today in the world is in Secunda in South Africa. It makes 150,000 barrels per day of liquids. I can tell you that because I have visited it, half by helicopter and half by walking around the facilities. It is a very messy affair and it is very inefficient energy wise. Now the Chinese are trying to make CTL—coal to liquid—of one million barrels per day capacity. I think it is going to cost them $10 billion at least. I cannot imagine how this site is going to be. I am waiting for them to finish, but it will probably take them quite a long time to get that one million barrels per day off the ground.

You mentioned ethanol, biodiesel and all that. This is not the future. This is not sustainable because in the future, if our predictions are correct, the No. 1 priority will not be transport and all that. The No. 1 priority is going to be food. And for food you will have to have top priority for fertilizer and insecticides and whatever you need to produce food only. So ethanol is a very, very wasteful system.

And again, however much you want to make some ethanol, it will still be a drop of water in the ocean. Just let me tell you that for every liter of ethanol you will need between three and four liters of water to produce it. The best way to go for these types of fuel, and certainly the most efficient way, is sugarcane. That is what the Brazilians are doing today. With sugarcane you need one square kilometre of sugarcane to produce 3,800 barrels of ethanol per year. It is not very easy and it is very inefficient.

So I cannot see any of these alternatives coming up in the future in a big way. Now, certainly solar power will have a small role to play. Today it is still very expensive at between roughly $US 7,000 and $US 10,000 per megawatt. But it could certainly play a role, especially in Australia where you have quite a lot of sun and quite a lot of land to develop that. Wind also, in windy countries, could play a small role. But these roles will amount to two to three, or maybe four, per cent of oil consumption over the next 15 or 20 years, and not more. The orders of magnitude are not at all the same. You will make a small dent with each one of these but not much more than a dent. Replacing crude oil is not that easy.

CHAIR—I would like to follow up on this issue of price. The Australian Bureau of Agricultural and Resource Economics—ABARE—in their submission to us have done predictions based on future oil costs of $US 30 per barrel. How realistic do you think that is?

Dr Samsam Bakhtiari—I believe you will never, ever see $US30 per barrel again unless you have a bird flu epidemic that wipes out at least millions of people or, as Senator Joyce said, something hits the planet and disrupts all calculations.

Senator JOYCE—That takes out Europe.

Dr Samsam Bakhtiari—If oil falls below even $US50 per barrel, that in my opinion would be very bad news, because if it goes back to, say, $US50 per barrel for some reason and for a short period of time, people will think: ‘Ah! So $US75 was just a spike and now we are back to the good old days and we can begin consuming again. Let’s go and buy that big SUV that we were looking at.’ You then lose two or three years at least.

CHAIR—My next question relates to the industry. BP when they made a presentation to the committee said that the prices now are basically the same proportionally as the spike in the 1970s. What is your opinion of those comments?

Dr Samsam Bakhtiari—If you take into account inflation, it is the roughly same—it was $US 75 to $US 80 in those days. But those were spikes. Today it is a totally different problem.

Today it is a transition into the unknown; then it was known. I am now personally of the opinion that if they had continued with the spikes we would have been much better off today. But they did not. After the two oil price shocks of 1973 and 1979 you had two price counter shocks in 1987 and 1998, when it dropped below $US10 per barrel. That was very bad news, because then demand started going up again. If all these reserves had been better controlled, maybe the transition would have been much easier. Just to remind you, in 1950, which is not that long ago, global consumption was only 10 million barrels per day. That was very easily controllable with the reserves we had. What is not easily controllable is the 81 million barrels per day that we have today.

CHAIR—I want to go back to the price per barrel. What is your understanding of what IEA is saying is the standard price per barrel?

Dr Samsam Bakhtiari—In the world or in the Middle East?

CHAIR—In the world.

Dr Samsam Bakhtiari—It is very difficult to reply to that question because you have many costs per barrel, depending on whether they are onshore or offshore and whether those offshore are in shallow waters, deep waters or ultra deep waters. To make an average over all that is very difficult. I could not answer you. I can tell you that it is not $75 per barrel; it is certainly lower than that.

Senator MILNE—In your opening presentation, you said that you thought that in 2006 we had begun transition 1, and that it would be a relatively gentle stage, and then we would go to extreme discomfort, presumably in transition 2. Can you outline to me the time frames you see for each of the transition stages, and how they will proceed? What will trigger moving from transition 1 to transition 2? When do you expect the real crisis to hit in that transitional phase?

Dr Samsam Bakhtiari—Certainly. From now on, from 2006 to 2020, making predictions is an extremely difficult process, because we do not know exactly what to expect of these transition periods. But I have decided for the time being to split the next 14 years into four transition periods, which I call transition 1, 2, 3 and 4. Every transition period has a steeper gradient and I do not know exactly how long each of these will take, because it depends on many factors.

Nevertheless, I envisage now that transition 1 should take between three, four or five years, but I would have to revise this every three to four months.

Now I will try to explain to you when I predict will be the end of transition 1 by drawing you a model on the whiteboard. We are here in 2006, which is, according to my model, the first year of transition 1. And we want to go all the way to the end of transition 1. Here, in the world of oil, we have the following: today, we have a demand for oil which comes from all of the countries and the regions on earth. The demand is about 81 million barrels per day. What happens to this demand is that it does trigger a supply. This supply comes from two entities. The first entity is non-OPEC and the second entity is the 11 OPEC countries. The OPEC countries are the marginal producer—that is, whatever non-OPEC produces is subtracted from the demand, and it leaves what is required from the OPEC countries to produce to make up the rest of the demand.

This is the system today. It is a very simple system. It has been in place since 1960, when they created OPEC. In my opinion, the international oil industry created the entity of OPEC for this very simple reason: to have a marginal producer. So far it has worked very well. But today OPEC is not playing its role, because it is producing oil out, which is not a good thing.

I will open a parenthesis here about the oil industry and the oilfields. There is nothing worse for an oilfield than to be pushed. I believe that is what is happening to oilfields like Ghawar and Cantarell. They have been pushed. A better example is the Samotlor oilfield of Russia, which was a marvelous oilfield that the Soviets in the 1980s, when they badly needed money to have a system that would be a rival to the American Star Wars, destroyed, in my opinion. It was an extraordinary oilfield which could produce three million barrels a day. Today it is only producing 300,000 barrels a day. If they had managed that oilfield better, I think they would have had a much higher return. Pushing an oilfield is not very good for it. Letting an oilfield rest is the best thing you can do for it. The Iraqis’ oilfields had a marvelous time during the 1990s because they rested for a long time. I would be glad if such a thing could happen to the Iranian supergiants—if they could rest for some time. I think it would not be bad.

Coming back after this parenthesis to this system, between the beginning and the end of T1, you will have the two major scales tilting. At the end of T1 you will have a supply, and this supply is going to dictate the demand. Here you will have entities which will have the marginal demand. So it will be a totally different system form what we had at the beginning. It is this tilting of the scale that will in my opinion determine the end of T1. We have just begun shifting from one to the other.

In the time frame of T1, you might have some volatility in that it will start shifting to one side and then shifting back again to the demand side and going back and forth. So one has to be very careful. But in the end it will be the total shift that will in my opinion make the end of T1 clearer. About T2, T3 and T4, it is still very early. I am working on the next transition, but first we have to get this transition right.

One thing I might add about T1 is that I see not only that business as usual is not in the new rules but also that mega projects are not to be begun, because mega projects are long-term projects that take 10, 20, maybe 25 years. Because we do not know exactly where we are going at this stage, it is very dangerous to begin mega projects. But people are still doing this.

The Europeans have begun a freight train line from Barcelona to Kiev, which is roughly 2,600 kilometers. The idea of having freight trains is a very good idea, but it is a bit late now. If you have rails you might make the service a bit better, but you should not construct it from scratch because it will take 20 years and will never be finished because the high oil prices will trigger rises in prices for all other commodities.

You already see that steel is way above the usual prices. Copper has hit between $7,000 and $8,000, and it will go much higher than that. Nickel is $22,000. I think $22,000 is very cheap today; it will go much higher. All these commodities and all these metals will go very much higher, because it is the crude oil price which dictates the prices. Sugar is going up, orange juice is going up—everything is going up—because the price of crude oil is going up. It is the price of crude oil which more or less dictates all the other price hikes. In my opinion, you will have a correlation between all the price hikes in the future, and you can already see the first signs now.

Senator HUTCHINS—What do you see in transition phases 2, 3 and 4? Do you see any specific dates?

Dr Samsam Bakhtiari—No, not now, not yet. The gradients will get steeper, so the effects and the impacts will be greater. T1 is very benign; the gradient is very slow and you almost do not notice it. We will go from, maybe, 81 to 79.5 over the next few years; it is not difficult. But T2 will be much more difficult—it is already—because it will start dropping considerably; then you will notice the drops every year, probably, and then it will get worse and worse. It is a process, fortunately, where the introduction is easier than the following phases. But it is still very early to start predicting what T2 will do. Firstly, we have to see what T1 is going to do, because already, in many aspects, T1 is difficult to predict, with all the events that could take place in the next three to four years.

Senator HUTCHINS—What should governments do if you say that supply will determine demand?

Dr Samsam Bakhtiari—I think that every society, every city and every government should do a certain number of things—many things; 1,001 things. There are not one or two solutions.

There is no panacea. There is no silver bullet that you can just shoot to get rid of this. You have to start as early as possible and think about this type of future. I do not think the Europeans are ever going to make it.

I do not think that Airbus A380 is a valuable airplane. It is a marvelous airplane, but it is arriving at the wrong time. They should have built it 20 years ago—and it would have been marvelous—when we were in the ascending curve of petroleum, not in the descending one, and not now that we have entered T1. I told them five years ago but naturally they did not want to listen at all, so they carried on. Now they have the problems and they are paying the penalties to all these companies already. It is still not commercial. I do not know why it will be commercial. I do not see a very bright future for that.

There is not too much innovation now; there is certainly a returning to commodities and exploration. I know of a company in Australia that invested very heavily and has just found a brand new copper mine. That is fabulous, because the copper they are going to extract in a few years is going to make enormous profits. If you put money into oil exploration—whether onshore or offshore—almost whatever you find is going to make money. These are types of investment. Or you could invest in agriculture but not ethanol or biodiesel.

Senator HUTCHINS—Yes, I was going to ask you about that—and I do not know if that is the point we are at, Madam Chair. You seem to be dismissive of alternative fuels.

Dr Samsam Bakhtiari—Yes. I do not think it is a very good idea. You can always try it on a small scale, but I think that energy wise it does not make much sense. Now we are in transition 1, I try to look at things from an energy point of view, not from an economic point of view. We do not know these days exactly what economics are. You have to think energetically and about the things you really need. For example, Western Australia—sorry, I am always coming back—

Really, I think Western Australia is doing all the right things. They were kind enough to have been the very first to invite me, and I am very happy for them. Western Australia does not have enough water and the water table is falling. It is a very big problem. They are putting in two desalination plants. They are obliged to put in two desalination plants. The desalination plant will need fuel—it will need gas—to run. In my opinion, they have no alternative so they are obliged to do this. When you are forced then you have to do it. I see that one problem in the future in Australia, much more important than the oil problem, is going to be water.

Your precipitation is going lower and lower. I heard that in June you had an average of only 14 millimeters of rain instead of the normal 108 millimeters. When I crossed from Perth to Sydney in the plane, over 3½ hours, what I saw was very dry. I think one of the problems is water. When you consider that every liter of ethanol or biodiesel will take between three and four liters of water then you start having a problem on the water side and on the energy side. I think you have to reconsider the economics of all of that in the near future.

Senator WEBBER—On that optimistic note—being a Western Australian—what do you consider the prospects for the future of gas as an alternative?

Dr Samsam Bakhtiari—Gas is the big issue, because we are not only having peak oil but, according to my prediction, in 2008 or 2009 we are also going to have global peak gas. Peak gas and peak oil are two totally different things because oil is a very special commodity. Gas is not the same because you cannot just put it in a ship. You either have to consume it locally, pipe it to some other country or put it in a LNG tanker. You have only those three alternatives.

