In 15 years, New Zealanders could be the oil sheikhs of the Pacific if Government projections over the potential of our petroleum sector bear fruit.

Ministry of Economic Development estimates suggest the petroleum sector alone could generate over $30 billion per annum in export revenues by 2025.

Unfortunately I really don’t think the MED have an accurate handle on potential or possible oil reserves, and they are being wildly optimistic. The Taranaki basin has been well explored and even the relatively successful Tui oil field last year yielded just $24m in royalties and $31m in income taxes. Tui is just 12.5% owned by NZOG, so the rest of the profits flow directly overseas, and we continue to import all of our oil.

Mr Gunstan, a commercial manager for the Marsden Pt oil refinery before becoming a fulltime “futurist strategist”, advised planners to break free of incremental thinking wedded to the more recent past.

He said much of New Zealand’s roading infrastructure harked back to horse and cart tracks built 100 years ago, and was totally unsuitable for modern society.

Showing a slide of a motorway jammed with 10 lanes of bumper-to-bumper traffic, he said too much planning involved “more of the same with just some slight variation – maybe a few more intelligent traffic signs”.

“It doesn’t actually conceive that life would ever be different. It maybe takes advantage of some new technologies, but when we build it, it’s for incredibly long time periods – it’s still around when we’re six foot under the ground.”

But as a former oil importer, he was acutely aware of depleting fuel supplies, and expected New Zealand would have no more bitumen in 20 years for maintaining roads.

“So what are we going to build our roads out of – what sort of planning are we doing to maintain and build our roading for the future?” he said.

For the full article, click here.

The world is heading for a catastrophic energy crunch that could cripple a global economic recovery because most of the major oil fields in the world have passed their peak production, a leading energy economist has warned.

Higher oil prices brought on by a rapid increase in demand and a stagnation, or even decline, in supply could blow any recovery off course, said Dr Fatih Birol, the chief economist at the respected International Energy Agency (IEA) in Paris, which is charged with the task of assessing future energy supplies by OECD countries.

In an interview with The Independent, Dr Birol said that the public and many governments appeared to be oblivious to the fact that the oil on which modern civilisation depends is running out far faster than previously predicted and that global production is likely to peak in about 10 years – at least a decade earlier than most governments had estimated.

But the first detailed assessment of more than 800 oil fields in the world, covering three quarters of global reserves, has found that most of the biggest fields have already peaked and that the rate of decline in oil production is now running at nearly twice the pace as calculated just two years ago.

The basic premise is that for a city’s transportation system to be resilient – that is to be able to adapt to the changing world that we face over the next few decades – it simply can’t be as auto-dependent as many American cities, as well as Auckland, are at the moment. Whilst electric cars may come along and be the answer to our problems at some point in the future, to properly ensure that the effects of peak oil and climate change are not too horrific there is simply no alternative to making cities more public transport oriented.

One point that I found particularly interesting, before I get on to explaining the pointlessness of building more motorways, is the relationship between increased public transport use and decreased car use. Often it is simply thought of as a one-to-one relationship: that each increased ride for public transport is one fewer trip made in the car. However, it appears as though the relationship is actually stronger than that: that “there is an exponential relationship between increased transit use and declining car use.” This is further explained:

This helps explain why use of cars by inner-city residents in Melbourne is ten times lower than that of fringe residents, though transit use by inner-city residents is only three times greater. The reason is that when people commit to transit, they may sell a car and even more closer to the transit, eventually leading to lan use that is considerably less car dependent.

It is probably too early to tell, but perhaps it is this phenomenon that goes some way towards explaining some of the traffic patterns around Auckland over the last year and a bit. After the Northern Busway opened last year there was a significant increase in the number of people using public transport on the North Shore, but a far MORE significant decrease in the number of people driving across the Harbour Bridge each day. Clearly, rising petrol prices had a lot to do with lower car use (perhaps fewer discretionary trips were made), but perhaps people were starting to realise that with the Northern Busway in place they no longer had to live such auto-dependent lives. Over time, especially if we see some intensification around the busway stations, we may actually see this trend continue quite significantly.

Anyway, onto the main purpose of this post: to question whether building motorways really actually ends up achieving the purpose of what they were trying to achieve. Now, for a start, I must say that having spent a decent amount of today driving around on Auckland’s motorways I definitely do see a use for them: in shifting people around long-distances within the city fairly quickly – especially on weekends when the traffic flows are less concentrated and more all over the place. However, as I am certainly not advocating we get rid of any of Auckland’s current motorways, the question is mainly around “should more be built?” While Resilient Cities doesn’t mention Auckland specifically, some of the points it makes would certainly apply here – especially when considering many of the arguments put forward in support of the Waterview Connection.

