Peak Oil and the Australian Army: An Update

In 2007 the Australian Army Journal published an article titled Peak Oil and the Australian Army. The motivation for writing that article was the risk of Army being ‘functionally dislocated’ by the onset of peak oil with inappropriate doctrine, training and equipment. This post provides an update to the original article, focusing on the current global and Australian oil situation. It also discusses Army’s, and more broadly Defence’s, approach to a liquid fuel constrained future. 

The continued growth in oil production indicates that the global oil production peak, which will be followed by a terminal decline (commonly known as peak oil), has not as yet been reached. Indeed global oil production has increased by around 10 million barrels a day (mb/d) from 2005—when peak oil became a major concern—to 2016 according to BPs Statistical Review of World Energy.

Despite global peak oil not having been reached as yet, there are multiple reasons to be concerned about the future cost, reliability and availability of oil, which is still the world’s primary source of energy and predominant transportation fuel. Some of these reasons include:

• Oil discoveries peaked in the 1960s and are in long term decline. According to the International Energy Agency (IEA), oil discoveries in 2017 were only 4 billion barrels (compared to global consumption of 33 billion barrels per year). This rate of discovery is a 70 year low.
• Demand for oil is continuing to increase while production from existing fields is declining. An additional 3 mb/d of new production is required every year to meet demand.
• Oil industry investment has fallen significantly and may be insufficient to guarantee future supply.[1] Of concern is that much of the investment is in US shale oil. A shale oil well is 70 – 90% depleted in three years, in comparison to conventional oil fields that produce at high rates for decades. Sober analysis of the US shale oil industry suggests that the projections of continued production growth are highly optimistic and unlikely to be met.[2]

These factors, and others, suggest that the peak oil predicament has not gone away but rather there has been a decade long reprieve, due in part to the decreased rate of demand growth since the Global Financial Crisis (GFC) and the rapid, but likely temporary, growth in shale oil production.

Australia’s oil situation has considerably deteriorated over the last decade. While domestic oil production has continued to decline, consumption has increased (Figure 1). Australia is becoming increasingly reliant on the importation of both refined oil-based products and crude oil for our dwindling refining capacity. Australia consistently fails to meet the International Energy Agency’s requirement of holding oil reserves equivalent to 90 days of imports as a buffer against supply disruption (generally holding just half that amount with stocks of diesel fuel being as low as 12 days of supply in the recent past); relying instead upon a Just-In-Time supply chain and the ability of the oil market to address disruptions.

Figure 1. Australian Oil Production and Consumption (Source: 2017 BP Statistical Review of World Energy)

In 2005 a major report indicated that it would take an intensive effort over decades to mitigate peak oil. A crash action mitigation program at the oil peak would leave the world with a significant liquid fuels deficit for more than 20 years. Despite this warning, efforts to transition away from oil have been minuscule. For example, there are currently only 4000 electric vehicles in Australia.

Barring a significant geopolitical event, the cost of oil is likely to be of more concern to economies than its availability in the short to medium term. Historically oil price spikes precede, if not trigger, economic recessions. This is due to the tight coupling of economic growth and energy consumption. Rising demand, ongoing depletion, insufficient investment in future production and increasing geopolitical tensions are all indicators that suggest another oil price spike is on the way. With debt levels far greater today than prior to the GFC, an oil price spike could be a trigger for the next financial crisis.

With rising geopolitical tensions between major powers, the potential for disruption to Australia’s oil supply is omnipresent (for example, over half of Australia’s diesel and jet fuel transits through the South China Sea). Despite this, the Australian Government continues to view energy security as primarily an economic concern. This is clearly evident in documents such as the 2011 National Energy Security Assessment (NESA) and the 2015 Energy White Paper, documents primarily authored by economists. Retired AVM Blackburn has pointedly argued ‘energy security is too important to leave to economists alone’.

Relying upon the market to address energy security is a dangerous assumption. Whether due to declining oil production, an oil price spike triggering a recession or geopolitical turmoil, it is increasingly likely that there will be a significant discontinuity in the foreseeable future that results in a market failure for Australia’s oil supply. Both the Army and the Australian Defence Force, as well as our critical national infrastructure, must be capable of functioning when such a discontinuity occurs. The apparent complacency of both Government and Defence towards such a possibility is highly concerning. Our nation has invested billions fighting terrorism yet the actual impact of terrorism in this country is minor. A market failure for our oil supply could see supermarket shelves empty within a week; a disproportionate calamity that would affect the entire nation. 

The current market-led approach to energy security could well result in the ADF being unable to get to the fight, let alone win it, in the event of a conflict within our region. Energy security is not a logistics issue for Joint Logistics Command to address, as is Defence’s current approach. It is clear that energy security must be addressed as a priority national security issue if the entirely foreseeable risks associated with Australia’s future oil supply are to be addressed. This will have wide-ranging ramifications but is critical to ensuring Defence’s ability to meet plausible contingencies, as well as ensuring the prosperity and security of our nation.

[1] International Energy Agency 2018, Oil 2018: Analysis and Forecasts to 2023 Executive Summary (https://www.iea.org/Textbase/npsum/oil2018MRSsum.pdf), International Energy Agency, Paris.

[2] D Hughes, 2018, Shale Reality Check: Drilling into the U.S. Government’s rosy Projections for Shale Gas & Tight Oil Production Through 2050, Post Carbon Institute, Corvalis: Oregon.