Fortunately, Australia has an enormous amount of gas, and I believe this is going to become very handy because the peak for gas will be between 100 and 105 TCF global production in 2008-09.

Because of this peak in gas, you will have enormous problems all over the world but firstly in the US. The price of gas is going to go sky high. Today, it is incredibly cheap. Gas in the US has a threshold price today of between $7 and $8 per million BTU. This is going to go much higher. Every year you will have to add $2 to $3 to that price. The US price is going to affect all the other prices, and it has already begun in South-East Asia. All that will be linked through the LNG price that you will have, and the price of LNG is going to go very high.

I think that Russia does not have much gas anymore, although it is the largest producer in the world. I am very worried for the Europeans, and probably this winter you will see that the Europeans are going to have an enormous number of problems. If it is a harsh winter in Europe, you might have thousands of people dying. You had hundreds last year, but that was only the beginning. If this winter is harsh, you will have thousands dying because the Russians simply do not have enough gas to provide to Europe.

The Americans do not have enough gas. The Americans had the incredible chance to have the mildest winter last year in 100 years. If that had not happened, I do not know where the price of gas would be today. That was very lucky, and they now have enough reserves for the coming winter because all the storage depots are almost full.

That is a positive point, but the Europeans do not have that kind of chance, so you will have lots of problems. The price of LNG is going to go sky high because everybody will want LNG—in America, Mexico and Canada, which are in full decline; in all the South-East Asian countries and especially in China; and even in Europe. If the Europeans cannot get the Russian gas, their only solution will be to get LNG from wherever they can.

I can tell you that, with gas prices in the US being around $6 per barrel, you have LNG spot sales today of $12 per barrel—and we are in a normal situation. So, wait for the panic and you will have prices of $25 or $30 per barrel, and maybe much more than that. For one week in March this year the British did not have enough gas and the price of gas shot up to $258 per barrel oil equivalent. At first I thought I had made a mistake of one decimal place, but then I realized it was not $25.8—it was $258. For one week they were paying that price for their gas.

And we are in a very normal situation now; we are not at peak yet. So you can imagine how it is going to be when it is at peak, with the panic in all those countries because of the winter months. Just wait and see how it develops this winter in Europe.

Senator WEBBER—That is pretty dark.

Senator JOYCE—Going back to the biorenewable fuels issue, ethanol is being used in Brazil, and the terminal gate price of ethanol in Australia is around 80c a liter, so the reason that it is not being utilized is that the oil companies refuse to take it up. I have heard of a lot of what is going wrong but what we are really looking for is the solution; we are looking for the way out. Or is the world as we know it going to come to an end and this is just a prologue to the end? We need to find the solution.

I do not say ethanol is a panacea but it is certainly a mitigating circumstance. We need to take it up. It could run conjointly with a whole range of issues. I have two questions. Firstly, if ethanol is not the answer, can you explain why it is being used so prolifically in places like Brazil, and why the United States, Europe and Asia are all taking it on board as a component of trying to deal with the impending oil crisis—or the oil crisis that is already here, apparently? Secondly, what is your solution? What is the noble horizon we need to head towards in order to maintain our current standards of living and economies?

Dr Samsam Bakhtiari—Allow me to take those questions one by one. First I will address the alternatives. Brazil can use ethanol as a fuel because of its enormous amount of sugarcane. There is also the idea of self-sufficiency. People like the Brazilians and the South Africans always have a complex about self-sufficiency. If the South Africans have gone after GTL and have pursued coal to liquids, it is because they want to be self-sufficient. It was not an economic decision; it was a political decision. I think the Brazilians are in somewhat the same situation. For them, because of the enormous amount of sugarcane they have, it does make some sense, but I really doubt that it makes a lot of sense in terms of energy. And I believe that, come the day there is conflict between producing ethanol or biodiesel and producing food, food is going to win because, first of all, you have to eat.

There is another danger in Brazil. They are destroying the Amazon rainforest at the rate of some 20,000 square kilometers per year and on that land they are planting food crops—in enormous amounts. I think that this will also be part of the future: when the other countries do not have enough food, they will go back to the Brazilians. Brazil has become one of the largest exporters of food in the world, whether it be soy beans, sugar, coffee or beef. It is almost anything. They have the surpluses. The Americans are also trying to get the ethanol. It makes a small dent for the time being, but not a very big one. I think that it is only a question of a few million gallons. I do not know what percentage you have, but it is not very much.

All of the others are trying. I heard there are a few million in Australia, but it will not make a very big difference, so I am not very keen on these types of bio alternatives. As for your second question about what should be done, there are many things.

Everyone should study their own situation and see what can be done with the possibilities at hand, and not one thing, not two, but 10, 20 or 50. In my opinion, the first thing is to develop free public transportation, and that applies to everybody. Make it free from now. Even if it does not make very much economic sense now, it will in the future. Certainly, there is absolutely no doubt, as you go into transition 1, that free public transportation has to make sense. That is one of the things.

There are many other things that you can do. Plan; get new ideas from the grassroots. That is what Perth has been trying to do, to congregate 1,200 people from different walks of life in teams of eight, give them each a computer and have all of these ideas go back to the top for the selection of the ones they think are viable and useful. Have teams of elders. You have a fantastic man out there, Mr Brian Fleay. He predicted peak oil in 1995. It is extraordinary what he did. He was maybe the second person, after Dr Campbell, to have done that. And he did it almost from scratch. So people like this could have predicted that in 1995—in 1995 he wrote his book, so he must have predicted it in 1993 or 1994.

Senator JOYCE—Sorry, I have missed something. What is this team of elders?

CHAIR—What he is talking about is dialogue with the city.

Dr Samsam Bakhtiari—Yes, to have these people present their ideas and solutions, and then to build on that through a committee of elders. Or create steering committees through such people, and then get younger people to come in, very bright people, to start setting the priorities, because one day you will have to set priorities for the use of petrol. Have these in place soon, maybe in the next year or two. You will not need them in the next year or two, but have them in place already so that you are prepared. Get prepared for any eventuality. Have a special committee for that now. That is what I can see. I can advise that such things should be done this year or next year so that when or if the crisis really hits, then you have something to fall back on; you have a team that is already prepared and who has thought these problems through.

Thinking about these problems is very important, but there is something else. It is going to be very, very difficult to change the minds, to have the minds set on the new realities. For six generations we have been thinking one way—that is, that petrol is always there, petrol is not too expensive, oil products are not too expensive. We do not think about it. We do not think about fertilizers. We do not think about insecticides. Why? They are not that expensive, so it does not come into the day-to-day consideration. Petrol was always $1, not that much of a problem. We are used to that. The problem is going to be when it becomes $3 or $4 or $5. Then people will notice. Already at $1.40, some people are beginning to think about it, so when it becomes higher they have to change their minds, their way of thinking and their way of planning.

Senator JOYCE—But changing the way people think is a very hard task. That is not really a solution; it is nirvana. I want to go back to shale oil. They say there are three trillion barrels of shale oil equivalent in China and two trillion barrels in the United States, and I think we have 440 billion barrels of equivalent shale oil between Proserpine and Gladstone. Surely if the price of oil keeps heading north, this potential oil will begin to be exploited. Can you give me your impressions? You have gone through gas to liquid and coal to liquid. Do you have any opinions on the shale oil issue?

Dr Samsam Bakhtiari—Yes. There is a lot of shale—many thousands. There is an enormous amount of oil in there, but it is a very messy and difficult industry. In Canada, you have about 1.1 million barrels per day of synthetic crude oil produced, which is being exported mostly to the US, and which makes economic sense, especially at the prices of $74 to $75 per barrel. I think it costs them around $30 to $40 per barrel, so they are making some money. But I think it is limited, and I think the limits to that industry are, according to my prediction, roughly three million barrels per day. I cannot see Canada or the US together making more than three million barrels per day at the 2020 or 2025 horizon, investing enormous amounts of money. The shale oil industry is like the oil industry. You go to the best places first, naturally. And then, as you go along, it gets more difficult, it gets more expensive and it gets messier. I think you need roughly 2,000 ton of shale oil to make one barrel of synthetic crude oil. You can imagine, on an enormous scale, what that involves for the land and for everywhere else.

Already, at the level of 1.1 million barrels a day, the Canadian rivers are becoming so polluted as to have triggered alarm bells over Canada; the fish are dying and it will soon be impossible to clean up all the rivers. There are side problems for that as well. If one day we reach three million barrels per day I do not know what the situation will be there, but I do not think we can go further than three million; that is it.

There is also the heavy oil in Venezuela. Today there are 600,000 barrels of capacity. I do not think the Venezuelans can go beyond twice that amount, and with the government they have now they are stuck with their 600,000. I do not think anybody will be willing to invest in such expensive and difficult processes of exploitation. But even if the conditions were right I think they can go to 1.2. I really cannot see them going much further than that. So, yes, there is the potential but you have to transform the potential into production.

I forgot to tell you about the tar sands and the shale oil. All the heat you need for that comes from natural gas. You are spending 1.5 million BTUs for every barrel you are going to produce; that makes a lot of gas. What the Americans are beginning to tell the Canadians is, ‘We’d rather have this gas than anything else.’ So you have other problems that arise in this exploitation—at most, three million for tar sands and shale and one million for the Orinoco heavy oil. That makes a total of four million over the next 20 or 25 years. It will not change a thing for people—it is a drop of water—in the 81 we are facing now.

Senator JOYCE—Everyone knows about the price of fuel in Venezuela—I think you can buy a liter of petrol for 6c or 7c or something; it is still cheap—and we know what the price of petrol is on the streets in Australia. The organizations that control basically from the wellhead to the bowser are predominantly the same four major oil companies. We know that the price of Chevron has gone through the roof and that the price of Caltex domestically has gone through the roof, so they are making a far greater return on their asset. Can you say what you believe is their interest in the future—where oil prices are going? Can you also give some sort of indication about what sort of control the major oil companies have through the whole process of oil production as it stands today, from the oilwell to the bowsers? What form of control do they have over the total production of that product? What sorts of profits do you think they would intend to make in the future?

Dr Samsam Bakhtiari—I think that oil companies are like all corporations: they want to make profits, and they want to make the highest return for their shareholders. In 2005, they set new records in every country for profits. I think that in 2006 they will have far higher returns and record profits of, maybe, $50 billion for Exxon or something like that. It will be roughly the same, maybe $40 billion, for BP and a bit less, maybe, for Shell. Their shares will be reevaluated all the time as the price of oil goes up—and, as I told you, it can only go up.

But they control part of the system. You have many players. You have the national oil companies now, like Saudi Aramco, the National Iranian Oil Company and the national oil companies of Kuwait or Qatar. The oil companies control part of the system and it seems that their share of oil production is beginning to decline as well. It is still quite substantial, but it is also beginning to decline. Naturally, I think they are in it for the profits, and they control wherever they are from the wellhead all the way down to the retail. I think they get profit centres all along the way, and they are making enormous profits.

Senator JOYCE—The issue I am getting at is a transfer pricing issue. By the time the fuel gets to Australia, the same organization controlled entity has made its profit offshore. It is only the final stage. The purpose of Australia is just to move the product, not to make the profit. That would be a fair statement, wouldn’t it? Everyone talks about the terminal gate price of fuel as if that is the true price. It is a transfer pricing issue. By the time the fuel arrives in Australia, the same controlled entity has made the profit overseas. The purpose of Australia is to move the final product of petrol—not to make profit but to move product—because the profit has been made before the product actually arrives in Australia. The purpose of the Australian retail market is to move product, not to make profit. Therefore, it would be the intent of the oil industry to keep exclusively their product out there in the market and not encourage an alternative market apart from their product, which is oil.

