Petrol prices signal the need to prepare for change - Editorial - Opinion

Governments can't do much about the oil price. Politicians and the public can do much more to modify policies and behaviour to prepare for a new era of energy use.

Australians who go out in their cars this weekend and fill up with petrol will shudder at the cost. They may even mutter that the Government must do something about the price. Perhaps, though, they should pause for a moment and look beyond the figures on the bowser to the insatiable demand for finite oil reserves that is driving up prices. They might then realise that cutting fuel taxes is a counterproductive solution; it encourages Australians' dependence on oil and thus their vulnerability when oil runs out or, probably well before then, becomes prohibitively expensive.

A year ago, Treasurer Peter Costello warned that petrol prices would stay above $1 a litre. Ah, those were the days: the price is testing record heights (for the cities) of $1.40. By last September, Prime Minister John Howard was warning the Government could do nothing about a short-term price spike. Seven months later, Mr Costello is talking about the risk of a third "oil shock", saying: "This has lasted longer than anyone expected." Mr Howard hopes prices will soon "recede a little bit". It is not just the Australian public, then, that seems to be struggling to come to grips with the fact that the future of oil prices that once seemed inconceivably high is upon us. Service Station Association chief executive officer Ron Bowden this week summed it up: "You're living in a fool's paradise if you think you're just weathering a storm and everything will go back to normal. Normal is high energy prices ... $2 a litre is quite possible."

Official forecasts have proved to very wrong, as the convener of the Australian Association for the Study of Peak Oil and Gas, Bruce Robinson, told a Senate inquiry in Perth last week. In 2002, the Australian Bureau of Agricultural and Resource Economics (ABARE) forecast an oil price of $US21 a barrel this year (it was $US18 at the end of 2001), not $US72. Its estimate of $US35 just a year ago was still out by 100 per cent. The problem, as with comparisons to the 1970s oil shocks, is that the parameters of supply and demand have changed profoundly. The Inquiry into Australia's Future Oil Supply and Alternative Transport Fuels has not attracted the attention it should, but anyone who reads the Hansard record of a thought-provoking discussion on April 11 would understand why old assumptions are unreliable. When even a Big Oil champion such as US President George Bush warns that his country must end its oil addiction, Australia should get the message. The old tyranny of distance grows along with fuel prices.

Demand, driven by China and India, is soaring, but production has been flat for 18 months. Producers are pumping at capacity, not cutting supply as they did in the '70s. Oil is being used up at four times the rate that new reserves are being found. The cheapest oil from the biggest, most accessible fields has driven global development - there has never been a cheaper, high-energy fuel - but the new sources are more inaccessible and costly to tap. ABARE still forecasts that in the next 25 years Australia will use 66 per cent more oil. Where will it come from and, more to the point, at what price?

The question of when oil production will peak (some analysts even say it has) is a highly uncertain one, but it can no longer be safely assumed that there is plenty more, at an affordable price. Australia must urgently assess the full extent of its oil vulnerability, across all industries and sectors. It must be more selective in its use of oil (for fuel and a vast range of products) and develop alternative, market-ready fuels. Some seemingly obvious answers, such as converting vast natural gas reserves into liquid fuel, may not be as cheap or last as long as expected once the world starts looking at this alternative. The US (which could use up Australia's gas in three years) and Europe have depleted much of their natural gas, and China is buying up Australian gas.

Then there is the aviation industry to consider. It has no ready alternative to jet fuel - where does that leave a nation girt by sea, its travellers, exports and imports, should oil prices also go sky-high? (Ships and trains at least can use biodiesel.) Biofuels are being widely advocated, but this is a supplementary resource. Our entire wheat crop could produce only enough fuel to match about 10 per cent of our oil use. The Senate inquiry has aired concerns about the diversion of resources should farmers get better returns from fuel production.

The question hovering over the inquiry is why has there not been more strategic planning to reduce the oil dependence that makes us so vulnerable? Politicians have not led the way in informing the public; they even offer subsidies that encourage reliance on petroleum fuels. The Howard Government has failed to deliver the policy certainty and strategies, including targets and tax incentives for innovation and large-scale investment in alternative fuels. State governments, Victoria's included, are backing huge road projects that keep commuters in cars and promote oil use. The car industry is also built around six-cylinder cars, rather than smaller, fuel-efficient models that motorists are realising are a smarter choice.

There is a convergence of many economic and environmental issues here. While some scenarios being put about may be alarmist, there are positives for Australia if it acts on the concerns driving this debate. Many practical solutions will benefit public and environmental health and enhance liveability through better urban planning. Motorists vote with their feet for public transport when petrol prices rise, and perhaps politicians might start to consider the votes of low-income, outer-suburbs residents who lack this option. An electricity-driven mass transport network is one of the most environmentally friendly uses of Victoria's vast coal reserves, particularly if cleaner generating technology is used.

Decisions about the best uses of the world's oil and alternative fuels, matched to local resources and needs, are becoming urgent. It is hard to say exactly how urgent, but can any Australian government claim to have all the bases covered? While there is no single, simple solution, one certainty stands out amid the complexity. Smarter use and conservation of a more balanced range of fuel sources is the best and cheapest way to avert an oil shock. Victorians already know how easy it can be in practice to conserve resources - we have big reductions in water use to prove it. If Australians and their leaders act now, this country can be ready when oil supplies become unaffordable or unreliable. Planning for the transition from an oil-dependent economy is one of the great challenges of this generation.