The Canberra Times has a guest editorial from Jenny Stewart on energy security and peak oil - Time to refine energy security.

For the past six months our national attention has, understandably, been focused on the carbon tax issue.

The policy agenda now needs to move in a related, but different direction. The reason is a three-letter word – oil.

While oil producers will be affected by the carbon tax, politics ensures that there will be no tax on petrol.

Yet oil is, arguably, one of Australia’s key energy problems. As a nation, we passed ‘‘peak oil’’ some time ago. Domestic production plateaued more than 20 years ago, and since 2005, has been in decline. The oil that is left is a long way offshore, and a long way down. Extracting it will be costly and risky.

Australian refining capacity is more constrained now than it was a decade ago. South Australia lost its one oil refinery in 2003. A number of the refineries in Queensland, Victoria and NSW are small in scale, and subject to stiff competition from imported, refined products. Further rationalisation of refining capacity seems likely as imports continue to increase, particularly from large-scale refineries in Asia.

The government (in the form of the National Energy Security Assessment released in 2009) acknowledges challenges ahead, but tells us that, fundamentally, all is well. Energy security (that is, adequacy, reliability and affordability of supplies) is assessed as ‘‘high’’ until 2018, with only moderate concerns for 2023. Essentially, the assessment assumes that, because markets will continue to operate, there is no need to worry.

Although oil prices will continue to rise, the resilience of the Australian economy will ensure that we can cope. While domestic refining capacity is expected to decline, this is not considered to be a concern, so long as more facilities are built for handling imports. The assessment does not examine the impact of possible disruptions in oil supplies from the Middle East. Indeed, the reader would be hardpressed to realise that oil is a resource whose future is problematic.

Now, price signals are important inputs into public policy. But in the case of oil in particular, there are good reasons to be sceptical about the merits of relying on this mechanism as a basis for policy. World oil prices subside when growth declines, and pick up again when growth gathers pace. And as we saw when the oil producing nations began to exercise their market power in the 1970s, they can spike rapidly. But over the longer run, oil prices do a poor job of reflecting the scarcity of the resource.

Internationally, as in Australia, rates of oil use exceed the extent to which new reserves are being found. Planetary ‘‘peak oil’’ will soon be upon us. Given this situation, the price of oil should have been rising steadily over the past 20 years, because producers would be holding back present-day production, in order to receive higher prices later. Yet while there are short-term fluctuations, the inflation-adjusted price of oil has proved remarkably steady over the past two decades, increasing only in recent years as demand has accelerated.

Governments are thinking longer term, but not in the way an environmentalist would want. Nations are looking far less at the greenhouse gas equation, and far more at economic growth and energy security. Hence the efforts in Canada to extract oil from tar sands.

Almost as much energy goes into the process as comes out of it, yet Canada’s federal and provincial governments remain committed to the industry. Despite the recent disaster in the Gulf of Mexico and in the face of the protests of conservationists, the US is again moving towards oil-drilling in the Arctic.

For countries with some oil reserves of their own, there are difficult questions to answer about the extent to which local production should substitute for imports. Certainly, since the Hawke government deregulated the industry in 1988, Australia has been content to leave the decision about whose oil to use, to market forces. As a result, our petrol and diesel prices are low by international standards and our transport (and food production) systems are more dependent upon oil than ever. But these very factors make us vulnerable to geopolitical change. Not only that, we are at the end of some very extended supply chains.

The ABC's 7:30 report has a segment noting the surprising lack of attention to Australia's oil supply deficit during the current election campaign - Running on empty.

It’s the lifeblood of the modern economy, but over the next five years Australia’s oil import bill is expected to almost double from $16 billion a year to $30. It’s an issue that will affect every business and household in the country, but it’s had precious little mention in the current election campaign.

KERRY O'BRIEN, PRESENTER: Whoever wins the election will be confronted by a series of daunting strategic dilemmas, not the least of which will be how to secure sufficient fuel to counter an alarming shortfall in Australian oil production. In just five years, the Federal Government is projecting a trade deficit in oil that will almost double from $16 billion a year to $30 billion. Yet it's been off the radar in this election, despite the implications for every Australian home and business. Business editor Greg Hoy reports.

GREG HOY, REPORTER: Australia's oil gauge is falling fast for a nation self-sufficient in oil 10 years ago. Now, to fuel its 16 million cars, trucks, motorbikes, its trains, tractors, mining vehicles, ships and aircraft, Australia must pay a $16 billion-a-year import bill for half the 300 million barrels of oil it drains annually. In 20 years, it's forecast 500 million barrels of oil will be needed, 80 per cent of those imported.