Dr Samsam Bakhtiari—Yes. Certainly that is one of the goals of any corporation which makes a product: not to have rivals in the field and to try somehow to destroy or not let them in. Certainly you have this factor. I do not think that any oil company would be very happy to see an enormous boom in biodiesels, unless they could control it, which they cannot. So it will be certainly in their interest to see alternatives. Some oil companies want to get into solar and into other types of alternatives, but I do not think it is their job or their way of doing things. Somebody is going to do it much better than that.

Senator STERLE—I have two questions. If we were to take all the alternatives around the world—solar, hydro, gas, CTL, GTL and all those—how far off subsidizing our thirst for oil would that be? Could we supply the world’s demands? Nowhere near it?

Dr Samsam Bakhtiari—Very, very little. In any scenario and in any field for the next, say, 20 years: very, very little. It is a drop of water. If you make the calculation of increasing even by 100 per cent every single year, it is still a drop of water in solar, in biodiesel, in anything.

Senator STERLE—So there really is no alternative at this stage?

Dr Samsam Bakhtiari—No.

Senator STERLE—You spoke about Western Australia and the free public transport. I think it is going to send some ripples, but we really are faced in the world today—and I can only talk of Australia and my home state in particular—with some very hard decisions to be made.

Dr Samsam Bakhtiari—Yes.

Senator STERLE—It will bring in a lot of side issues of employment and revenue for governments—all sorts of things will pop up. If we are not fair dinkum in what we are leaving for the next generation—for our environment, our economies, our communities and our world— we really are in serious trouble. I pick up on that earlier comment you made about public transport and integrating public transport in trains and buses and whatever else there might be. It is not nirvana; it is a reality that we really are confronted with and we have to face.

Dr Samsam Bakhtiari—Yes. Provided that our models and our predictions are correct, this is exactly what you are going to face very soon. I do not want to be more negative, but I have started looking into T2, T3 and T4, and, my God, there are some things I started seeing down there that really send shudders up my spine. But I will spare you that today. Maybe that is for another time.

But I entirely agree with your statement. It should be done if only to get prepared so that if things go the wrong way you have something to fall back on—that you have some organization which you have already set up. As the crisis develops you develop this organization and make it ever bigger and more powerful to take care of the crisis.

There are companies which are employing 300,000 people in 140 countries who do not know a thing about peak oil. I do not know how they are going to react tomorrow.

The Europeans do not want to believe this reality. Next year they are going to start—they have already started—dying from the cold. According to my statistics, at least 900 people in eastern European countries froze to death last year. This year it is going to be double or triple that amount. This is the reality already. When there is a real crisis, how are they going to react?

The most important point is that governments do not to cause people to panic. The worst reaction to this type of crisis will be panic. If governments are not prepared there will be panic.

The more prepared governments and institutions are, the less panic you will have. Panics are very costly. I entirely agree with what you just said. There is still time to get prepared. We are not that much down the T1 slope. It will be a very slow development, so there is time.

Senator STERLE—Apart from what you saw in Perth with the free public transport around the CBD, are any other countries taking that lead?

Dr Samsam Bakhtiari—No, nobody. There might be a city or two, but I have not heard of any that have taken this drastic step already, and I have not seen such things at all. I can tell you that the future is to rails because rails are the most fuel efficient system. Would you like to see some figures on that? I can illustrate this for you on the whiteboard. This will give you an order of magnitude. At ton kilometers per liter of fuel, airplanes are between two and three, cars are between 10 and 22, trucks are between 65 and 85 and trains are around 320. So on these very simple figures, I think you can see that the future is to trains, but not trains that you build now; trains that you already have and that you are going to spend money on. I have heard that Sydney in 2006 is planning to spend half its budget on roads and other infrastructures and half on public transportation—it seems to be roughly fifty-fifty. I think that as soon as you change this percentage towards rail and public, fuel efficiency might begin to make some sense. I think you can see the future here.

CHAIR—It is not planes.

Dr Samsam Bakhtiari—Aeroplanes will be the first casualty in the system. They are already making losses. I do not know how they can carry on because the jet fuel is directly proportional to the increases in crude oil. It is not like petrol. Petrol is very much cheaper because you have hidden subsidies and you have the taxes naturally.

Senator MILNE—I have a strategic question about Iran’s contribution to global oil supply as well as to gas. What percentage of global reserves does Iran hold? If Iran were to stop supplying overnight for a geopolitical reason, what impact would that have on 81 million barrels used per day? In other words, T1 is assuming everything goes along smoothly. Let us assume there is a geopolitical crisis and Iran decides to stop supplying into that 81 million barrels a day. What impact would that have?

Dr Samsam Bakhtiari—At present I think that Iran is supplying roughly two million barrels of oil for exports. In the case of some geopolitical problem, you would have to take the two million out of the 81 million. That in itself would not be very harsh. Why? Because major consuming countries have their strategic petroleum reserves. They could start taking it out of their reserves. The latest data on the US SPR is that they have 688 million barrels in their reserves. I believe that the Japanese must have something around 120 million barrels. The Europeans, all together, have roughly the same amount as the Japanese. The Chinese are trying to build up a strategic reserve of roughly 40 million barrels, but they have not started yet. Maybe they hope for the price of crude oil to come a bit lower before they start. They could do that. What would be impacting heavily on the price is the psychological impact of any geopolitical happening, whether in the Persian Gulf or in South-East Asia. Because the leeway in T1 is extremely small—as I have tried to mention to you—the slightest impact geopolitically will have enormous consequences. If you had in Saudi Arabia, for example, or anywhere else, some two million to three million barrels of spare capacity—that you usually had before—then people would not be so worried about this geopolitical impact. But you do not have spare capacity anymore. I do not believe the Saudis have any spare capacity today, although they say they have a million or 1½ million barrels. They have no spare capacity. Nobody, in my opinion—neither OPEC, nor non-OPEC, nor the Russians, nor the Saudis—has any spare capacity. It would have an enormous impact. The price could go anywhere.

I will give you just one example of what we in NOIC did in 1975 after the first price shock, when the price went from roughly $2 per barrel to $11 per barrel. To find out what the real price was NOIC set up an auction, saying, ‘We have a few barrels and we are going to auction these barrels, so whoever is interested should give us a bid.’ Through the bids, we found out what the real price was. Some bids were up to $41. There were people who were willing, at $11 per barrel, to pay $41.

Then you have the problem that the national oil companies today in the Middle East and in OPEC are not what they were in the past. That is another problem. If there is a disruption, as long as the system is working, you have little problem. It just goes on and on. You see that in cases of earthquake or catastrophe. Once there is a catastrophe, it is very difficult to put it back to the way it was before. You see it taking 10, 12 or 15 years to bring it back. If you have geopolitical problems in the Middle East, it will be very difficult after the crisis has been fortunately somehow solved to put the system back to where it was before. For all these reasons—and because of the herd instinct and the panic that might follow—you could easily have prices doubling overnight. If somebody were smart enough to have an auction, you would see prices that even I could not imagine today.

Senator MILNE—You have just talked about the strategic ramifications of even two million barrels being taken out. Australia, as you know, has just signed up to long-term gas exports to China at a fixed price. Given what you have just said, that looks like an increasingly bad deal.

Dr Samsam Bakhtiari—At a fixed price?

Senator MILNE—That is what I said. Yes, I can see that you are not impressed by the brilliance of that and neither are we, but nevertheless the Prime Minister and Premier Wen both opened the terminal in China recently, celebrating Australia selling bulk gas at a fixed price—to the horror of much of our country. But there are some people who are saying that given what we are having with peak oil and approaching peak gas and given Australia’s wealth in gas and the importance of gas as a transition fuel Australia ought not be exporting gas, that we should be keeping gas as a transition fuel as transition 1, if you like, goes to the more difficult transitions 2, 3 and 4. What is your view about that?

Dr Samsam Bakhtiari—I cannot comment on political decision-taking by national politicians but I believe that gas is a very strategic commodity today and the more you have the better it will be. You will certainly see in the next few years, even during transition 1, cases of what they call in international law ‘force majeure’ and when you are confronted with force majeure then there are many decisions that you can take.

Natural gas is certainly a strategic commodity today and commodities are becoming very strategic. Commodities like coal and copper, which do not seem to be very strategic, are very strategic. Uranium, for example, is already costing $47 or $48, which is still very cheap. Uranium was $10 not so long ago when nobody was thinking about it, but I can see uranium going way over $100 a pound. All other commodities are important, but natural gas is a very strong commodity. You can always use it domestically in the long term and I can see that happening easily for gas.

CHAIR—What would you recommend that we invest in? As a committee we need to make recommendations against our terms of reference, so what would you suggest we recommend should be the focus of government to deal with this issue?

Dr Samsam Bakhtiari—It is a very difficult question but I would have one major recommendation, and Senator Siewert touched upon it: to create some kind of national steering committee of experts in the field, dependent upon this committee maybe, to study as fast as possible all these questions, then under the aegis of this steering committee maybe create a very small executive committee to study all that and the priorities so that you have something that is working. That is the only thing that I could recommend now—to study.

CHAIR—Where do ships fit in your chart? You have airplanes, cars, truck and trains. Where does sea transport fit in?

Dr Samsam Bakhtiari—Ships are way down. Shipping is marvelous, in terms of energy efficiency, whether it be cargo or container ships. That is marvelous. Shipping is very good.

CHAIR—One of the scenarios into the future is likely to be that there will be less air travel and more ship transport and cargo.

Dr Samsam Bakhtiari—Yes, certainly. Airplanes in transition 1 are at risk. They are already at risk today and they are going to be much more at risk than that. Air travel will have to be more and more reduced in the future and it is going to be more and more expensive. Shipping will come back because the factor of time is not going to be as important as the factor of energy efficiency.

CHAIR—If I understand you correctly, you are saying that we should be investing now as a matter of priority in public transport.

Dr Samsam Bakhtiari—Certainly, yes. Right now. As soon as possible. Start tomorrow on public transport. It is better than starting the day after tomorrow. You also have the problem that, at some stage, you will not be able to invest that easily. The further we go down the line, investment gets more difficult. People who think they will undertake projects in 10 years time do not realize the problems of making these projects. I will give you two examples. The Europeans have woken up to this lately. They now want to bring gas from the Persian Gulf to Europe, but that is a 20-year project and it will cost at least $25 billion. It is not feasible today. They are dreaming. And even if they think of putting a gas pipeline from Iran to Pakistan to India, they are also dreaming. You cannot do that today. It is too late. You could have done that as long as you were on the curve, but when you are on the top the projects have to be smaller and smaller and you have to start them as soon as possible, and not get caught up by the events. It is a different way to do things.


Byron King, who writes the “Whiskey & Gunpowder” column, wrote Bakhtiari to ask him to further explain his thinking on T! through T4. Here’s what he said:

“The four Transition periods (T1, T2, T3, and T4) will roughly span the 2006-2020 era. Each Transition [will] cover, on average, three to four years.

The major palpable difference between the four Ts is their respective gradient of oil output decline – very small for T1, perceptible for T2, remarkable in T3, and rather steep for T4. In fact, this gradation in decline is a genuine blessing for those having to cope and adapt.

It should be borne in mind that these four Ts are only an overall theoretical structure for future global oil output. The structure is thus so orderly because [it is] predicted with ‘Pre-Peak’ methods, ‘Pre-Peak’ assumptions, and [a] ‘Pre-Peak’ set of rules.

The problem is that we now are in ‘Post-Peak’ mode, and that none of [the] above applies anymore.

The fact of being in ‘Post-Peak’ will bring about explosive disruptions we know little about, and which are extremely difficult to foresee. And the shock waves from these explosions rippling throughout the financial and industrial infrastructure could have myriad unintended consequences for which we have no precedent and little experience.

So the only Transition we can see rather clearly (or rather, we hope to be able to comprehend) is T1. It is clear that T1 will witness the tilting of the ‘Oil Demand’ and ‘Oil Supply’ scales — with the former dominant at the onset and the latter commanding toward the close (say, by 2009 or 2010).

But even during that rather benign T1, the unexpected might become the rule and the orderly ‘Pre-Peak’ rapidly give way to some chaotic ‘Post-Peak.