Now, motorways are usually proposed to help ease congestion, and are considered to save time, fuel and emissions by avoiding the stop-start nature of driving on local roads. As we all know, cost-benefit analyses are used to justify motorways, largely based on these ideas. Resilient Cities strongly questions the supposed benefits of this approach to justifying the money that is sunk into motorway projects:

Will it really save fuel to build freeways? No, the data do not support these contentions. The data show that cities with higher average speeds use more fuel per capita as the faster roads just mean people travel farther and more frequently by car. Is congestion associated with higher fuel use in cities? No, on the contrary those cities with lower congestion use the most fuel. Although individual vehicles in less congested cities are moving more efficiently they are being used much more often and for longer distances while greener modes are being used less.

In my opinion this is the crux of the issue, at least to some extent, in that induced demand is often ignored when planning road development. Furthermore, by ‘demonising’ congestion, we ignore the fact that congestion is actually a pretty good indicator that we need to offer better alternatives to the car: rather than just providing more capacity for cars. It is congestion of the road system that – as long as alternatives are available – will give people the incentive to use those alternatives. We needn’t destroy our cities by fighting and endless battle of providing more capacity, watching that fill up, having to provide more capacity and then watching that fill up too. This is further elaborated upon in Resilient Cities:

Is removing congestion always a good thing? Not if it is attempted by increasing road capacity; car use will increase to quickly fill the newly available space. The Texas Transportation Institute, in a study of US cities over the past thirty years, found no difference in the levels of congestion between those cities that invested heavily in roads and those that did not. It is possible to make more car dependence and congestion out of a policy to improve traffic.

It certainly seems like this is the mistake Auckland has made over the past few decades – and in particular in the last decade where it seems like we’ve really tried to build our way out of congestion. Somewhat ironically, the only thing that has ever really had a major effect on reducing congestion in Auckland over the past decade has been rising petrol prices.

With $1.4 billion likely to be sunk into the Waterview Connection over the next few years, as well as $430 million on the Victoria Park Tunnel, $300+ million on the Manukau Harbour Crossing Project, $200 million on the Newmarket Viaduct replacement, around the same on the Hobsonville Deviation and the SH20-SH1 project, it’s pretty clear Auckland hasn’t yet learned that you cannot build your way out of congestion.

First of all, let’s start by disproving the last statement, and then work our way through the rest. My trusty guide this time around is a truly fantastic book called “The Last Oil Shock: a survival guide to the imminent extinction of petroleum man“, by David Strahan. I feel compelled to repeat myself: this book is utterly brilliant in its analysis of peak oil, its causes and effects, and potentially what we can do about it. I absolutely recommend anyone interested in peak oil buy this book. So yeah, let’s start with the whole “there might be masses more oil out there we just haven’t found yet” myth. The easiest way to analyse that is to just have some idea about where we find oil and why – effectively the main point being that oil will only exist in certain favourable geological circumstances. The most important of these is a sufficient type of rock to “trap” the oil in place. Most oil throughout history has bubbled to the surface fairly quickly, or hasn’t even formed in the first place from rotten ancient trees and creatures, because it wasn’t trapped in place for long enough. To cut a fairly long story short, if you have some idea of the geological make-up of what’s under the earth (which we do) you can pretty much rule out the 95% of places where oil will never be. It can’t be in those places because it is simply unable to form and remain in those areas. The main issue now is exploring the remaining areas, to see whether those places where oil “could” have formed, actually has it or not. Most don’t.

So over the past 100 odd years (particularly in recent decades) we have actually done a pretty thorough job of exploring those places. This is particularly true in the USA, where production peaked in 1970 and has been in decline ever since, even though production from Alaskan fields (with huge environmental consequences of course) has somewhat slowed the decline. The Last Oil Shock quotes Richard Hardman – former head of exploration and production of Amerada Heiss – as saying “The world has been surveyed to the extent that it’s very unlikely that very large reserves exist in areas that we haven’t looked.” Discoveries of oil are now way below the levels of production and consumption, and well below the level of discoveries that we had 40 or 50 years ago. Clearly that has a flow-on effect, in that if you keep using stuff you discovered earlier, but don’t discover new stuff – eventually you’re going to run out. Or more to the point, you’re really going to struggle to increase your level of production to match increasing demand, which is really what peak oil is all about. So, there is no magic fix that we’re going to discover another Ghawar any time soon.

