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RUNNING OUT OF OIL — AGAIN

by Roger Kerr, executive director of the New Zealand Business Roundtable

 

New Zealand is fast running out of oil, Green Party co-leader Jeanette Fitzsimons MP told an energy workshop in Masterton last month. She was referring to both domestic production and imports.

“Government planners are blithely ignoring the fact that the world’s oil demand will very soon exceed supply”, Ms Fitzsimons said. She called on analysts and planners to acknowledge that “there is just not enough oil left at an affordable price to fuel New Zealand’s future”.

We have long been told that we were running out of oil. In 1914 the US Bureau of Mines estimated that there would be oil left over for only ten years’ consumption. In 1939 (and again in 1951) the Department of the Interior projected that oil would last only 13 more years.

Danish environmentalist Bjorn Lomborg, who came to New Zealand as a guest of the Business Roundtable earlier this year, quotes Professor Frank Notestein of Princeton, who said in his later years: “We’ve been running out of oil ever since I was a boy”.

The easiest way to tell if a resource is becoming scarcer is if its price goes up in real terms. But the price of oil is well below its earlier peaks, and oil has not become scarcer.

This seems baffling: despite using more and more oil, the world has more and more left. There are three reasons. First, known resources are not finite, but limited by what companies and countries know can be accessed. They won’t go in for costly exploration in advance of their foreseeable needs. Second, technology and efficiency have constantly improved. And third, it is possible to substitute. In around 1600, wood became increasingly expensive, and this prompted a gradual switch to coal. During the latter part of the nineteenth century, a similar substitution took place from coal to oil.

In 1865, a highly regarded English economist named Stanley Jevons wrote a book about coal use. He foresaw a relentless increase in the demand for coal, which would inevitably exhaust the nation’s coal supplies. He warned: “it will appear that there is no reasonable prospect of any release from future want of the main agent of industry.” Jevons’ arguments are not dissimilar to those made by Fitzsimons today.

As with oil and gas, coal reserves have increased with time. Worldwide, since 1975, total coal reserves have grown by 38 percent, but the price of coal in 1999 was close to the previous low of 1969. Despite 100 years of mining, only 1% of New Zealand’s economic coal resource has been utilised. New Zealand has more than 10 billion tonnes of coal — the equivalent of 50 original Maui gasfields, and enough to power New Zealand’s economy for more than 1,000 years at present rates of energy demand.

The government’s goal of achieving annual economic growth of 4% or greater means the economy would be nearly 50% larger in ten years’ time. To support that growth, electricity supply needs to expand by a third to a half. Coal is currently used to produce just 5% of the nation’s electricity, compared to 80% in Australia and 37% worldwide. This relatively cheap energy offers a strategic economic advantage. Coal technology is becoming ever-cleaner. New Zealand has to have a coal future.

It is not clear today what resources will eventually replace New Zealand’s current energy sources. But substitution is bound to occur. Fission and fusion energy both provide possible substitutes, along with renewable sources such as sun, wind, water and the earth’s internal heat. The immediate potential of renewables is strictly limited, however: in 1998 wind and solar power accounted for just 0.05 percent of world energy production. This low share is simply a consequence of renewables not yet being competitive with fossil fuels. But with the cost of solar energy and wind energy dropping (by 94-98 percent over the last 20 years), each is becoming closer to being profitable.

As Sheik Yamani, Saudi Arabia’s former oil minister and a founding architect of OPEC, has pointed out: “the Stone Age came to an end not for a lack of stones, and the oil age will end, but not for a lack of oil.” We will stop using oil when other energy technologies provide superior benefits.

Fitzsimons is right to argue that fossil fuels are non-renewable, but she is wrong to assume that technology will remain constant and we will keep on using these resources in the way that we do today. She is also wrong to worry about both an early end to fossil fuels and global warming.

Doom merchants have warned about resource depletion since the Club of Rome’s discredited report in the 1970s, and these warnings have been debunked many times. As a former academic, Fitzsimons must be aware of the facts, yet she refuses to engage with them.