In any instance, the overall structure of the ‘Four Transitions’ is a general guideline for the next 14 years or so — as far as global oil output is concerned. In practice, reality might prove to be worse than these theoretical Transitions; but certainly not better.

I also agree that at the junction of two Ts, there should be some kind of a milestone. For example, at the close of T1, Supply should totally dominate Demand…I am toying with [the] idea, very preliminary, that close of T2 could be OPEC [oil production] surpassing non-OPEC [oil production], although OPEC died in 2004”.

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Why U.S. Is Running Out of Gas (Time magazine 2003)

Donald L. Barlett & James B. Steele. July 21, 2003.  Why U.S. Is Running Out of Gas. Time Magazine.

Inflated oil prices and natural gas shortages are wiping out jobs and savings, thanks to three decades of bungled energy policy. Get ready for more bungling.

If all goes according to plan, the U.S. Senate in the next few weeks will follow the House and approve the latest in a long line of national energy policies. This one incorporates a favorite initiative of President George W. Bush’s—the hydrogen-powered car. In his State of the Union address in January, the President proposed “$1.2 billion in research funding so that America can lead the world in developing clean, hydrogen-powered automobiles.” As the President explained, his goal was “to promote energy independence … in ways that generations before us could not have imagined.”

Democrats joined euphoric Republicans in signing on to the proposal. “The supply of hydrogen is inexhaustible,” Senator Byron Dorgan, North Dakota Democrat, told his colleagues. “Hydrogen is in water. You can take the energy from the wind and use the electricity in the process of electrolysis, separate the hydrogen from the oxygen and store the hydrogen and use it in vehicles. The fact is, hydrogen is ubiquitous. It is everywhere.”

Was this a rare instance of the two parties working together in Washington for the good of the country? Far from it. They’ve been doing this energy dance off and on for 30 years.

At the time of the first energy crisis, in 1974, President Richard M. Nixon put forth Project Independence to end American reliance on foreign oil through a series of energy programs, among them “hydrogen-fueled vehicles” that could be developed “to enable a shift away from oil.” Takeoff date for the new technology: 1990. Members of Congress were enthusiastic about the hydrogen car then too. “Hydrogen offers us great potential as a fuel for the future,” said Representative Charles Vanik, Ohio Democrat. Representative Robert Wilson, a California Republican, was equally excited: “We can now look forward to running our automobiles on water.”

But hydrogen power went nowhere then, just as it went nowhere when it was trumpeted nearly a century ago. It will probably go nowhere today, for many reasons, most notably a chronic case of short attention span among American politicians when it comes to energy policy. With great fanfare, lawmakers and Presidents—both Democrats and Republicans—announce sweeping plans to end or ease American dependence on foreign oil and find other stable sources of energy. When the headlines and television sound bites fade away, however, they scrap the programs, which then are often reintroduced to an unsuspecting public as new in later years by another generation of lawmakers and Presidents. But changing anything as deep-seated as America’s habits of energy use calls for consistency and follow through, so the failure of Washington to stick with hardly any of its plans has wound up making the U.S. more dependent than ever on foreign sources.

Now Congress is about to enact yet another doomed energy policy that promises more of the same. Take hydrogen. Ideally, the gas would be extracted from water using fusion technology. But that won’t be available for decades. In the interim, a substitute energy source would be used—natural gas. Yes, the same natural gas already in short supply.

Then there’s coal. The Senate bill would authorize spending $200 million a year to study and develop “clean coal” technologies. But that’s a substantial comedown from the billions spent in the 1970s and 1980s to encourage development of an industry that would turn coal into oil and synthetic gas, enabling the U.S. to dramatically curb imports. It never came about.

The Senate bill also contains an assortment of goodies. It would hand out $3.5 billion to revive America’s moribund nuclear power industry—even though the last order for a plant that actually went online was placed in 1973. It would parcel out nearly $10 billion in tax breaks and subsidies to oil and gas companies that will not erase falling production but instead enrich oilmen and investors. At the same time, the President’s proposed budget slashes spending on wind research by 5.5%, zero-energy buildings by 50% and biomass by 19%. To add to the insult, the Administration took the money to print its 170-page 2001 National Energy Policy out of the budget for renewable fuels.

This comes at a time when Americans are heading into their first big energy squeeze since the 1970s: a shortage of natural gas, the invisible resource used to heat homes, fuel kitchen appliances, generate electricity and manufacture many of the chemicals we use. The shortage has triggered a sharp rise in prices that is likely to exact a heavy toll on low- and middle-income Americans, especially those living on fixed incomes. Home heating bills last winter more than doubled in some areas, and they are expected to go up at least another 20% this winter. Electric bills also will spike because generating plants are increasingly gas-fueled. And in places like Louisiana, where the petrochemical industry makes up a big part of the local economy, the shortage is causing a loss of jobs, with at least 2,000 layoffs so far. The entire industry may be forced to move offshore over the next few years if there is no relief.

Beth Wilson, a stay-at-home mom in Hobart, Ind., 35 miles southeast of Chicago, is still seething over last winter’s bills from Northern Indiana Public Service Co., known as NIPSCO. In March 2002, Wilson paid the utility 33(cent) a heating unit for the family’s two-bedroom home. By March of this year, the price had shot up to 86(cent), an increase of 161%. If the price of new cars had risen at the same pace, a midrange Ford Taurus would sell for $54,000 today. Says Wilson: “I never turn my heat up past 68. I didn’t want to turn my ceiling fan on.” (NIPSCO also furnishes her electricity.) “How can other people on fixed incomes pay if I can’t?”

For consumers, the second part of this one-two punch is exaggerated oil prices. While the world is swimming in crude oil, it already trades at an inflated price of $30 a bbl., a level essentially dictated by Saudi Arabia with the approval of the U.S. government. This translates into swollen prices for gasoline, home heating oil and other petroleum products. What’s worse is that because of Congress’s three decades of fumbled energy legislation, Americans have become more vulnerable than ever to an interruption in foreign supply that would truly send prices into orbit and cripple the U.S. economy. More than 53% of America’s daily consumption of oil and petroleum products comes from foreign sources, compared with 35% in 1973.

Why are Congress and the White House responsible? As part of a long-standing ritual involving Democrats and Republicans, lawmakers and Presidents have devised energy plans that add up to no plan at all—not deliberately but by default. In pursuit of different agendas, competing interests tend to cancel one another out over time, leaving the nation with no coherent direction on energy. Lawmakers launch programs to develop alternative- energy supplies but later quietly cut or eliminate the funding so there are no realistic alternative sources.

They enact legislation offering incentives to stimulate crude-oil production in the U.S., when the politicians know—or should know—that the programs will not do so in any significant way. They encourage utilities, businesses and industries to shift to natural gas, then fail to ensure sufficient supplies of the fuel. The lawmakers refuse to make the tough choices on energy supplies and consumption, while they cater to the demands of campaign contributors and special interests. Worst of all, when politicians craft a conservation program that actually works, they abandon it. As a result, after three decades and dozens of energy bills, Congress has helped position Americans so they may be closer to an energy crisis than at any time since the oil shocks of the 1970s. And this time, the U.S. is finally beginning to run out of domestic oil and easily recoverable natural gas. Here is how it happened:

NATURAL GAS: THE CONGRESSIONAL FLIP-FLOP. A quarter-century ago, Congress enacted the Powerplant and Industrial Fuel Use Act, which banned after 1990 the burning of natural gas by power plants to generate electricity. The reasoning: because that fuel was in short supply and was most widely used to heat homes—it goes to half of all residences—it should be preserved for that purpose. Pete Domenici, the Republican Senator from New Mexico, told his colleagues that year, “Almost since we found natural gas we have been busy finding ways to abuse it, waste it, literally throw it away on uses that we are now finding are absolutely the wrong thing to do, and basic among those that are wasteful are … the use of natural gas to generate electricity.”

As the years slipped by, Congress reversed course. Prodded by the Reagan Administration, lawmakers repealed the ban in 1987 and opened the door to construction of natural gas-guzzling power plants. Three years later, they amended the environmental rules to discourage the burning of coal—America’s most plentiful fuel—to produce electricity. Predictably, the generation of electricity with natural gas, which had fallen 17% from 1979 to 1987, has shot up 151% since then, reaching a record 686 billion kWh last year. Nearly a fifth of all U.S. electricity is now generated with natural gas, and 88% of all new generating plants built in the past decade use the fuel. Meanwhile, U.S. production of natural gas has remained stagnant at 19 trillion cu. ft. a year, about the same as a decade ago. But the U.S. consumed 22 trillion cu. ft., up 8% during that time. Because natural gas moves more efficiently by pipeline than tanker (for which it needs to be liquefied), the difference comes mostly from Canada. Now the Canadians are running low, and exports to the U.S. are expected to be flat, or possibly even decline.

During these same years, Congress prohibited drilling for natural gas offshore for environmental reasons.

Earlier, in the 1970s, it had studied and then rejected building a natural-gas pipeline from the Arctic, where there are substantial gas reserves, south through Canada to serve the U.S. The worry was that Canada would hold the U.S. economic hostage.

This time around, the energy bill calls for taxpayer subsidies to build a needlessly longer and far more costly pipeline that follows a roundabout path. Called the Southern Route, it starts at the North Slope and heads south along the Alaskan highway before turning east into Canada. A far more direct path, called the Northern Route, would have cut across the north coast of Alaska and hooked up in Canada with the recently announced Mackenzie Valley pipeline. Both lines ultimately would feed into trunk lines in Alberta and serve the U.S. market.

Why the meandering route? In 2001 the Alaska state legislature enacted a law blocking the cheaper northern pipeline. Lawmakers wanted a pork-barrel project to keep construction and supplier jobs in the state. State representative Jim Whitaker, a Fairbanks Republican who sponsored the measure, summed up the state’s attitude: “The legislature has a responsibility to ensure that Alaska gas goes to market in a manner that is in the maximum best interest of the people of the state of Alaska.” Congress has agreed. In the years that it will take North Slope gas to reach the lower 48 states, natural-gas prices will keep moving up. In the short run, high temperatures this summer could produce spikes in prices and regional brownouts. In June natural gas sold for an average of $5.83 per 1 million btus, up 169% from the same week in 1998. Higher prices already are taking their toll on energy-dependent industries, like those that produce ammonia, the key ingredient in fertilizer. In June 1998 the Louisiana Ammonia Producers trade association had nine corporate members with 3,500 employees. Today it has one, CF Industries. “We’ve lost 2,000 employees,” says Jim Harris, a spokesman for the producers, who accounted for 40% of America’s ammonia output. “It’s been devastating. The high natural-gas costs have been the overwhelming reason plants have closed. It’s completely depressed the whole area.”

Other businesses have sounded the alarm, among them a consortium of nearly two dozen companies, including pharmaceutical makers (Abbott Laboratories), brewers (Coors), chemical companies (Dow) and makers of building materials (Owens Corning). They have urged President Bush “to declare war on high natural-gas prices.” Heading a list of recommendations: “Maximize use of other energy sources for power generation.”

At the same time that Louisiana factories are laying off workers because of gas prices, the U.S. is shipping gas to Mexico to generate electricity there. While the volume is still comparatively small, exports nonetheless have swelled 674% over the past seven years, to 263 billion cu. ft. last year. El Paso Energy, for one, pipes gas directly to the new Samalayuca II power plant, about 25 miles south of Ciudad Juarez. It serves 1 million people and some 300 factories south of the border. The potentially chronic natural-gas shortage and its impact on the economy and employment have even Alan Greenspan worried. Talking about the many industries dependent on natural gas, the Federal Reserve chairman told the Senate Energy Committee last week that “we do see the obvious loss of jobs … because it has made us largely uncompetitive in a number of industries in which gas is a critical input.” He also saw little hope that prices would fall. “We are not apt to return to earlier periods of relative abundance and low prices anytime soon,” he said.