DAVID LAMB, CSIRO AUTO TECHNOLOGY CEO, 1992-93: We have no-one to blame but ourselves when things go wrong, as surely they will. We saw in the '70s what happens when fuel runs out: the queues, the panic, the resentment, the anger. I wouldn't fancy being in government in that sort of situation. And you can say that's overstated. Too much hyperbole. But it is certainly on the cards.

MONICA RICHTER, AUSTRALIAN CONSERVATION FOUNDATION: We need to be making sure that we're not forcing families to be having to deal with petrol prices of $2 and $3 a litre, which is a real possibility in the future, or at the worst case, to be looking at oil shocks of $8 a litre in the next 10 years.

WENDY MACHIN, NRMA PRESIDENT: We'd like to see firstly some policy leadership. We'd like to see a key person in each of the major parties take hold of this issue and start planning, start developing a policy for our national transport fuel security. And there are a lot of reasons: national security, the hip pocket, the cost of our fuel, as well as environmental reasons why we've gotta start planning for a future that's not dependent just on oil.

GREG HOY: But this is a political minefield.

PEARCE BOWMAN, QLD ENERGY RESOURCES CEO: Shale oil has a huge potential. We develop very large supply in situ, particularly in Queensland.

GREG HOY: Demolishing the controversial technology of previous owners who failed to raise sufficient finance in the face of fierce environmental protest, near Gladstone Queensland Energy Resources is resurrecting development of Australia's vast reserves of shale oil, building a replacement test plant to demonstrate it says a far cleaner technique trialled in Colorado, where Queensland shale has been successfully heat-processed to extract crude oil.

PEARCE BOWMAN: We have a series of private investors who see the potential and the concerns for future supplies of oil and how critically they are tied to the economy. They're prepared to invest here in this technology, a new technology, that we will be developing and improving.

GREG HOY: In March, the Australian Bureau of Resource Economics emphasised Australia's extensive shale oil deposits, suggesting that combined with domestic use of liquefied gas or LNG, now mostly exported from the North-West Shelf, plus the planned extraction and liquefaction of gas from the country's coal seams, Australia might overcome its oil problems with new fossil fuels. But if it does happen, it won't happen fast, and in an age of increasing carbon concern and constraint, it's unlikely to happen without a fight.

MONICA RICHTER: Shale oil is four times more greenhouse intensive than conventional oil. So, we have the equal challenge of dealing with greenhouse gas emission reductions as well as reducing our dependence on imported oil. So shale oil cannot be considered to be a legitimate option.

GREG HOY: It's a sensitive subject, such that the Federal Government had promised to release its white paper on energy security well before this election. The paper has been completed, but never released, due, we are told, to delays in reaching a carbon consensus at the Copenhagen conference. Which suggests a prolonged delay lies ahead. Meantime, the oil problem intensifies, and so does the frustration of the National Roads and Motorists' Association, which has been pushing politicians in Canberra for a united plan of action.

WENDY MACHIN: We had a wide coalition of support go down to Canberra just a couple of months ago to press this case. We didn't get any serious commitments from either of the major parties to develop a policy on this. We're going to keep hammering them on that because we think it's a really important question for the future on all sorts of grounds - you know, economic, environment and national security.

GREG HOY: Some hope the solution will be found by industry, and indeed, just last week, Caltex announced in co-ordination with Holden it will ramp up service station supplies of biofuels. But in a speech announcing this, Caltex chief executive Julian Segal stated, "There is inadequate funding of biofuels, research and development and industry development. We really do need an energy white paper that addresses energy security and climate challenges. ... we shouldn't wait until the lights go out and oil prices escalate before we get a comprehensive grip on energy policy in Australia."

DAVID LAMB: We've just seen the price of oil rise in 2008 and then fall because of the Global Financial Crisis that sent us back to sleep. We didn't worry about it anymore. As the oil price goes back up, which it is already doing, we can expect to see an ever-increasing price at the pump.

GREG HOY: While politicians procrastinate, the NRMA has established a panel of Australian energy, transport and environmental interests to consider what Australia should be doing.

DAVID LAMB: Adopt a plan. We've suggested a plan; if you don't like elements of that plan, change those elements. But you're not going to find any new elements that we haven't thought of. All you can do is shuffle around the mix of those elements.

