The Oil Drum: Europe

I've seen a number of comments, both at TheOilDrum and elsewhere, suggesting that the US is now less susceptible to supply disruptions because we have reduced our demand for oil by several hundred thousand barrels per day over the past year. In general, I get the sense that people think we can insulate ourselves from supply disruptions, from our dependence on potentially unreliable foreign sources of oil, by improving our efficiency and eliminating "unnecessary" oil consumption. In my opinion, this is backward. In this post, I will argue that, because the demand that is destroyed first in a free market is the demand that is easiest to eliminate, the resulting consumptive system is more inelastic, more brittle, and more susceptible to systemic shock from supply disruption. I will approach this argument by outlining what makes a system either resilient or brittle and why market-driven demand destruction creates a more brittle system. I will conclude with a few thoughts on how we can increase the resiliency of our energy-driven economy in a future environment of declining energy supplies.

This is a guest post from Cameron Leckie of ASPO Australia. He can be contacted at cameron.leckie (AT) aspo-australia.org.au.

Major transportation projects and the requirement for Oil Vulnerability Assessments

Introduction

I live in South East Queensland, a beautiful part of the world, but one with a population expected to grow significantly over the coming decades. Brisbane, the capital of Queensland, had a population of 1.77 million in 2004. This is expected to grow to 2.58 million by 2026 ⁱ. There are a large number of significant infrastructure projects planned, or under construction with the aim of delivering the infrastructure required to support the population growth in South East Queensland.

Unfortunately, despite the Australian Senate’s report into Australia's Future Oil Supply, the Queensland Government having established an Oil Vulnerability Task Force and the Brisbane City Council having established a Climate Change and Energy Task Force, virtually no consideration has been given to the impact that higher oil prices and declining oil production will have on the need for, and the types of infrastructure required to support, a growing population.

This will be to the detriment of the residents of South East Queensland and those who invested in these projects. A case in point is the collapse of the River City Motorway’s Group’s share price over recent months.

We're in the middle of an interesting few weeks in the Australian oil market, so it's worth capturing these charts of international and regional oil prices from the Australian Institute of Petroleum for posterity.

Back in January, I made a financial forecast for 2008. In this post, I will update my analysis, looking both at what has happened thus far in 2008, and refining what is likely ahead.

Most forecasts are made with an overriding assumption of infinite growth, but the analysis made in January and updated now maintains an underlying assumption of resource limitations, such as will likely accompany the advent of peak oil. Under resource limitations, debtors are likely to find it difficult to pay back loans, as resources become more and more scarce. As a result, default rates are likely to continue to rise.

One of the issues I consider important in my forecast is systemic risk. This relates to the interconnectedness of the system, and predicts that if one part fails, other parts are also likely to fail. Many other articles mention this issue, but rarely address its full ramifications.

This is a repost from Cutler Cleveland on the underlying principles of net energy. We previously highlighted Dr. Clevelands work on the Energy Return from Wind. This post is Professor Clevelands latest installment on net energy analysis at the Encyclopedia of Earth, which I have reformatted to theoildrum. The Encyclopedia of Earth, where Prof. Cleveland is an editor/director, is a great academic/content based web clearinghouse for information on earth and our environment. I encourage everyone to follow some of the hyperlinks in the below story and peruse that site.

Outside of taxes and profits, we are a society used to thinking in gross terms. But the net is what we get to use. Net energy analysis, (and its subset EROI) get alot of airtime in peak oil discussions, but not yet in public. If the world is running on a certain total energy surplus, what are the implications for a decline in this surplus? Will the market, via dollars, treat gross production the same and forget to factor in increased costs? There seems to be much disagreement as to how best to use EROI and net energy principles, if at all, in planning for the looming energy crisis.

Soaring petrol prices have led to all sorts of calls for action to help reduce prices. The Opposition called for a 5 cents per litre reduction in the excise on petrol, which currently stands at 38.1 cents per litre. One Victorian Liberal MP, Chris Pearce, went further and called for a 10 cent reduction in petrol excise. The Rudd Government initially claimed that there was nothing more that they could do, but then buckled to the pressure and has proposed the introduction of a national FuelWatch scheme aimed at promoting price transparency at the bowser. The Minister for Competition Policy & Consumer Affairs, Chris Bowen, has indicated that this scheme is expected to save around 2 cents per litre. So, what is going on with petrol prices and what are the merits of these proposals?

The Commonwealth Scientific and Industrial Research Organisation (CSIRO) is the national government body for scientific research in Australia. The CSIRO Future Fuels Forum (FFF) began in November 2007 and culminated in July 2008 with the release of a report, "Future Fuels Forum report - Fuel for thought". The initiative brought together 18 leading representatives from Australia’s community, industry and government to share ideas and develop a range of options for our nation’s transport fuel future, determining what could potentially get us ‘from A to B’ by the middle of the century.

ASPO Australia spokesperson (and TOD editor) Phil Hart gave this speech at the launch of the report on Friday 11th July:

The Australian Association for the Study of Peak Oil congratulates CSIRO for leading the Future Fuels Forum and thanks all the participants for the constructive dialogue that led to this final report. We have all learnt new things along the way. I have been personally encouraged to hear of the many changes businesses have been making – there are more pro-active changes under way than even I realised.

2007 began with oil prices falling back to near $50 a barrel – because the speculators got it wrong. Many forum participants would have choked on a prediction of $8/litre (~US$30/gallon) early last year, but tight supply and the rapid increase in prices since then have given them courage to accept these dramatic model outcomes now. No one can know the precise future of oil prices, but such high figures reflect how hard it is to transform our cities and economies built on cheap oil when we are faced with declining oil production.

I see several possible explanations, including a long term shift in prices valuing diesel (or "distillate") more highly than gasoline; political pressure to keep gasoline prices low; and integrated oil companies not really needing a high gasoline pricing margin to keep overall profits at an acceptable level. I do not see ethanol as playing a significant role at this time. Regardless of the explanation, refineries and gasoline stations that are not part of oil conglomerates may find this a difficult storm to weather.

Figure 1 shows that the differential between the retail price of gasoline and the per-gallon cost of crude oil has recently dropped dramatically, leaving a much smaller margin to cover expenses and profit. It is this shift that I am discussing in this article.