LIQUEFIED NATURAL GAS: BACK TO THE FUTURE. To meet the surging demand for natural gas in the short term, Greenspan does see a solution: liquefied natural gas (lng). He has told Congress that “given notable cost reductions for both liquefaction and transportation of lng, significant global trade is developing. And high gas prices projected in the American distant futures market have made us a potential very large importer.”

Translation: Because natural-gas prices are going up—and are going to stay up—it’s now time to bring in more expensive lng from the Caribbean, the Middle East, Africa and possibly Russia. To import natural gas, it must be chilled to minus 260(degree)F, which converts it to a liquid and reduces its volume. An amount that would normally fill a beach ball can fit inside a Ping-Pong ball. When the liquid arrives at terminals in the U.S., it is slowly warmed up, returned to a vapor form and sent through pipelines.

The U.S. tried to build an lng supply line once before but, in typical fashion, abandoned it. During the last natural-gas shortage in the 1970s, when lawmakers voted to ban its burning to generate electricity, they also encouraged the establishment of the lng industry with taxpayer- guaranteed loans and grants. Special tankers, the most expensive ships in the world at the time, were built along with four terminals and re-gasification facilities at Cove Point, Md., near Baltimore, as well as in Georgia, Louisiana and Massachusetts. The first lng shipments arrived in 1978. In April 1980, Morris Udall, the Democratic Representative from Arizona, told the House that a Congressional Office of Technology Assessment report concluded that lng imports, “if encouraged, could double by 1990 and meet as much as 7% to 13% of U.S. natural-gas needs.” It was not to be. A series of events conspired to derail the policy. The Algerians, who shipped the lng, jacked up the price. The Carter Administration and the natural-gas and pipeline companies balked at paying more. After months of fruitless negotiations, the deal unraveled. The ships went elsewhere. Cove Point and two other plants closed. It was the end of the lng experiment. But the shortage has triggered a scramble to reverse course. Today Cove Point is being expanded and will reopen soon. The plants in the three other states are already open, and plans are on the drawing board for two dozen more.

OIL PRODUCTION AND IMPORTS: PROMISES, PROMISES. In 1973, with the country importing 6 million bbl. of crude oil and petroleum products daily, President Nixon pledged that by virtue of his Project Independence “in the year 1980, the United States will not be dependent on any other country for the energy we need to provide our jobs, to heat our homes, and to keep our transportation moving.”

He advanced a catalog of energy proposals that covered everything from drilling on the outer continental shelf to building more nuclear power plants, from expanding the use of coal to conducting research on potential new sources. In the end it didn’t work, and the U. S. failed to come close to his goal of energy independence. While the yearly numbers rose and fell, by 1980 net oil imports had increased 400,000 bbl. a day over 1973.

After the second oil shock hit America in 1979, Washington’s wandering attention was focused again on energy. Following Nixon’s lead, President Carter pushed development of synthetic fuels as part of his strategy to slash imports. When he signed the Energy Security Act into law in June 1980, Carter said it would “encourage production of 2 million bbl. a day of synthetic fuels by the year 1992.” That didn’t work either: synthetic-fuel production ended up slightly in excess of zero, and oil imports totaled 6.9 million bbl. a day that year.

Throughout the years, in one energy debate after another, lawmakers and Presidents insisted that if they handed out enough incentives, U.S. oil production would rise, and there would be less need for imports. In each instance, legislation was accompanied by extravagant forecasts not only by lawmakers but by energy-company officials as well. In 1974 policymakers predicted that U.S. oil production “could increase to more than 17 million barrels a day, which is more than sufficient to be at zero imports by 1985.” The Reagan White House shared the optimism. A spokesman said that “the ranges that any reasonable person is considering include zero (imports) by 2000.” By that year, however, imports were at their highest level ever, and domestic production had declined to levels not seen since 1950. Now President Bush has his own plan to jump-start oil production.

He wants to begin drilling in a portion of the 1.5 million-acre arctic coastal-plain area of the Alaska National Wildlife Refuge (anwr), which covers a total of 19 million acres. According to the White House, the President “believes that opening this small area to environmentally responsible exploration would provide the resources necessary to reduce our dependence on foreign sources of oil and provide for greater energy security.”

The reduction would be modest. Even if the ANWR would yield 1 million bbl. daily of crude oil, as suggested by the President, by the time pipelines are built and production gets under way, the oil would displace less than 10% of U.S. imports. And there are no guarantees for the 1 million bbl. In the early days of the North Slope project, politicians predicted that consumers would get 3.8 million bbl. of crude oil daily out of Alaska “by the end of the century.” Instead production hit a high of 2 million bbl. in 1988—the only year at that level— and then began to trail off, dropping to 984,000 bbl. last year.

To make matters worse, the U.S. is confronted with a refinery gap—just as it was in the 1973-74 oil crisis. The U. S. consumed 19.8 million bbl. a day of petroleum products last year, but its refineries could process only 16. 6 million bbl. of crude oil. The 3.2 million barrel difference was made up through imports of finished products like gasoline and jet fuel, which are even more susceptible to supply disruptions than crude oil.

Following the energy debacles of the 1970s, the industry began adding refinery capacity. By 1980, it could process all the crude oil required to meet demand, but that lasted only until 1985. The gap has been widening ever since.

CONSERVATION—BUT NOT FOR REAL MEN. After the 1973-74 energy crisis, when gas stations closed on Sundays and motorists waited in lines for hours to fill up, Congress enacted a series of tough conservation measures. The Energy Policy and Conservation Act of 1975 imposed stringent mileage requirements on automakers—an average of 27. 5 m.p.g. on passenger cars by model year 1985—to curb gasoline consumption. It worked.

In the decade before the act’s passage, gasoline consumption had risen 48%, to 6.5 million bbl. a day in 1974. In years to follow, even with millions more cars on the highways, consumption remained largely unchanged.

Beginning at 7 million bbl. a day in 1976, demand went up and down in a narrow range and by 1991 was at just 7. 2 million.

During the 1980s, as it became clear gasoline conservation was working, aided by a nasty recession, one energy forecast after another anticipated ever better mileage. The American Petroleum Institute, swept up by auto-industry fervor, announced in September 1981 that “forecasts of fuel efficiency for new cars now exceed those mandates (27.5 m.p.g.), suggesting an industry-fleet average of 30 m.p.g. by 1985.”

Not exactly: this year the average is still 27.5 m.p.g. for vehicles officially labeled as passenger cars, but for the entire fleet of vehicles, including suvs and trucks, it is much worse. The best overall fuel economy of 22.1 m.p.g. (for U.S.- made vehicles) was achieved in 1987-88. Aside from an occasional upward tick, that figure has inched steadily downward, to 20.4 m.p.g. last year.

That’s because Congress lost interest in conservation and failed to keep the pressure on the car companies. Lawmakers refused to set new mileage goals. Worse, they excluded from the existing requirements light trucks and suvs, the fastest-selling vehicles and the ones that use the most gasoline. Contributing even more to the trend, they extended an extraordinary tax benefit to the gas guzzlers, so drivers who used a vehicle for work could write off the cost on their tax returns—even as much as $38,200 toward a new Hummer H2 that gets only 10 m. p.g. As might be expected, consumption rose 1.5 million bbl. a day over the past decade, to 8.8 million last year. But for owners of pricey vehicles like the Hummer, it keeps getting better. The tax-cutting bill signed into law in May expanded the write-off to $100,000.

For its part, the Bush Administration is dismissive of serious conservation. Vice President Cheney, who headed an Administration task force to devise an energy strategy—a group whose work was carried out in secret and whose papers remain secret—expressed the attitude two years ago in a now infamous way: “Conservation may be a sign of personal virtue, but it is not a sufficient basis for a sound, comprehensive energy policy.”

Representative Raymond Green, a Texas Democrat, was more blunt when the House earlier this year beat back an attempt to raise mileage standards. While allowing that he was for “better gas mileage,” said Green: “We come from a big state that wants big trucks and big cars.”

ALTERNATIVE ENERGY: HERE COMES THE SUN, AND THERE IT GOES AGAIN. No alternative-energy source has captured the imagination of lawmakers and Presidents like the sun. For three decades, solar energy’s champions on Capitol Hill have insisted that the harnessing of this free and unlimited supply of energy was just around the corner. Representative Charles Mosher, Ohio Republican, was among the ardent supporters in 1974. “Much of the technology needed to utilize this nonpolluting source of power is nearly at hand,” Mosher said in a speech on the House floor. “In fact, the consensus is that there are no major technical barriers to the widespread application of solar energy to meet U.S. energy needs.”

With that notion in mind, President Carter in 1980 pushed legislation that he said would help “us to reach our goal of deriving 20% of all the energy we use by the end of this century directly from the sun.” The forecast proved breathtakingly overreaching. Last year solar energy accounted for about seven one-hundredths of 1% of all U.S. energy consumption. The Bush energy package includes a $2,000 tax credit for individuals who buy and install photovoltaic or solar water-heating equipment in their residences.

Nothing new here: the government has been selling solar for years with generous tax incentives. Most of the public, though, isn’t buying. And people who do often have memorable experiences. A quarter-century ago, the owners of a 13-story, 64-unit co-op at 924 West End Avenue on New York City’s Upper West Side erected a steel framework on the rooftop, welded it to the building’s steel beams and attached 117 solar-collector panels.

Water heated by the sun flowed through pipes into a 5,000-gallon storage tank in the building’s old coal bin and from there into the building’s hot-water system. The project was funded in part with a $112,000 federal grant. Today the solar experiment is long gone. A building workman told Time that the collectors behaved like sails, swaying back and forth so much that water leaked into apartments below. It cost several million dollars to repair the roof, he said.

But solar is hardly the only alternative energy source that has failed to live up to the promises of its congressional supporters. Just as both parties have embraced President Bush’s hydrogen initiative, they have also signed on to another of his long-shot proposals, one he says will provide “clean, safe, renewable and commercially available fusion energy by the middle of this century.”

Unlike nuclear fission, the splitting of uranium atoms that powers nuclear reactors, fusion joins hydrogen atoms to unleash far more energy. The trick is to control the fusion reaction to generate electricity. It has been an elusive goal for half a century and probably will be for many decades to come. Even so, according to the President, “commercialization of fusion has the potential to dramatically improve America’s energy security while significantly reducing air pollution and emissions of greenhouse gases.”

That’s about what President Carter envisioned more than 20 years ago—albeit with a different timetable—when he signed into law the Magnetic Fusion Engineering Act in 1980. Said Carter: “Fusion power offers the potential for a limitless energy source with manageable environmental effects.” The law established as a national goal the successful operation of a magnetic fusion-demonstration plant in the U.S. by 2000.

The cost was put at $20 billion. As Congress is given to do after announcing grand projects, it slimmed down appropriations to less than $10 billion. U.S. researchers eventually teamed up with colleagues in several countries, but in 1998 Congress pulled the plug on the consortium, contending that it was too expensive.

President Bush, however, reversed that decision. The White House announced last January that the U.S. “will join … an ambitious international research project to harness the promise of fusion energy, the same form of energy that powers the sun. America will join negotiations with Canada, Europe, Japan, Russia and China to create the International Thermonuclear Experimental Reactor (iter). This will be the largest and most technologically sophisticated fusion experiment in the world.” Actually, it’s the same consortium to which the

U. S. had been party in the 1990s and from which it then bailed out.

So it is that the U.S. is likely to be faced with recurring oil and natural-gas crises for some years to come. Their duration and severity remain to be seen. But volatile prices—as with gasoline during the Iraqi war, natural gas last winter and electricity in 2000—are all but guaranteed. The result is a hidden tax of tens of billions of dollars on American consumers. Just how many billions depends on a catalog of variables ranging from the harshness of the weather to unfolding events in the Middle East. More important, it depends on whether Congress and the White House, Democrats and Republicans, come up with a thoughtful energy policy that imposes tough conservation and efficiency measures, promotes research to develop one or two realistic alternative energy forms in commercial quantities and encourages production from a mix of existing energy sources. But none of this will be worth the effort unless the U.S. sticks with a plan long enough for it to pay off.