MONICA RICHTER: By 2020, the UK Government has said that all new cars sold will be electric or hybrid electric. We don't have those kinds of targets here in Australia. We also need to be looking at mandating fuel consumption standards. And of course, modal shift. We need to be giving people choice to move away from relying on their second car or the private motor vehicle towards public transport, much more substantial investment in rail. All of this requires investment, all of this requires a strategy that needs to start now.

GREG HOY: Indeed, major car manufacturers overseas are ramping up production of fully electric vehicles which have begun arriving on Australian docks, though major local car makers have no such plans. Nor is there any enviro-friendly infrastructure planned to encourage greater demand for such passenger vehicles.

Posing an even bigger challenge for freight, where long haul transport companies will be increasingly exposed to rising fuel prices. In Melbourne, Kenworth Trucks recently began manufacturing liquid natural gas-powered vehicles. But demand is low, costs high, and the fuel, though exported by the ship-load to Asia from the north-west, is scarce in Australia's busy south-east.

BRAD MAY, PRODUCTION DEVELOPMENT MANAGER, KENWORTH: There's little or no incentive for truck operators to adopt alternative fuels of any sort. I think that people understand that alternative fuels are a thing of the future, that there's certainly some challenges to overcome.

GREG HOY: Bad news perhaps for environmentalists, good news, it seems, for shale oil producers.

PEARCE BOWMAN: The International Energy Agency clearly predicts that oil is a part of our - part of the future for the world. We're gonna need in Australia all of our fuels. We're gonna need the LNGs, we're gonna the fossil fuels, we're going to need the biofuels.

GREG HOY: It's an issue of great national interest crying out for strong political leadership, but some are not holding their breath.

DAVID LAMB: I wouldn't be talking to you now if I were not an optimist. I'd like to think that we human beings are intelligent enough to take the knowledge that we have and apply it. I can't believe that we would be so stupid as to just let the fire overtake us before we decide that it's too hot.

Energy Bulletin has an article from Rick Munroe summarising a new report from the "Center for Naval Analyses’ Military Advisory Board" in the US, looking at the country's energy security - Review of CNA Report: “Powering America’s Defense: Energy and the Risks to National Security” (May 2009).

Energy Bulletin also has a related article - Energy Security: an Annotated Military/Security Bibliography.

Powering America’s Defense comes two years after the Military Advisory Board’s landmark report, “Climate Change” (May, 2007). This review of Powering will examine the way its authors deal with the issues of peak oil, oil imports and the potential for oil supply shocks.

A. Peak Oil

With respect to peak oil, Powering refers to the 2007 GAO report, “Addressing a Peak and Decline in Oil Production” [1] and makes specific reference to the GAO’s conclusion that “the peak in production is likely to occur some time before 2040” [2].

Powering then refers to the recent World Energy Outlook (WEO, Nov. 2008) and states, “According to the International Energy Agency (IEA) most countries outside of the Middle East have already peaked, or will soon reach, the peak of their oil production” [3].

However, Powering does not include some of the most compelling information contained in the 2008 WEO:

- its acknowledgement that oilfield decline rates are much worse than was previously recognized [4],
- its warning of an oil-supply crunch by 2015 unless there is a major surge in investment [5],
- its marked shift in tone from previous WEOs [6].

The 2008 WEO states, “Production has already peaked in most non-OPEC countries and will peak in most others before 2030” [7].

When the IEA’s Fatih Birol, was questioned on this pre-2030 time-frame, he conceded, “Assuming that OPEC will invest in a timely manner, global conventional oil can still continue [to increase] but we still expect that it will come around 2020 to a plateau, which of course is not good news for global oil supply. “

Birol went on to say, “The reason we are asking for a global energy revolution is to prepare everybody for difficult days and difficult times. I think we should be very careful…” [8]

To summarize, the Chief Economist of the IEA has verbally indicated that the global peak (which the GAO thought might occur as late as 2040, and which the WEO indicated might be “before 2030” has now been brought forward to an anticipated plateau a mere decade from now. ...

The Age has an article on some interesting comments by Aloca Australia chief Al Cransberg about national energy security - Energy security vital: Alcoa head.

AUSTRALIA must implement a long-term energy strategy or risk dire environmental and economic consequences, Alcoa chairman Alan Cransberg has warned. Mr Cransberg yesterday called for a national security strategy to guarantee the nation's energy requirements for the next 50 to 100 years.

