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Guest post from Brett McLean

February 26th, 2004

I’ve received a guest post from Brett McLean which includes reference to a topic that’s been mentioned several times in comments, – the possibility that world oil output has peaked or will shortly do so. I plan to have my say on this before too long.

h3. Brett’s post.

The Treasurer, Peter Costello has repackaged and relaunched his Intergenerational Report in the last few days.   The essence of Costello‚s case is that the demographic changes caused by reducing fertility will have profound economic implications as the baby boomer crest moves into retirement, and in 40 years the proportion of the population over 65 to be double that of today at 25%, thus putting an intolerable burden on Government spending programs in Health and Disability and Pensions.    

Costello‚s discussion paper released on 25th February lists four choices to address this: raise taxes (to over 40% personal income tax); Cut back government spending; Run large deficits; and its preferred option increase the size of the economy through labour force participation.   Hence, Costello‚s plans to modify superannuation rules and create incentives for people to retire later.  

All these treasury projections are built on a series of economic growth assumptions which ultimately boil down to one single assumption. That productivity will grow at around its 30-year average of 1.75 percent per year, and this is where the Treasurer‚s planning could become seriously unstuck, because coming at us potentially in the same timeframe the world may very well start to run out of cheap oil.  


There are recent suggestions that the Saudi Oilfields are becoming tired, and this would tend to confirm speculation in oil circles that global oil production may have peaked or may peak in the not to distant future. Jean Laherrère an oil industry consultant, demonstrated how the increasing world population and a potential oil production peak in the next 20 years will result in a headlong crash between demographics and the available supply resulting in a forced reduction in per capita usage of Oil and Gas.  

If this is so then our standard of living is going to sustain a serious battering not just from an aging demographic but also from escalating energy prices. As the cost of extracting oil from increasingly unproductive wells rises along with demand from the huge and developing nations in Asia, the price of a barrel of oil and hence all units of energy needed to drive our economy and maintain our productivity will rise.   

The Danish Technology Council and the Danish Society of Engineers at their Copenhagen conference in 2003 point out that the predominant economic growth theories of this singular historic era [the era of cheap oil] are based on the axiom that economic growth will not be constrained by limitations in the supply of the fossil fuel resources upon which the economy is based, in particular the supply of oil.  

They state it is hazardous to rely unconditionally on the validity of a continued-growth axiom for which there is no empirical evidence. That’s Engineers saying this by the way, not Greenies.   

The political economic, environmental and technological problems that must be solved in a very short space of time if we are to smoothly transition to alternative energy technologies and maintain our present standard of living are enormous and make the aging population problem being addressed by Peter Costello look trivial by comparison as well as casting serious doubt on the validity of Treasury‚s underlying assumptions.   

It is right and proper for the Government to be looking ahead 40 years or more to address the demographic changes that this nation faces, but if they are blind to, or choose to ignore another reality that nature will impose on us within the next few decades, then it does not help us at all.  Australian‚s who are asked by the Government to adopt superannuation and retirement strategies now, based on the Intergenerational Report have every right to be sceptical that the conditions that the Government foresees will necessarily hold true.   
 

Brett McLean ˆ is a Business and IT Consultant.

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  1. Jill Rush
    February 26th, 2004 at 20:45 | #1

    As with much of the Liberal/National policy making Costello only looks at a narrow part of the picture. The standard comment being “that is a separate issue”.

    The early retirees are in great part involuntary, limited in skills and language, productive within the volunteer sector, enjoying life.

    On the other hand those that are still in the workforce are overlooked for advancement and therefore have little to look forward to and resentful that their skills and experience are used for the advantage of those younger staff members who are happy to use their backs for leapfrog. They are also often suffering a belated midlife crisis that they would really like to be doing something else entirely.

    The federal government has made a habit of providing benefits to retirees (not pensioners) with assistance far greater than for other sectors of society. Why wouldn’t baby boomers aspire to join these ranks. The current incentives to stay in the workforce until 70 years are window dressing as so much social welfare policy is currently.

    The issues around oil are likely to make the baby boomers think that they should retire early so that they can enjoy the good life before it evaporates.

    In trying to grab the “financially responsible” highground Costello is likely to alienate a large number of people who have clear aspirations to get out of the workforce but are still prepared to contribute to society through causes that give a sense of worth and satisfaction. He is also likely to alienate those who would like to be part of the workforce but are no longer valued by employers and are being forced to undergo the same type of work search as others who are more employable. The Mature Age Alowance was a recognition that over 60 it was next to impossible to get work so people shouldn’t have to be treated like mendicants. This has been abolished but work is not available for these “workers”.

    The message is clear – The current government cares little for the consequences of its employment policies which have made it easy for employers to sack long term employees via restructuring and to create less stability and security in employement. It might suit those at the top of end of town but those who live elsewhere might be inclined to bite the hand that is refusing to feed it.

    The oil crisis is too far away for most people to worry about as like most environmental issues it will only command attention when it is a crisis. That’s why someone like Costello ignores it.