—With reporting by Laura Karmatz/New York and Eric Roston/Washington, with research by Joan Levinstein/New York

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House Representative Stewart Udall (Arizona) 2005 Time to discard 50 years of energy myths

Stewart Udall and Matthew R. Simmons. Nov 20, 2005. Time to discard fifty years of energy myths. Arizona Daily Star.

Stewart Udall was elected to Congress more than 50 years ago, and served as secretary of the Interior during a vast expansion of the nation’s wilderness areas. For the last 35 years, Matt Simmons has been one of the world’s leading energy investment bankers, while writing widely on energy trends. One of us is a Democrat, one a Republican, but both of us believe that the nation can no longer afford fanciful, indulgent, “Alice in Wonderland” energy policies that place our economic prosperity and national security at risk. Stewart Udall, a former Arizona congressman, served as secretary of Interior in the Kennedy and Johnson administrations. Matthew R. Simmons is chairman of Simmons & Co. International, an energy investment banking firm. His recent book, “Twilight in the Desert,” is an investigation of Saudi Arabia’s oil industry.

This summer’s hurricanes have triggered the most serious energy emergency in the nation’s history. With gasoline, natural gas and heating oil at near-record highs, many families face the chilly prospect of much higher energy bills in the future. The entire economy is at risk, but airlines, tourism, farmers, small business, seniors and the poor are particularly threatened.

Katrina and Rita ravaged the Gulf of Mexico’s petroleum infrastructure, but a larger, more daunting crisis was already on the horizon.

To craft an intelligent response, we must begin by discarding 50 years of energy myths.

Because our continent had huge reserves of oil, coal and natural gas, Americans have nurtured a set of energy illusions that have now come home, in biblical fashion, to haunt us.

The most dangerous myth is that cheap energy is our birthright, that the well will never run dry.

This illusion was born in the early 1950s, when U.S. oil fields provided two-thirds of the planet’s petroleum. Oil was so abundant that domestic producers were required to curtail production to prevent a price collapse. For lack of a market, large plumes of natural gas, now our most precious heating fuel, were flared into the sky.

And atomic energy, the new kid on the block, promised an infinite supply of almost-free electricity. In this euphoric moment, our nation began to fashion a new way of living unlike anything ever seen on the planet.

For a half century, we designed skyscrapers, autos, cities and houses on the assumption that energy would remain inexpensive. In the ’50s, we invented the suburb, the shopping center and the Interstate Highway System. In the ’60s we bought Mustangs. In the ’70s we visited the moon, and in the ’80s we built the world’s most powerful military. Between 1950 and 2005, the country’s population doubled and the economy grew sixfold.

Although advanced technology, superb engineering and Yankee ingenuity played vital roles, it was cheap energy that invented U.S. prosperity. Even at today’s prices, a dime buys enough electricity to lift a pickup truck 500 feet in the air. A gallon of gasoline contains as much energy as that expended riding a bicycle across the United States or hiking 300 miles across Arizona.

Because energy was affordable and abundant, we learned to consume enormous quantities. In recent decades our “burn rate” has been the equivalent of 100 pounds of coal per person-day. Americans now consume their body weight in petroleum products each week.

Energy may be a sliver of gross domestic product – but try running the rest of the economy without it. Energy, not money, is the original currency, the source of all wealth. We share this view even though we come from vastly different backgrounds.

The coming months will pose an enormous challenge, with the highest heating bills in U.S. history and the prospect of natural gas rationing. It is a time for bold, courageous leadership, but to date the political response can be summarized as “pray for a mild winter.” Although the near-term challenges are dwarfed by those of the coming decade, our leaders continue sleepwalking.

Katrina showed us what happens when you unplug modern energy: Civilization unravels. Because energy is the prerequisite for economic prosperity, social stability and environmental well-being, we must discard the dangerous myths of the past and embrace the momentous challenges of the future.

U.S. oil production peaked 35 years ago and no amount of drilling can turn back the clock.

  • Depletion rates in natural gas wells have reached alarming levels.
  • The nation’s energy workforce and infrastructure are aging.
  • No new refineries have been built in 30 years.
  • Our population is increasing by 30 million each decade.
  • Chinese oil demand is surging.
  • Finally, the cornucopian assumption that the Middle East holds unlimited amounts of oil is false.
  • Approximately three dozen aging fields produce most of that region’s supply. The thesis that the Saudis could open the tap as wide as necessary is appealing but fictitious. As a result, world oil production is likely to peak within the next decade, if not sooner.

In short, the era of cheap energy is over. Where to from here?

More drilling? Of course we will need to do more drilling, if only to stay where we are. But research shows that more than half the energy used in this country is lost in inefficient power plants, buildings and cars.

Efficiency must be the rallying call. Conservation is, well, conservative, the single most patriotic thing we can do. Longer term, we’ve got to acquire more accurate information about the true state of the world’s aging oil fields, reorganize our work patterns, modernize our shipping and transportation systems, refurbish our aging energy infrastructure, weatherize tens of millions of buildings, and exponentially expand the production of domestic biofuels, wind and solar power, while replacing 225 million automobiles and light trucks with far more efficient vehicles. This scope of work is not optional: It is an urgent matter of national preservation.

If we ignore the current crisis or misread its message, the world as we know it is likely to become a far darker place for our children.

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James Howard Kunstler posts

[ As I re-read Kunstler posts I will add more excerpts and/or links.  I encourage you to read these brilliant posts in their entirety at http://kunstler.com/clusterfuck-nation/ for their wonderful humor, language, and the full logical chain of discourse, which excerpts disrupt. Alice Friedemann www.energyskeptic.com]

Excerpts from posts by James Howard Kunstler

November 16, 2015. There are no Safe Spaces.

I’m not persuaded that world opinion will ever “make sense” of the Paris attacks. The non-linear rules the day. So-called Fourth Generation Warfare works because there are so many small arms loose in the world and any band of maniacs with a few machine guns and a pound of Semtex plastic explosive can create the equivalent of a war zone in a given locality…..None of this is good, either, for a global economy constructed around long, hyper-complex, and fragile chains of obligation, the most critical being global finance and global energy lines. You think the Paris attacks were bad? Just wait until a few maniacs lob some explosives at the giant Ras Tanura oil refinery and shipping terminal on Saudi Arabia’s Persian Gulf coast. Imagine if that happens in the middle of winter, when Europe is freezing. Do you suppose the Big Brains in the Pentagon think about that? The West itself, including America, is a circus of soft targets. The softest ones are between our ears.

November 9, 2015. The Leviathan.

The economic picture manufactured by the national consensus trance has never been more out of touch with reality in my lifetime. And so the questions as to what anyone might do can hardly be addressed. How can I protect my savings? Who do I vote for? How do I think about where my country is going? Incoherence reigns…The Federal Reserve has morphed from being a faceless background institution of the most limited purpose to a claque of necromancers and astrologasters, led by one grand vizier, in full public view pretending to steer a gigantic economic vessel that has, in fact, lost its rudder and is drifting into a maelstrom.The Fed now finds itself in a trap of its own making. Having so interminably yapped about the interest rate hike, the central bank will have to put up or shut up in December… The truth is, this phony baloney economy can’t withstand even a measly quarter-point benchmark interest rate hike [which] would blow up the operating models of Fannie Mae and Freddie Mac, the buyers of home mortgages who are keeping the construction industry on life support, as well as the parallel rackets in securitized auto and student loans. Imagine all the derivatives bets that would go south. In reality, the Fed knows that it will have to shovel more ZIRP money into the debt-saturated maw of a dying financial leviathan… and the leviathan will be a little closer to heaving up dead on the beach.

October 12, 2015. Bang You’re Dead.

October 5, 2015. Syriasly.

Senior administration officials say the new offensive holds promise and may change the dynamics on the ground. — The New York Times

Whew…. That’s reassuring. Finally, a Middle East policy you can believe in….based on a joint Kurdish-Arab army that our side (the USA) is pretending to assemble around the ISIS stronghold of Raqqa. We’re informed also that American military officials have screened the leaders of the Arab groups to ensure that they meet standards set by Congress when it approved $500 million last year for the Defense Department to train and equip moderate Syrian rebels.  Is it safe to say that the table is now set for World War Three? King Salman of Saudi Arabia is itching to mix it up. Of course, the moment he sends official KSA ground troops in there, he will be eligible to have his oil terminal at Ras Tanura in the Persian Gulf blown up. Imagine what that would do to the S & P index. The Turks, too, are none too happy with their currency imploding and their economy falling apart, and perhaps view a widened war as politically refreshing. And let’s not forget Iran — having concluded the long, torturous negotiations to make America feel better about their nuke program, Iran is eager to put an end to this barbaric (Sunni-flavored) ISIS nonsense. Oh, did I leave out Israel. Probably a good idea since so many people just want to hate on it if the subject even comes up. But suffice it to say they are in the mix, too, with the ability to turn their adversaries into ashtrays, should it come to that.

As the old song goes: someone left the cake out in the rain.

You had to at least admire the forthrightness of Mr. Putin. His economy of motion is breathtaking. He goes to the UN and says: “The situation in Syria is intolerable and we’re going to do something about it,” and a few days later they did. Russia commenced bombing groups that the US had labeled “the moderate opposition” to Bashar al-Assad. The quandary for the US, of course, as Mr. Putin pointed out at the UN, is that we keep on arming and training “moderate oppositions” to this regime and that regime and abracadabra (to use an old Middle Eastern term-of-art) they break bad on us. They use the Humvee’s we give them to control the landscape and they blow stuff up with the ordnance we give them, and cut off the heads of Americans on video in the rudest and cruelest manner imaginable. So, might we ask ourselves: is there anything to the US’s complaint that Russia is not bombing the right ISIS?

September 28, 2015. Tick Tick Tick.

September 21, 2015. Fed Cred Dead.

The economy is a two-headed monster. One head is the trade in real goods and real services. The other head is the financialized traffic in swindles and frauds that surrounds banking…Most of the remaining on-the-ground economy consists of people merely driving their cars absurd distances, burning gasoline, between exquisitely-tuned giant warehouse store operations that were designed to destroy local Main Street trade — and accomplished that, by the way, to the applause of the local citizens whose towns were destroyed (“We want bargain shopping!”). Now, of course, even WalMart is looking over its shoulder at the collapse of the complex arrangements that allowed it to metastasize across North America like some cancerous fungus. Globalism is winding down as the gargantuan matrix of Ponzi schemes based on owed money dissolves debt by debt….A few decades ago, the suburban arrangement of daily life seemed like a good idea. You buy cheap land 27 miles outside what used to be a functioning (now obsolete) city. Build lots and lots of houses out of cheap, shitty materials such as strand-board and vinyl, pave a lot of new roads, line many of them with even shittier strip-mall buildings and Big Box “power centers,” and there you have a wonderful basis for an economy. That was more or less the Ronald Reagan Utopia. Now it’s all aging badly, fraying, too costly to fix and, increasingly, not worth scraping off the land and replacing with a new cheap, shitty building…The Federal Reserve itself is the victim du jour of its own grandiose fatuous fecklessness, in particular the idea that it could play a national economy like a three-button flugelhorn. What seemed like a good idea at the time when Alan Greenspan and then Ben Bernanke stepped into the pilot house now just looks like the fraud of frauds: enabling corporations to borrow ever more money from the future to pretend that their balance sheets are sound. That scam has nowhere left to go, except into the black hole that has been waiting for it.  Meanwhile, what remains on the other head of this two-headed economy besides driving to-and-from the Walmart? Pornography? The tattoo industry? Meth and narcotics? Prostitution? Professional sports on the flat screen? Kim and Kanye? Grand theft auto? Do you really think Donald Trump can fix this?

September 14, 2015. The Parties Crawl Off to Die.