Of course there are other ‘non-conventional’ sources of oil – such as the Alberta Tar-Sands. Now while there is clearly masses of potential oil in Alberta, actually getting it out is a mission and can’t happen very quickly – current levels of extraction use around a quarter of Alberta’s water. And that’s for barely 1% of the world’s daily oil use. So while Alberta’s tar sands might mean we have a long-term supply of oil (although a very enviornmentally damaging one at that), they are not a source that can be “ramped up” when other areas of oil production inevitably fall.

Now I think of peak oil as the point where oil prices increase significantly because supply can no longer keep up with demand, due to half the world’s oil having been extracted. This means that the point when oil runs out is actually pretty irrelevant, and what becomes relevant is the point when only half the world’s oil has run out. As oil takes thousands or millions of years to create, we aren’t replacing what we use any time soon, so of course we are depleting it each and every time we use it. Therefore, even if we have only used something like 46 per cent of all the recoverable oil in the world, it’s not actually a point where we can be complacent and say “well more is left in the ground than what we’ve used so far… sweet”, but rather a point where we need to say “yikes another four percent and we’re halfway through it, roll on peak oil!” The fact that oil production wasn’t able to increase significantly last year when prices went through the roof (in fact they went so high that even OPEC was worried about them as they realised people would start looking at alternatives to oil at those kinds of prices) says to me that perhaps we’re either really close to hitting that 50% mark, or perhaps that we’ve already reached it.

The importance of that 50% mark is down to the way oil from an individual field is extracted: with the first half extracted at an increasing rate (due to more wells being put in it), but after that first half has gone the pressure in the oil field decreases and more work is necessary to squeeze the rest of it out. Once you hit the 50% mark you can’t usually increase the rate at which you extract the oil, no matter how hard you try. Aggregate that up for all the oil fields in the world and it explains why it will be really difficult to increase the rate of production after we hit that 50% mark. The USA already hit the 50% point in 1970, and has had declining production ever since. Many other non-OPEC countries have hit that point in recent years, including the entire North Sea oil field. We’re all now effectively relying upon Saudi Arabia, Iraq and Iran to have not reached that magical point so they ARE able to increase production enough to off-set the ‘post-peak’ countries. One could say that they didn’t manage that in mid 2008.

Of course, there is the question of “how come oil prices have come down so much in recent times then?” Page 177 of The Last Oil Shock has some sobering news on that front, linking the current recession with peak oil and some pretty nasty long-term consequences. Keep in mind this book was written in 2007.

Paradoxically the very worst short-term outcome might be not a sudden shock, but a milder recession. If this were to create some temporary spare oil production capacity by depressing demand, the economists would claim it was all back to business as usual, and the urgency of the need to prepare for the impending peak could easily be forced off the policy agenda – assuming it ever gets there – by apparently more pressing problems. The world might roll over and go back to sleep again, only to suffer a far more brutal awakening later on.

Now I don’t think many people are calling the current recession “mild”, but its effects are certainly similar to what is outlined in the quote above. The recession has knocked back the growth in demand for oil, which has also created some spare oil production capacity. Combined with an over-inflated price for oil in any case (largely the result of traders becoming aware of oil as something to make money off last year, and then everyone jumping on the bandwagon), the recession has depressed demand. Economists, seemingly those favoured by the New Zealand Government in particular, do appear to have the outlook of “business as usual”, with a private-car based transport system being the way of the future.

In some ways, what’s even more fascinating is how The Last Oil Shock links the spike in oil prices last year with the current recession. Remember, this book was written in 2007 so what is being proposed was just hypothetical at the time (from page 180-181):

The first major oil price spike is likely to send a series of violent quakes through the economy. Quite how violent will depend on the level of awareness of investors on the currency and stock markets. For as long as most continue to labour under the misapprehension that every short-term spasm in the oil supply is simply some disconnected local difficulty, the response of the financial markets may be relatively subdued – perhaps with the exception of Iran. But the moment the money men get it, the price of oil and other energy assets will soar, and almost everything else will go into meltdown.

Hmmmm… sounds a lot like June-September last year to me. Eventually the money-men started to realise that rising oil prices were not just one-off events linked to someone letting off a bomb in Iraq, but were linked to something longer-term. So they all rushed to throw their money at oil, its price soared – cue meltdown.

A major spike in the oil price is recessionary not only because of its direct effects on the global economy, but also because it is likely to cause stock markets around the world to crash, further reinforcing the recessionary pressures. This in turn will lead to second order effects, such as the deepening insolvency of many pension funds, which hold the bulk of their investments in stocks and shares… As the crisis deepens, pension payments may be slashed to derisory levels in both money purchase and the supposedly more secure final salary schemes. The value of endowment policies will collapse too, with devastating effect on the borrowers who were counting on them to repay their mortgage, and the housing market as a whole. The banking sector will also act as a multiplier: since so much lending is “secured” against future economic growth, as the outlook worsens lending will fall, leading to further contraction.