"Energy security is absolutely critical in the issue of climate change and our capacity to meet the greenhouse challenge," he told yesterday's meeting of the American Chamber of Commerce in Australia. "For too long we have been focused on expanding and maximising energy exports, without proper protection for our own future generations."

Long-term energy contracts of more than 20 years were to the detriment of Australia's energy needs, Mr Cransberg said, because it meant the energy was no longer available for the local economy. "Those foreign-contract prices have been regularly spiralling upward with telling consequences for local users."

Securing sufficient energy stores was a key national security consideration, he said, because of the growing dependence on "supplies from politically unstable regions" and the growing demand for oil and gas.

Al Gore's speech yesterday was a masterpiece from my point of view - outlining most of the solutions to our energy issues (fixing and expanding the grids, energy efficiency, solar, wind, geothermal, electric cars etc etc etc) and many of the political factors involved (especially Iraq and the defenders of the status quo who took us there, and the culture war that has paralysed America).

Best of all (unlike "An Inconvenient Truth") he set an ambitious target for implementing the solutions - a switch to 100% renewable energy by 2020 for the United States (none of this 20% by 2020 nonsense that the weak-kneed keep offering up as a way forward) - something we should be attempting globally.

The speech is online now.

It was interesting that one of the people he thanked for attending was the Libertarian candidate for President - hopefully the libertarians are all starting to get on board with the idea of market based solutions to global warming and peak oil.

From The New York Times' review - Gore Calls for Carbon-Free Electric Power.

Former Vice President Al Gore said on Thursday that Americans must abandon electricity generated by fossil fuels within a decade and rely on the sun, the winds and other environmentally friendly sources of power, or risk losing their national security as well as their creature comforts. “The survival of the United States of America as we know it is at risk,” Mr. Gore said in a speech to an energy conference here. “The future of human civilization is at stake.”

Mr. Gore called for the kind of concerted national effort that enabled Americans to walk on the moon 39 years ago this month, just eight years after President John F. Kennedy famously embraced that goal. He said the goal of producing all of the nation’s electricity from “renewable energy and truly clean, carbon-free sources” within 10 years is not some farfetched vision, although he said it would require fundamental changes in political thinking and personal expectations.

“This goal is achievable, affordable and transformative,” Mr. Gore said in his remarks at the conference. “It represents a challenge to all Americans, in every walk of life — to our political leaders, entrepreneurs, innovators, engineers, and to every citizen.”

Although Mr. Gore has made global warming and energy conservation his signature issues, winning a Nobel Prize for his efforts, his speech on Thursday argued that the reasons for renouncing fossil fuels go far beyond concern for the climate.

In it, he cited military-intelligence studies warning of “dangerous national security implications” tied to climate change, including the possibility of “hundreds of millions of climate refugees” causing instability around the world, and said the United States is dangerously vulnerable because of its reliance on foreign oil. ...

Mr. Gore said the most important policy change in the transformation would be taxes on carbon dioxide production, with an accompanying reduction in payroll taxes. “We should tax what we burn, not what we earn,” he said.

The former vice president said in his speech that he could not recall a worse confluence of problems facing the country: higher gasoline prices, jobs being “outsourced,” the home mortgage industry in turmoil. “Meanwhile, the war in Iraq continues, and now the war in Afghanistan appears to be getting worse,” he said.

By calling for new political leadership and speaking disdainfully of “defenders of the status quo,” Mr. Gore was hurling a dart at the man who defeated him for the presidency in 2000, George W. Bush. Critics of Mr. Bush say that his policies are too often colored by his background in the oil business.

A crucial shortcoming in the country’s political leadership is a failure to view interlocking problems as basically one problem that is “deeply ironic in its simplicity,” Mr. Gore said, namely “our dangerous over-reliance on carbon-based fuels.”

“We’re borrowing money from China to buy oil from the Persian Gulf to burn it in ways that destroy the planet,” Mr. Gore said. “Every bit of that’s got to change.”

And it can change, he said, citing some scientists’ estimates that enough solar energy falls on the surface of the earth in 40 minutes to meet the world’s energy needs for a year, and that the winds that blow across the Midwest every day could meet the country’s daily electricity needs.

More at the FT - Gore seeks 100% green energy.

Energy Bulletin has a transcript of the speech.

Jerome Guillet has a run down of how the solution could be implemented at TOD, focussing primarily on wind power, which is his area of expertise (I think he greatly understates the potential for solar in the time frame available) - Gore sets goal of 100% carbon-free electricity by 2020.