I‘ve alluded to being a registered Democrat now and again, a disclosure that makes some readers go feral with wrath. For years I could only justify it as formal opposition to the cretinous brand of Republicanism that washed over the country like a septic wave with the reign of that sainted pompadour-in-search-of-a-brain, Ronald Reagan, whose “morning in America” bromide was among the biggest whoppers of my lifetime. With Reagan, we got the officially-sanctioned marriage of right wing politics and the most moronic strains of Southland evangelical religiosity. (Ronnie stated more than once his belief that Biblical “end times” were close at hand, which should have raised the question of his actual concern for the nation’s future — did he think it had one? — but nobody ever asked him about it.) George H. W. Bush expressed a similar view, perhaps merely pandering to the dolts of Dixie.  Who in his right mind could have subscribed to that load of bullshit? …More than once I’ve referred to the earlier period in US history, the 1850s, when the political compass points shook loose and parties died. The Whigs disappeared altogether (and fast!) and the Democrats became a rump party of southern slavers. Well, the two major parties of our time are now perfectly poised to enter the Temple Grandin cattle chute of death. But history doesn’t repeat, of course, it only rhymes, and this time there are no other political parties standing by to take their place, no credible institutions, certainly no one like Lincoln. There are only Bernie Sanders and the execrable Trump.
Sanders functions nicely as a foil to the flying reptile. But the self-labeled socialist has a big problem. The public may be simmering with grievance, but my guess is that they are not especially hot for more redistribution of the national wealth — that is, whatever little remains in the hands of a sore beset former middle class. The absence of any other reputible figure on the Democratic “bench” belies a party now more hollow than a supermarket Easter egg. What we see gathering is a political storm as perfect as the typhoon that has formed in banking. Surely the financial storm will strike first and it will leave the public stupefied with loss. I would not even bet against the possibility of the 2016 selection being canceled in some manner. Imagine, for instance, what the Pentagon brass thinks of Trump. And what they are planning for him. Just sayin’.

September 6, 2015. There Goes Europe.

The desperate wish in what is loosely called the West to at least appear morally correct is unfortunately over-matched by the desperation of people fleeing unstable, overpopulated places outside the West, and it is a fiasco beyond even the events of the moment. The refugee / immigrant crisis around the Mediterranean is a preview of a horror show to which there is no end in sight, and is certain to escalate. So anyone who indulges in fantasies about organizing an orderly, rational distribution of displaced persons for the current wave, is badly missing the point. Wave beyond wave awaits after the this one.  Yes, the tragic intrusions of the US military in Iraq, Libya, Somalia, Syria, and elsewhere have been reckless and stupid. But that is not the whole story. The desert nations of the Middle East and North Africa (MENA) have populations abnormally swollen by a century of oil-and-gas-based agriculture, really by the benefits of Modernity in general. Now that the oil age is chugging to an unruly crack-up, and Modernity with it, and the earth’s climate is doing wonky things, and the rich nations to the north have faked their finances to the point of bankruptcy, well, circumstances have changed.

In the years ahead, populations will be fleeing and shifting from many more unfavorable corners of the world. The pressures are mounting all over. Alas, the richer nations in which the fleeing poor aspire to gain a foothold, will also be contending with the disabling effects of a universal economic contraction — the winding down of the techno-industrial system and the global economy with it. That process has the potential to shatter political unions, overthrow established social orders, and provoke wars between the demoralized countries who still possess dangerous military hardware. At the least, it will produce economic conditions in Europe and North America probably worse than the Great Depression of the 1930s.

So, the idea that the nations currently bethinking themselves “rich” can take in, shelter, and employ the masses fleeing MENA (and elsewhere) is absurd. Somehow the people in charge, plus the intellectual classes who shape opinion and consensus, are going to have to arrive at some clear notion of limits and boundaries. It is actually happening in parts of Europe right now, extempore, where the immediate crisis is worst, for the moment in Italy, Greece, and Hungary — which first interned the refugees and then let them loose on the road to Vienna, probably only a way-station to Germany. Soon all nations across Europe will be agonizing, shucking, jiving, or improvising some sort of desperate response.

Among other confusions of policy and intention, the public “debate” so far does not make any distinction between true political refugees fleeing for their lives or economic migrants seeking to improve their prospects elsewhere. It is surely easy to empathize with both categories of persons, but that doesn’t mean you give up the control of your borders just to make yourself feel better. That is pretty much what has happened in the USA, where the Left, for political expediency, has deemed it indecent to call “illegal” immigrants what they are, and the Right has just been pusillanimous and hypocritical about it. H

Likewise, the rise of Marine LePen in France, Geert Wilders in Holland, and other parties seeking limits to immigration, perhaps even deportations. Personally, I reject the idea that it’s “racist” to want to preserve one’s national culture and character (especially in language), or to favor bona fide citizens for gainful employment. Europe has the additional obvious problem of an immigrant Islamic population overtly hostile to European culture and tradition. Why is it morally imperative for Europeans to countenance what amounts to low-grade warfare?

The situation that smoldered for decades is now exploding. Don’t expect to see any end to desperation and instability in MENA, but do expect new demographic crises out of other regions: Indonesia, Ukraine, Pakistan, West Africa, and Brazil, with its cratering economy. It’s not inconceivable that China might bust apart politically, with centrifugal consequences. The global economy is contracting. We have indeed attained the limits to growth. Cheap oil is bygone and the capital infrastructure we have won’t run on expensive oil — including the oil industry itself. New technology or further central bank legerdemain is not going to fix that. We’re in population overshoot and a scramble is underway to bail on the places that just can’t support the people who live there. National boundaries will be defended. Sentimentalists will have to step aside. History is not a bedtime story about bunnies and kittens.

August 31, 2015. Say Goodbye to Normal.

The tremors rattling markets are not exactly what they seem to be. A meme prevails that these movements represent a kind of financial peristalsis — regular wavelike workings of eternal progress toward an epic more of everything, especially profits! You can forget the supposedly “normal” cycles of the techno-industrial arrangement, which means, in particular, the business cycle of the standard economics textbooks. Those cycles are dying.

They’re dying because there really are Limits to Growth and we are now solidly in grips of those limits. Only we can’t recognize the way it is expressing itself, especially in political terms. What’s afoot is a not “recession” but a permanent contraction of what has been normal for a little over two hundred years. There is not going to be more of everything, especially profits, and the stock buyback orgy that has animated the corporate executive suites will be recognized shortly for what it is: an asset-stripping operation.

What’s happening now is a permanent contraction. Well, of course, nothing lasts forever, and the contraction is one phase of a greater transition. The cornucopians and techno-narcissists would like to think that we are transitioning into an even more lavish era of techno-wonderama — life in a padded recliner tapping on a tablet for everything! I don’t think so. Rather, we’re going medieval, and we’re doing it the hard way because there’s just not enough to go around and the swollen populations of the world are going to be fighting over what’s left.

Actually, we’ll be lucky if we can go medieval, because there’s no guarantee that the contraction has to stop there, especially if we behave really badly about it — and based on the way we’re acting now, it’s hard to be optimistic about our behavior improving. Going medieval would imply living within the solar energy income of the planet, and by that I don’t mean photo-voltaic panels, but rather what the planet might provide in the way of plant and animal “income” for a substantially smaller population of humans. That plus a long-term resource salvage operation.

All the grand movements of stock indexes and central banks are just a diverting sort of stagecraft within the larger pageant of this contraction. The governors of the Federal Reserve play the role of viziers in this comic melodrama. That is, they are exalted figures robed in magical Brooks Brothers summer poplin pretending to have supernatural power to control events. You can tell from their recent assembly out west — “A-holes at the J-hole” — that they are very much in doubt that their “powers” will continue to be taken seriously. This endless hand-wringing over a measly quarter-point interest rate hike is like some quarrel among alchemists as to whether a quarter-degree rise in temperature might render a lump of clay into a gold nugget.

What they do doesn’t matter anymore. What matters is that a great deal of the notional “wealth” they conjured up over the past decade or so is about to vanish —poof! Perhaps that will look like a black magic act. That wealth seemed so real! The bulging portfolios with their exquisite allocations! The clever options! The cunning shorts. Especially the canny bets in dark derivative pools! All up in a vapor. The sad truth being it was never there in the first place. It was just an hallucination induced by the manipulation of markets and the criminal misrepresentation of statistics, especially the employment numbers.

I have to say it again: prepare to get smaller and more local. Things on the grand level are not going to work out. Get your shit together locally, and do it in a place that has some prospect for keeping on: a small town somewhere food can be grown and especially places near the inland waterways where some kind of commercial exchange might continue in the absence of the trucking industry.

August 24, 2015. Worse Than Hitler.

Immigration is a practical problem, with visible effects on-the-ground, easy to understand. I’m enjoying the Trump-provoked debate mostly because it is a push back against the disgusting dishonesty of political correctness that has bogged down the educated classes in a swamp of sentimentality…But for me, everything else about Trump is frankly sickening, from his sneering manner of speech, to the worldview he reveals day by day, to the incoherence of his rhetoric, to the wolverine that lives on top of his head…Did any of you catch Trump’s performance last week at the so-called “town meeting” event in New Hampshire? Trump told the audience he was “very smart” 23 times… This is a man whose lifework has been putting up giant buildings that resemble bowling trophies, some of them in the service of one of the worst activities of our time, legalized gambling, which is based on the socially pernicious idea that it’s possible to get something for nothing…
Trump’s verbal incoherence is really something to behold. He’s incapable of expressing a complete thought without venturing down a dendritic maze of digressions, often leading to an assertion of how much he is loved…When he attacked Jeb’s statement that we have to show Iraqi leaders that “we have skin in the game,” Trump invoked the “wounded warriors,” saying “I love them. They’re everywhere. They love me.” In the immortal words of Tina Turner, “what’s love got to do with it?

Trump’s notion that he can push around world leaders such as Vladimir Putin by treating them as though they were president of the Cement Workers’ Union ought to give thoughtful people the vapors. It doesn’t seem to occur to Trump that other countries could easily get pugnacious towards us. He would have us in a world war before the inaugural parade was over.

The trouble is that it’s not inconceivable Trump could get elected. Farfetched, perhaps, but not out of the question. The USA is heading for a very rough patch of history… The country stands an excellent chance of waking up some morning soon to discover it is broke and broken. When that happens, all the anxiety and animus will be focused on looking for scapegoats, and they are likely to be the wrong ones. World leaders considered Hitler a clown in the early going, too, you know. But the Germans were wild about him. He pushed a lot of the right buttons under the circumstances. Trump is worse than Hitler. And the American people, alas, are now surely a worse lot of ignorant, raging, tattooed slobs than the German people were in 1933. Be very afraid.

August 17, 2005. True Believers.

July 27, 2015. Potemkin Party.

There is no Democratic Party anymore. There …is no will to oppose the lumbering parasitic corporatocracy that is doing little more than cluttering up this moment in history while it sucks the last dregs of value from our society. I say this as a lifelong registered Democrat but a completely disaffected one — who regards the Republican opposition as the mere errand boy of the above-named lumbering parasitic corporatocracy. Readers are surely chafing to insert that there is Bernie Sanders, disdaining Wall Street money, denouncing the current disposition of things with the old union hall surliness we’ve grown to know and love. I’m grateful that Bernie is in the race, I just don’t happen to think that Bernie gets what the country — indeed what all of techno-industrial society — is really up against, namely a long emergency of economic contraction and collapse.
These circumstances require a very different agenda than just an I Dreamed I Saw Joe Hill redistributionist scheme. Lively as Bernie is, I don’t think he offers much beyond that, as if cadging a little more tax money out of WalMart, General Mills, and Exxon-Mobil will fix what is ailing this sad-ass polity. The heart of the matter is that our way of life has shot its wad and now we have to live very differently. Almost nobody wants to even try to think about this.

The “to do” list for rearranging the basic systems of daily life in America is long and loaded with opportunity. Every system that is retooled contains jobs and social roles for people who have been shut out of the economy for two generations. If we do everything we can to promote smaller-scaled local farming, there will be plenty of work for lesser-skilled people to do and get paid for. Saying goodbye to the tyranny of Big Box commerce would open up vast vocational opportunities in reconstructed local and regional networks of commerce, especially for young people interested in running their own business. We need to prepare for localized clinic-style medicine…..