Far out. That sounds an awful lot like the last few months.

The worry here seems to be that peak oil causes recessions, which then themselves create a situation where oil prices are lower. Lower oil prices make people forget oncoming peak oil, which therefore means that necessary changes aren’t made. Once the economy recovers, we see oil prices skyrocketing again (made even worse by low investment in oil exploration during times of recession). As we haven’t adjusted ourselves to living without the need for cheap oil, we get slammed again by the high oil prices, get thrown back into recession, and the cycle continues. The only way to escape the cycle is to break our oil-dependency.

And how does this link back to transport? Well of course it is oil that drives just about all methods of transport in New Zealand. Private cars use the vast majority of New Zealand’s oil, and because our transport system is extremely auto-oriented, and heading more that way thanks to our current government, this leaves us extremely vulnerable to the oil-spike, recession, oil-spike, recession cycle that is so worrying.

A little over a year ago, when oil was $US56 a barrel, I wrote an article which concluded that New Zealand needed to diversify away from fossil fuels in order to survive and prosper.

One year on, and with oil now over $US70 per barrel, there has been no policy response at all from central Government. Projects that would reduce our dependency on imported fossil fuels, such as electrification of the rail network, are being passed over in favour of completing “missing” links of the motorway network. With the price of oil forecast to go much higher than the 25% increase we have had in the last year, many fossil fuel dependent projects simply will not be viable.

Fuel prices will continue to rise as they have done for over five years now. This is because demand continues to grow globally, while supply remains flat or even starts to decline. Recent studies show that 9 out of the top 10 international oil companies have flat or declining production rates as a result of their oil fields maturing.

So why do fossil fuel dependent transport projects continue to be funded in New Zealand? Because the benefit cost ratio (BCR) framework used by Government agencies completely ignores the future price of fuel.

An example is the road pricing study currently being championed by the Ministry of Transport. I attended a briefing for this and I asked officials what the expected price of petrol will be in 2016, which is the purported timeframe of the project. After a bemused silence, the answer was that the price was irrelevant for the purpose of comparing different charging options, and so was benchmarked at today’s prices.

Future fuel prices are also similarly ignored for billions of dollars worth of projects, such as the Manukau Harbour crossing and the State Highway 20 projects being promoted by Transit.

Under the current BCR evaluation framework, therefore, fossil fuel dependent projects will still appear to be viable even if no one can afford the future price of petrol.

It shouldn’t be like this. In 2003 the Government enacted the Land Transport Management Act. The aim of this act is to provide an “integrated, safe, responsive and sustainable land transport system.”

The act established a funding process so that “approved organisations” such as Transit, local and regional councils and the Auckland Regional Transport Authority could seek funds for transport projects from Land Transport New Zealand. Projects from different sources were supposed to be evaluated and prioritised according the aims of the act.

Clearly the implementation of the Land Transport Management Act is failing. It is hard to see how the sustainability of transport projects can be evaluated if the price of oil is not considered. Also projects which are environmentally beneficial or reduce carbon dioxide emissions don’t receive any greater weighting than ones that don’t.

Further adding to the confusion is a recent Government directive that Treasury will now take over the funding of rail capital projects. The Government went as far as supplying the Auckland Regional Council with a list of Auckland rail projects that Treasury is willing to fund. These projects include established projects such as double tracking the western line, but don’t include any plans for electrification or expansion of the rail network such as the Onehunga branch line. ARTA, the agency tasked with planning Auckland’s passenger transport, has wisely determined that Auckland needs electrification as the price of oil rockets through the $US70 a barrel mark, but it is unable to convince Treasury of this.

Our current Government has funded alternative transport more so than any other in recent history. But now we are facing a new challenge. We must accept the reality of rising oil prices, start making intelligent decisions and fund the most appropriate transport projects.

It remains to be seen when the Government will finally start doing this. Perhaps, when petrol reaches $2.00 a litre, it may realise that the current congestion charging initiative will be redundant. Perhaps, when petrol reaches $3.00 a litre, it may suspend all uncommitted roading projects, and begin investment in an alternative fuels infrastructure instead.

We can only hope that whenever that the Government does decide to act, that it will not be too late to catch up with the rest of the world.

During the debate about the forthcoming 5c per litre increase in petrol excise, a number of politicians and commentators have suggested deferring the increase until oil prices stabilise at lower levels. Yet no one has been able to offer a valid reason why prices should come down.

