Pipe dream of infinite fuel is a costly myth
September 5, 2007
By Jeremy Wakeford
Bids by Transnet Pipelines and iPayipi to construct a new liquid fuel pipeline between Durban and Gauteng received prominent coverage in the financial media recently.
The pipeline is intended to address anticipated fuel shortages in Gauteng by 2010 and to enhance security of supply. However, a crucial premise needs to be interrogated: will sufficient oil imports be available and affordable over the pipeline's lifetime to ensure it is viable?
It seems the competing bidders have not done their homework. In its Medium-Term Oil Market Report last month, the International Energy Agency (IEA) issued a stern warning: "Despite four years of high oil prices, this report sees increasing market tightness beyond 2010, with Opec spare capacity declining to minimal levels by 2012." Compared with the IEA's history of rosy supply forecasts, this statement is a watershed.
It is just one of a growing number of voices raising the alarm about an imminent oil crunch as demand growth outstrips supply.
Even the industry-led National Petroleum Council (NPC) in the US has changed its tone, if not its tune, in a huge new study called Facing the Hard Truths about Energy.
However, neither the IEA nor the NPC has yet tackled the fundamental issue, which is when global oil output will reach its all-time peak and begin an inexorable decline.
The logic of peak oil is simple. Oil is a finite resource: the quicker you consume it, the faster it depletes. Production must peak before diminishing towards zero, no matter how high the price or how fancy the technology becomes.
Of roughly 100 oil-producing nations, about 60 have passed their individual peaks, including top producers like the US, UK, Norway, Indonesia, Mexico and Iran.
Colin Campbell, the chairman of the International Association for the Study of Peak Oil, maintains a detailed database and forecasting model. He predicts that world output of petroleum liquids will top out around 2011, "subject to demand-side conditions (global growth) and potential short-run supply disruptions".
Thereafter, he forecasts a decline rate of about 3 percent a year - a conservative estimate compared with some others.
For oil importers, there is worse news. Oil exports are sure to peak before world output peaks, and the decline will be faster. As demand for oil products is growing rapidly in oil-exporting nations like Saudi Arabia, the amount of oil they can export is diminishing.
Importers will soon be competing for a shrinking pool of oil. The most powerful players will outbid and outgun the rest. Many African countries are unable to afford sufficient oil at more than $70 (R500) a barrel, and parts of their economies are shutting down, while China's oil imports are growing at nearly 20 percent a year. South Africa's oil imports could begin to shrink in a few years, starving the proposed pipeline of its rationale.
The issue of peak oil is making headlines in mainstream media, from the UK's Independent paper to US magazine Business Week.
More governments are taking oil depletion seriously. The US government accountability office released a detailed report in February addressing a peak in oil output.
More boldly, Sweden announced last year that it intended to wean itself off oil by 2020.
The US city of Portland, Oregon is calling for oil and gas consumption to be halved by 2020 and mitigation strategies to be adopted.
Thus far, our government's one-sided view of liquid fuel security focuses solely on supply. Transnet's R9.5 billion fuel pipeline plan is but one example. A demand-side approach that seeks to reduce dependence on liquid fuels is less risky and probably less costly.
The government could mandate higher fuel efficiency standards for road vehicles and realign incentives to encourage electric and hybrid vehicles. Most importantly, it should expand the provision of public transport and rail freight.
A clear look at the abundant warning signs of future constraints on oil supplies reveals the folly of basing policies and investments on extrapolations of past trends. Ultimately, South Africa's citizens and taxpayers will pay the hefty price of poorly informed decisions.
Jeremy Wakeford is a senior lecturer at the University of Cape Town's School of Economics and a research director of the Association for the Study of Peak Oil South Africa
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