  2. Steve
    February 27th, 2004 at 00:06 | #2

    Done more reading lately:

    The international energy agency (IEA) produce a regular oil market report here.

    Another good website with extemely well updated current and historical (back to 1920′s) oil price data is here.

    Search around the IEA website a bit, especially the world energy outlook section. Heaps of stuff. Here is a report on energy outlook.

    It concludes that we are not energy resource limited up to 2020, but that problems might occur with cost, as cheaper reserves are depleted.

    Also of relevance: a recent report by CSIRO, ABARE and the Bureau of Transport Economics for the australian government which concludes that, in short, trying to foster a competitive local biofuels industry is too expensive and a waste of time.

  3. February 27th, 2004 at 00:26 | #3

    This is all really pretty obvious when you stop to think about it. Let’s think a bit more about it before we paint any ‘doomsday’ scenarios though.

  4. Brian Bahnisch
    February 27th, 2004 at 08:15 | #4

    Steve, I don’t have time to read all those reports at the moment. Maybe on the weekend.

    Do they mention the use of nuclear power for electricity generation, a clean, safe solution suggested by Dr Colin Kay on Radio National’s Ockam’s Razor last Sunday? A transcript is here.

    Then there was a story recently about a hydrogen car travelling from Perth to Sydney where the lord mayor drank the waste produced, being a cup of water.

  5. February 27th, 2004 at 10:37 | #5

    Was that testing on dumb animals, BB?

  6. Brett
    February 27th, 2004 at 14:10 | #6

    Jill: The message I get from the Treasurer’s report is that they recognise the demographic timebomb, but having ruled out tax hikes, they see work force participation as the solution.

    That strikes me as being pretty short sighted. Notwithstanding the potential spanner in the works created by the increase in energy costs, there actually needs to be jobs for all these older workers to do.

    It seems eminently logical to me to recognise that an oil crisis is coming, and start investing now in the technology and infrastructure to transition to other forms of energy. This program in itself will create employment, and thus go toward solving Costello’s problem.

    Steve: Trying to pick the peak of oil production is certainly a guessing game. The IEA and the American DoE don’t even seem to speculate publicly on it. Some pundits say we’ve already hit the peak, other say it will be in the next 20-30 years. The fact is, its coming, and when the peak start to become obvious in retrospect the price of Oil will certainly skyrocket.

    My point in my post that John so kindly published is that when the price does skyrocket, all assumptions about growth, and individual productivity are shot out of the water. The worker productivity that we currently experience is due in very large part to the leverage obtained by cheap energy. When that energy is no longer cheap, then productivity drops, and consequently our standard of living is shot to pieces. If then the peak is in 20 years, and Costello’s plan is for 40 years out, then there’s going to be a problem much bigger than lack of space in the homes for the bewildered.

    Scott: I don’t think it has to be a doomsday scenario if we’re ready for it. But it will be if we ignore it.

  7. Steve
    February 27th, 2004 at 15:35 | #7

    I find I feel a bit uncomfortable about IEA and the lack of public statements on oil reserves too.

    It seems weird that they adopt a confident tone and say things like We have plenty of oil for the next 20 years. It seems weird to have such a tone when they are only talking about 2020, not that far away.

    Brian B: the oil and biofuel reports i posted don’t talk about nuclear of course, but uranium supply is covered in the IEA world energy outlook. If you are time constrained, just read the executive summary of the IEA report. Has plently of good tidbits.

    Steve

  8. gordon
    February 27th, 2004 at 18:24 | #8

    Just to cheer us all up a bit, we will also need to think about adaptation to global warming effects at just about the same time as oil is getting expensive/running out. I have a (as yet mostly instinctive) feeling that global warming is being played as a beggar-thy-neighbour game by the Powers, and that the US believes that Europe/Asia will suffer more than they will. The result of this sort of thinking is that the US appears as indifferent to global warming. Looking forward to Prof. Quiggin on the oil situation.

  9. Jill Rush
    February 27th, 2004 at 18:30 | #9

    Brett,
    Your points are quite valid.

    The problem I see is that the current government shows an aptitude for saying things and sounding concerned if it thinks that people care (and then talking about how much money is spent rather than what is actually achieved) but is so pro big business that it is unwilling to actually tackle the issues through new ways of thinking.

  10. Brett
    February 27th, 2004 at 20:22 | #10

    Jill, I think that all governments suffer from severe short-termism. In order to get elected they need to have something that differentiates them hence the tendency to populism if that’s the right word.

    Part of the problem of course is our short election cycle, but another part I suspect is because of our own very short attention span.

    I admit to being pleasantly surprised that Costello has even looked forty years ahead. Despite the fact that it misses some pretty important things, it at least is an an attempt at some long term planning, but some pundits are already saying that this is a message that is just too difficult or unpleasent to sell.