Al Gore has made a major speech in Washington this morning, setting out an ambitious goal for the USA to produce all of its electricity from carbon-free sources by 2020. I thought I'd comment on the technical feasibility of the plan, and the underlying economics of such an endeavour.

The short answer is: while 100% is probably unrealistic, it's not unreasonable to expect to be able to get pretty close to that number (say, in the 50-90% range) in that timeframe, and it is very likely that it makes a LOT of sense economically. ...

For the simplicity of this discussion, I will focus on wind, given that it presents a bigger challenge on the intermittency front (which the inclusion of solar can only help improve), and that it would drive the ecohnomics of such a plan given its larger scale deployment.

The main questions, of course are as follows:
1) is it technically feasible to build the requisite capacity within 12 years?
2) what will it cost, and what will it mean for power prices?
3) how can the intermittency issue be dealt with?

Technical feasibility

To get 2,000 TWh of electricity from wind, roughly 800GW of wind power capacity would be needed, considering that windfarms would get an annual production equivalent to 2,500 full hours (a pretty conservative estimate, given that the existing wind farms are closer to 3,000 hours today). 800GW is roughly equal to 30 times the currently installed capacity (which should reach about 23GW at the end of this year) and 100 times the capacity installed in 2008 (expected to be close to 8,000MW, after 5,000MW were installed in 2007).

To build 800 GW in 12 years would require a significant increase in annual installations - but actually not an unrealistic one. ...

Altogether, the plan would require boosting investment in wind production capacity to about $100-150 billion per year, a significant number but hardly one that would require a complete retooling of the US economy. With a stable regulatory framework (presumably provided if this were made a national priority) and guaranteed demand (which could come via very simple mechanisms, like a feed-in tariffs, ie mandatory purchases by local utilities at regulated rates), there is absolutely no reason to doubt that this could be done.

I'll address the requirement to boost the grid separately below.

Wind power economics are quite simple: most of the levelised production cost per MWh comes from the initial investment. It is thus naturally sensitive to investment costs, and even more so to financing costs, both of which are determined at the time of construction. Once a windfarm is built, its production costs are essentially set for the rest of its operating life, ie 20-25 years. The fixed nature of its cost base makes it a difficult bet in a deregulated universe, where prices can swing wildy (including to low prices that can be insufficient for the windfarm to service its debt burden, thus the requirement for feed-in tariffs or similar mechanisms to guarantee a floor to wind electricity). But such fixed prices make wind a great proposition at times of increasing oil&gas costs: wind power prices will NOT increase even if oil & gas or coal prices continue to go up, as is quite possible.

Thus wind power is a wonderful hedge against future energy prices. And given that today it already costs less than power from a ges-fired plant (the plants that typically drive the price of electricity on wholesale markets), it is both competitive and likely to remain so in the coming years.

And given the cost structure of wind, a very simple way for government to support wind at very little cost would be to provide funding for the sector at low interest rates. One big advantage of government is its ability to borrow at lower rates - indeed, government sets the lowest rates that are by the rest of the economy. By passing on its low cost of funding to wind developments, the final cost of wind power could be lowered significantly, and passed on to consumers (banks would still be required to hold onto operational and other risks linked to wind production, they would just get cheaper funding for that specific purpose, which the'd have to fully pass on to projects. Germany has successfully used such a mechanism for years).

Studies in Germany and Denmark show that wind power lowers wholesale prices by 30 to 70% when wind blows, and that the overall savings for consumers far outstrip the cost of guaranteeing to wind producers a regulated tariff. Ironically, the more wind power there is in the system, and the lower the wholesale marker price will be most of the time, which means that the regulated tariff remains a necessity to ensure that wind producers are able to pay off the debt linked to their initial investment. But that regulated tariff is known, is realtively low, and,again, will not need to increase over time, thus ensuring to consumers similarly stable retail prices. ...

Overall, network operators with actual wind experience seem confident that a combination of additional investment, smart grid management, and maintaining available (but not using much) a large gas-fired capacity can make it possible to cope with large amounts of wind power in the system.

While a goal of 100% of carbon-free electricity is probably unrealistic, it therefore seems possible to get pretty close to that, especially if nuclear and hydro are included in the mix. A plan that announced a specific goal of 40-50% of wind-generated electricity by 2020 and 10-20% of solar, with the appropriate feed-in mechanisms, demand guarantees for manufacturers and investment in the grid would therefore be realistic, make economic sense, and fulfill two major strategic goals: reduce carbon emissions, and lower fossil fuel demand.