Oh, by the way, notice that the lead editorial in Monday’s New York Times is a plea for transgender bathrooms in schools. What could be more important?

July 20, 2015. Trump Hits a Bump.

Was it Donald Trump or the wolverine that lives on top of his head who made the dumb crack over the weekend about Senator John McCain not being a war hero? After all, that ambiguous patch of ginger-colored fur has taken on a life of its own. If I were Trump, I’d simply disown the remark and say that the hair-thing blurted it out, ventriloquist-style, because he (Donald) forgot to feed it that morning….It’s obvious that much of the developed world is now sore beset by past immigration policy choices and by the current inrush of desperate souls fleeing the evermore general breakdown of societies across the Middle East and North Africa (MENA). European pols are at least willing to have the debate, unappetizing as it might be. This dreaded political dance is now occurring against the background of a probable financial breakdown across Europe. When the utopian project of the European Union fails, as seems likely now due to the sovereign debt fiasco, I suspect that we will see a renewed effort to defend national cultures — French, German, and all the rest — in a manner that has a great potential for turning ugly. Financial failure means the death of the current banking system and the disappearance of massive notional wealth, and if that isn’t a recipe for extreme nationalism (plus xenophobia) than we are truly blind to the lessons of history…. Europe is in a whole heap of trouble in the event that the Euroland project falls on its face. This is perhaps beyond the question of merely preserving national identities. I think we will live to see an era of mass expulsions, fair or not.

Were I a pol, I would propose a “time-out” from immigration of all kinds. The USA did it before, in the 1920s, after a half-century of prodigious immigration when new states needed to be settled, and new industries needed to be manned, and new cities needed to be built. We are not in the same circumstances anymore. The empty places have been filled (and then some). The factories were banished to China and elsewhere. Some of America’s farming regions aren’t working out so well a hundred years later — Nebraska has been depopulating and God knows what the fate will be of California’s Central Valley as the epochal drought creeps forward.

Meanwhile, notice today’s headline from the fabled “newspaper of record” (The New York Times): Women Who Dye Their (Armpit) Hair

Yes, these are the mighty issues that concern us most.

July 6, 2015. Welcome to Blackswansville.

The Greeks may not recognize this, but they are in the vanguard of a movement that is wrenching the techno-industrial nations back to much older, more local, and simpler living arrangements. The Euro, by contrast, represents the trend that is over: centralization and bigness. The big questions are whether the latter still has enough mojo left to drag out the transition process, and for how long, and how painfully.

World affairs suffer from the disease of terminal excessive complexity. To make matters worse, much of the late-phase complexity operates in the service of accounting fraud of one kind or another. The world’s banking system is mired in the unreality of so many unmeetable obligations, cooked books, three-card-monte swap gimmicks, interest rate euchres, secret arbitrages, market manipulation monkeyshines, and countless other cons, swindles, and hornswoggles that all the auditors ever born could not produce a coherent record of what has been wreaked in the life of this universe (or several parallel universes). Remember Long Term Capital Management? That’s what the world has become.

What happens in the case of untenable complexity is that it tends to unravel fast and furiously. That’s exactly why avalanches and earthquakes happen all at once, not stretched out over a six week period. The global financial scene not so different. It’s just another matrix of linked mutually-supporting relationships that can implode if a few members weaken.

One question worth reflecting on is whether the implosion is actually well underway on-the-ground in real economies, with just the scrim of illusion to make the surface appear intact. That surely seems to be the case in the USA, where the so-called economy has already avalanched into a rubble heap of part-time scut jobs, defaulted college loans, underwater mortgages, and groaning pension funds — with an overlay of pointless and endless motoring.

Over in Euroland, the Greek “no” also implies that every other sovereign nation wallowing in deep financial shit will demand a haircut (and a disinfectant shower). Italy, Spain, Portugal, Ireland, and even France cannot possibly meet their debt obligations. Their citizens are being taunted with currency controls, too, and they have every bit as much potential to go ape-y as the Greeks. Notice you haven’t heard much from their leaders and financial ministers in recent weeks. They are all standing on the sidelines watching the Greeks go through the wringer — but you can be sure they are all making plans of their own.

The failure of the European experiment will be extremely demoralizing to the hopeful citizens of that continent, who emerged from the bloodbath of the early 20th century to become the world’s premier peaceful tourist theme park. I don’t know that they necessarily have to go back to fighting each other on battlefields with things that blow up and destroy human flesh, but they surely have to decentralize and re-fashion some kind of simpler, local way-of-life if they expect to remain civilized.

It’ll happen everywhere. The Japanese are next, of course, and they may be the most fortunate, since they retain more than a few shreds of memory for exactly that mode of life: the Tokugawa shogunate (the Edo period, 1600 – 1853), a manner of high pre-industrial economy and culture that might have persisted indefinitely had not Commodore Perry come knocking on their door.

Ukraine is about halfway back to being medieval with excellent potential to overshoot even that. The Euroland PIIG(F) nations don’t have the energy resources to extend Modernity, even if the banking system wasn’t terminally ill, and then on top of that they have the ethno-demographic quandary of creeping Muslimization — plus the additional flotillas of desperate boat people arriving daily.

America, count your blessings. Tattoos, obesity, drug use, and shiftlessness are all basically behavioral choices. You don’t need a finance minister or a central banker to overcome those problems.

June 29, 2015.  System Turmoil, Structural Reform.

All this trouble with money comes from one meta problem: aggregate industrial growth has ended. It has stopped more in some parts of the world than others, while in the USA it has actually been contracting. The cause is simple: the end of cheap energy, oil in particular.  The bottom line is that the world can no longer count on getting more stuff, except waste, garbage, political unrest, and the other various effects of entropy. From now on, there is only less of everything for a global population that has not stopped growing.

This dynamic was plain to see a decade ago, but the people who run finance and governments thought it would be a good idea to maintain the appearance of growth via the usufruct mechanisms of central banking: ZIRP, QE, market intervention, and universal accounting fraud. It’s not working so well. Debt was generated in place of the missing growth, and now there is too much of it that can’t be repaid on a coherent schedule. Many nations, parties, and entities are in trouble with debt and the prospective defaults are starting to pile up like SUVs on a fog-bound highway. Greece is just the first one fishtailing into a guard-rail.

The magic moment will come when it becomes obvious that these systemic quandaries have no solution. The system itself is programmed for implosion, in particular and most immediately the banking sector, where most of the untruth and illusion is lodged these days. As it stands exposed, the people are compelled to shake off their faith in what it represents: order, authority, trust. Institutions fail and each failure acts as a black hole, sucking air, light, and even time out of the system.

In the natural course of things, structural reform can occur, but that natural course entails some degree of disorder and loss. If Deutsche Bank or Goldman Sachs founders a lot of people will be living in their cars — a first stop perhaps to not living at all. Sooner or later, though, the survivors will all have to live differently. Structural reform means, for instance, that you can no longer count on getting food the way you were used to getting it. No more 3000-mile Caesar salads and take-out tubs of Kung Po Chicken. That will be very traumatic in the early going. Eventually in the places where it is possible to grow food on a smaller scale, it will be done.

Americans think that WalMart and its brethren are here to stay. They’re mistaken. Structural reform means reorganizing many layers of commerce around town centers — Main Streets — while the disintegrating strip malls await the salvage crews. Are we ready for that? Rebuilding local economies would put a lot of people back to work doing real things. All the blabber about “job creation” for the moment is only about increasing the share price of predatory corporations and the bonuses of their mendacious executives. Will the world miss them?

Do you fear the end of mass motoring and the suburban infrastructure that it operates in? Maybe your children and their children will be happier in walkable neighborhoods — outlandish as that sounds. There is a hell of lot of rebuilding to do. It may not involve materials like strand-board and vinyl siding, but the newer and smaller buildings will probably last a whole lot longer and look better. And a lot of hands will be needed to do the work.

June 1, 2015. Twenty-Three Geniuses.

June 18, 2007.  Both Ways.

It seems to me you can call the situation in Iraq a lot of things, but it’s not a war. Not at this point, anyway. Call it an unsuccessful nation-building project, a failed occupation, a botched policing job, a monkey-in-the-middle clusterfuck. All the US political factions, from left to right, do the public a disservice by calling it a war, because it misrepresents what we’re doing there.

We’re involved in Iraq because we don’t want to begin thinking about modifying our behavior at home. We are desperate to preserve our access to Middle East oil because that is the only way we can keep running our society the way we’re used to running it.

Mostly, we don’t want to face the tragic misinvestments we’ve made in the infrastructure of happy motoring, and we don’t want to face the inconvenient truth that there really isn’t any combination of alternative fuels that will permit us to keep running all the cars the way we like to run them. Either we keep getting the oil or say goodbye to the American Dream Version 2.K.

The public has now decided that this nation’s primary mission is to find some magic way to keep the cars running on a fuel other than gasoline. Everyone from the greenest greenies to the most medieval-minded Kansas Republican senator has joined in this collective wish. They are certain to be disappointed. All the Priuses in the world will not avail to save the Drive-In Utopia. The public will learn painfully what Iraq is all about.

Every time somebody blames the politicians for this predicament, I’m reminded that the politicians are actually doing a fine job of representing what their constituents want. What they want is to not change their behavior. Not even the science and technology folks want to think about changing our behavior. They just want to find new ways to continue the old behavior. They’re invested in the triumphal effort to come up with a happy motoring rescue remedy. Their techno-cred is on the line. They all want to be the first kid in their housing subdivision to run a car on dark matter.

So, we’ve gone to Iraq on the quixotic mission to stabilize-and-pacify this key territory in the greater region of the Middle East, so we can keep getting oil imports out of there in a reliable and orderly way, so we can keep on driving all our cars. And the whole thing has turned out rather badly.

Now there is another consensus forming. Across the political spectrum, from the far left to the far right, elected officials are now clamoring to “stop the war in Iraq.” By this they mean get US troops out. What cracks me up is their juvenile belief that being there is somehow optional for us, that we can keep on running WalMart and Walt Disney World without paying any price for it in the costs of policing the Middle East.

If we don’t maintain a military presence in Iraq, it is perfectly plain what will happen: Iran will instantly gain control of the southern Iraq oil fields. Iraq doesn’t have an army anymore. It is incapable of preventing Iran from acquiring control of its territory. From that vantage, Iran would also effectively threaten the sovereign existence of Kuwait. Then there is the question of how much instability Iran could generate next door in the Shia-dominated Persian Gulf shoreline region of Saudi Arabia, where most of that nation’s oil lies. (Meanwhile, there will be plenty more Iran-inspired mayhem in Lebanon and the Palestinian territories.)

It seems to me the answer to all this is clear: the first thing the US has to do is reach a different consensus about our behavior here at home, starting with the proposition that the happy motoring era must end. If we’re not willing to do that, we’re eventually going to lose both at home and in our struggles abroad. You can be sure that coming disturbances in the oil markets will make suburban life untenable while exhaustion and bankruptcy breaks our military.

The air waves and internet sites are full of blather now about ending the “war” and bringing the troops home. The presidential candidates are agonizing over their various positions on the Iraq adventure. I’d like to hear one of them tell me how Atlanta is going to function without Middle Eastern oil, or how WalMart will move its merchandise from San Pedro to Lansing without a “warehouse on wheels,” or how the thousands of yellow school bus fleets will carry on next September.

Actually, instead, I’d like to hear talk about drastically reforming our zoning laws to discourage any more suburban development or a pitch to allow some of our tax money to fund a US passenger rail revival. I’d like to see a candidate refuse to attend a Nascar race on the grounds that it’s an unconscionably stupid @#%$ waste of energy resources.

I’m waiting for one of these birds to tell the American people the truth: you can’t have it both ways. you can’t get our military out of the Middle East without changing the way we live.

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