    Steve: The Danish Engineers state this about the IEA: OECD’s Paris-based International Energy Agency (IEA) states in its World Energy Outlook 2002 that supply can meet demand at least until 2030, provided that very large investments in exploration and the development of production capacity and pipelines are made. … However, the IEA explicitly states its concerns regarding the strenuous actions to be taken by governments in order to increase production at such a rate that economic development in the OECD countries as well as in the transition economies and the developing countries can be sustained.

    That is, our goverment needs to be taking strenuous action, and funnily enough I don’t count Manildra as strenuous action.

  11. derrida derider
    February 28th, 2004 at 20:03 | #11

    I think the “we’ll run out of cheap oil and this will crash our economies” line is hogwash. It ignores several things:

    - There are massive reserves of shale oil and coal. This will cap the price of oil at a level only (say) 40 or 50 percent above current prices.

    - Current oil prices are well above the costs of production in the ME. If these ultra-cheap wells run out a lot of the adjustment will be in the form of loss of rents for the owners rather than an increase in prices. This will have geopolitical consequences, but will not necessarily hurt other economies much.

    - Depletion would not be sudden. Even if I’m wrong on the other points and oil prices climb steadily ad infinitum, capitalist economies have proved extraordinarily good at coping with gradual changes in prices – it’s only sudden changes which hurt. This, after all, is a point made by people such as John who want us to start serious action on global warming now rather than later.

    In fact it’s far more likely the global warming consequences will cut our usage of oil than that a shortage of supply will.

  12. Brett
    February 29th, 2004 at 15:53 | #12

    Well its all speculation Derrida. I’m saying we should, as a nation, start considering it now.
    I take it you don’t think we should.

  13. Brian Bahnisch
    March 6th, 2004 at 11:39 | #13

    Brett, it seems a shame to leave this comments thread up in the air like this. With limited knowledge, let me venture a few comments.

    dd is probably right, he often is. But you are right, I think, to call for forward planning and a long-term view. It is certainly not plain sailing. Production of shale oil, for example, is problematic environmentally and requires large amounts of energy in the production process.

    Steve, the IEA report is interesting. As far as I can see they do one a year, and a more comprehensive report every 5 or 6 years. In this context a 20 year rolling view seems reasonable.

    The report says that there is plenty of energy now, and with new technology, plenty post 2020. They mention hydrogen-based fuel cells and carbon sequestration. They do identify price as a separate factor from cost. Price takes account of monopolistic tendencies, security issues and the geopolitical situation beyond the cost of production, distribution etc.

    The report is perhaps most notable, however, in identifying the need for massive investment in infrastructure for the production, transformation, transportation and distribution of energy, especially in developing countries. It says that the market won’t get us there and state intervention will be required.

    This seems to support your position, Brett, that our nation should examine the longer view. But as Jill says, short-termism seems to be the order of the day. Indeed, according to Laura Tingle in the Fin Review of 28 Feb the aged care issue was “rolled out – and pumped up – in a slightly desperate attempt to regain the political initiative” from Labor.

    Too often I find it hard to take Costello seriously.

    And, yes, PML, you’re probably right. I have a vague idea that there are local government elections coming up and maybe the lord mayor had passed his/her use-by date.

  14. March 6th, 2004 at 12:41 | #14

    “Production of shale oil, for example, is problematic environmentally and requires large amounts of energy in the production process.”

    The crucial thing isn’t the energy needed, but its availability in an accessible form. This is the main reason why a straight ethanol biofuel approach doesn’t make sense in its own terms, done directly; it needs too many fossil fuel inputs. It wouldn’t, if the production process were rejigged, but that’s another story – which is the point.

    With shale oil, you can burn shale wastefully to extract oil from the rest, rather like the way 19th century Sicilians used sulphur as the fuel to refine sulphur – it was cheap at the point of production (that’s also why the early steam pumping engines made sense). So, the bottlenecks move, and what matters is the pollution from the vast increase in fossil fuels being used (and the concomitant reduction in when shale oil becomes uneconomic), and the all up cost of even larger scale processing.

    Doing shale oil extraction without piggybacking on the same process would give nicer outputs – but it’s that that would cost a lot to set up. It would probably involve hydroelectric power with long transmission lines, much crushing of the shale, and repeated use of supercritical propane or similar to dissolve out the oils (with cycles of explosive decompression to shatter the shale further). All expensive stuff.

    At the moment my best bet would be to have more biodiesel use, with the oils coming from non-food production, e.g. Honge nuts grown from trees planted along the long paddock.

  15. Brian Bahnisch
    March 6th, 2004 at 14:01 | #15

    That’s interesting, PML. A few years ago I knew a guy who had invented an engine with one moving part and using an air bearing. Highly efficient. It produced electricity and as a by-product, cool air. The original power source was a windmill which compressed air into a large compression tank. Useful on rural stations but small scale and useless for powering vehicles. Also extremely noisy.

    He was working on another version that used liquid carbon dioxide in a closed cycle. The power source was to be the heat in the air around us. It was also too bulky to fit in an automobile.

    I drove past his house the other day and it’s still overgrown with vines and needing a coat of paint.

    All very fanciful, but some day one of these nutters might hit the jackpot.

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