Preface. This post is excerpts from Bakhtiari’s testimony about Peak Oil before the Australian Senate Committee in 2006. I’ve excerpted what I found of interest, so if it seems disjointed, that’s my fault. And it isn’t just the Australian Senate that’s “peak oil aware”. Perth’s government assembled 1200 people to brainstorm coping solutions for peak oil as Bakhtiari mentions below.

Some of Bakhtiari’s predictions are wrong — although he knew about fracked oil, he didn’t realize it would be enough to delay peak oil until 2018, when world oil production peaked, and may soften decline for as long as 2025. Though meanwhile it could decline rapidly financially, since it never made money even at $100 a barrel, and investors are weary of backing this industry.  He also may have overestimated how high the price of oil could go if Gail Tverberg is right that low prices rather than high ones will signal peak oil. This is because high prices crash the economy since people can’t afford expensive oil, and oil companies can’t afford to explore or start new petroleum producing projects if the price is low.

At any rate, though the timeline is wrong, Bakhtiari’s idea that the initial T1 phase, the plateau we’ve been on since 2005 is rather benign, appears to be right.  But the decline rate gets worse and worse over T2, T3, and T4 (explained near the end of this post), and I suspect that with the peaking of oil in 2018, we are about to enter T2 and the other more serious phases. These in turn I predict will increase the trend towards autocracies (i.e. Trumpism), social unrest, mass migrations, electric grid outages, supply chain disruptions and more.

It’s also possible the Middle East has higher reserves than Bakhtiari thought, since Saudi Arabia had to invite in outside experts to estimate their reserves when they went public. It is widely estimated that the Middle East has over two-thirds of the conventional, easy, cheap oil reserves in the world.  The other two main sources, the U.S. and Russia are going to shrink. America has less than 4% of remaining reserves, mostly from fracked oil wells that decline by 80% over 3 years. So when all fracked oil is in decline, production will quite dramatically fall.  Nor will Russia fill in the gap. Russia is a super corrupt mafia totalitarian state that isn’t investing in future oil and gas infrastructure and is likely at or past peak oil already.

Australia has done a great deal to educate their public and leaders about the issue of Peak Oil, far more than the United States where I found 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 possibility China will invade Australia for resources when the U.S. military is immobilized from lack of fuel, remains to be seen. 

I published this back in 2006, and I’m republishing it today because it is just as relevant now.  Also, I’m interested in the topic of why leaders in government, economics, and even science deny peak oil and the repercussions.  If we’d just faced the problem squarely, and while kicking and screaming all the way prepared for the inevitable end of oil, we’d be in much better shape.  More farms would have been converted to organic already, more research on pest control without pesticides, Roman stone roads and aqueducts to last for millennia instead of the 20 years today due to rusting rebar that expands up to 7 fold and destroys roads, dams, and other infrastructure today.  Well, what to do is a huge topic I address elsewhere at energyskeptic, and many people have published books about this topic, and postcarbon.org, resilience, transition towns and more are dedicated to our inevitable future.

Alice Friedemann   www.energyskeptic.com  author of “Life After Fossil Fuels: A Reality Check on Alternative Energy”, 2021, Springer; “When Trucks Stop Running: Energy and the Future of Transportation”, 2015, Springer, Barriers to Making Algal Biofuels, and “Crunch! Whole Grain Artisan Chips and Crackers”. Podcasts: Collapse Chronicles, Derrick Jensen, Practical Prepping, KunstlerCast 253, KunstlerCast278, Peak Prosperity , XX2 report

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

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%, 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 Hubbetrt’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% 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 into Ghawar 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 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 super giants 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 super giants 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 meters 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.

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? 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— 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 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 super giants—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—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 centers 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 T1 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”.