With global crude oil consumption running at a staggering 84 million barrels a day, the current price of around $US56 per barrel seems entirely reasonable. At an equivalent price in our currency of 50c per litre, even imported bottled water is more expensive.

Most people are aware that crude oil prices are currently at all time highs. Fewer people know why this is, and fewer people still have heard of a Shell Oil geophysicist called M. King Hubbert.

In 1956 Hubbert predicted, with considerable jeopardy to his career prospects, that oil production would peak in the United States some time between 1965 and 1972. In making this prediction he had determined that the production rate of oil follows a bell shaped curve. The variation in the timing of the peak reflected different estimates of known reserves of oil.

As it turned out it wasn’t until 1972 that analysts realised the peak had occurred two years earlier in 1970.  Hubbert’s theory was proved correct. US oil production has declined ever since, so much so that today the US only produces about half as much oil as it did in 1970, roughly 5m barrels a day. No amount of future drilling can reverse this trend either. If the Arctic National Wildlife Reserve is opened up for drilling, the peak production from this environmentally sensitive area will only amount to an additional half a million barrels a day, in about 15 years from now.

Expanding his analysis to the global oil situation, Hubbert predicted in the late 1960′s that the global peak would be some time around 2000. His estimate has been further refined, notably by Princeton geologist and a former colleague of Hubbert’s at Shell, Professor Kenneth Deffeyes. His somewhat tongue-in-cheek prediction is 24th November, 2005 –  Thanksgiving Day in the United States. Other projections range from “already peaked” to an optimistic 2035, which comes from the US Geological Survey.

Regardless of when the actual peak occurs, we are already living with high oil prices and associated high volatility. Over 50 countries are now producing less oil than they did a year ago, and discoveries of oil peaked in the 1960′s. Despite comments from OPEC about increasing oil production, there appears to be almost no spare production capacity at all. Qatar Oil Minister Abdullah al-Attiyah recently said that the current high prices are “out of the control of OPEC.”

Even with these high prices, demand for oil continues to go at unprecedented rates. China looks set to import 30% more oil than it did last year, and demand has also increased in almost every other country in the world.

The peaking of supply coupled with high demand growth can only lead to higher and higher oil prices for the foreseeable future.

Simply put, oil producing nations cannot get oil out of the ground fast enough to meet demand.

New Zealand’s transport agencies need a contingency plan for the rising price of oil. At $US70 a barrel, the Auckland Regional Transport Authority should be looking to secure options on electric rolling stock for our rail network. At $US100, Central Government should be suspending all new roading projects. At $US200, Auckland International Airport’s proposals for a second runway should be shelved in favour of a container wharf for shipping.

Reliance on emerging new energy technologies such as hydrogen won’t help us in the short term either. The so-called”hydrogen economy“ is a net energy loss proposition – more energy is put in to the extraction, compression and storage of hydrogen than comes out of it.

In addition, currently over 90% of all hydrogen is obtained from fossil fuels, which defeats the purpose of an alternative fuel. While hydrogen can also be obtained through the electrolysis of water, this process requires electricity and is 70% efficient. Adding the compression and storage requirements of hydrogen to the equation means that hydrogen is a net energy sink. These are just some of the significant hurdles to be overcome before we can look to hydrogen to solve our energy woes.

Nuclear power will not help us either. Significant environmental issues aside, uranium is subject to the same bell shaped production curve as oil, and evidence exists that it too may have reached its peak.

Alarmingly, in New Zealand it would appear that there is no contingency planning at any level of government for the likely prospect of high oil prices. The Government still retains a billion dollar investment in Air New Zealand. Treasury is still apparently sticking to its long term prediction of $35 per barrel. The ARC makes little mention of fossil fuel dependency in their Regional Land Transport Strategy. The 5c increase in petrol excise tax is to be spent on roading projects, when a better use of this money would be investing in research and development of energy sources and projects that do not rely on fossil fuels.

Other countries are beginning to accept that Hubbert’s Peak is inevitable. Queensland politician Andrew McNamara recently gave a speech on Hubbert’s Peak, concluding that “no alternative energy source available to us today or in the foreseeable future is going to make up the total energy shortfall.” In the US, Republican Congressman Roscoe Bartlett gave an hour long presentation to Congress on Hubbert’s Peak.

When Hubbert’s Peak becomes a reality, only the economies which are fastest to adapt to new energy sources will survive and prosper. New Zealand, with its near total reliance on fossil fuels coupled with poor contingency planning, does not look set to be one of these.