APPEA’s Executive Director, Barry Jones, said today too many political parties and commentators were being sidetracked when debating the current high world oil prices.

Jones said there was two very simple facts that needed reinforcing.

There is no oil supply shortage at present. He said the current prices are driven by market speculation about potential political risks in a situation of strong global demand.

The second point was that the Liquid Fuels Emergency Act is not a risk prevention measure. It is a crisis management vehicle for use in extreme circumstances when everything else has failed.

“The real problem is simply explained. Australia has a gap between demand and supply for transport fuels and industrial oil and that gap is growing,” Jones said.

“If we do nothing, in 10 years, Australia will be producing only 230 thousand barrels per day (kbd) of petroleum liquids, at a time we will be consuming 1030 kbd,” he said.

The demand/supply gap will be around 800 kbd. Over the next decade, the cumulative shortfall will be 2550 million barrels of oil. The national self-sufficiency rate will be 22% compared to the current 70% and our 2001 sufficiency ‘high’ of close to 90%.

“Our daily import bill will be $US24 million (assuming a long term average oil price of $US30). Lost government tax revenue would be $US12 million per day. Over the ten year period we will have paid $US76.4 billion to import oil.

“The impact on the economy and the budget, even if there was no supply disruption, would be significant. If a major, sustained supply disruption was to occur, in a decade the social and economic costs could be huge.”

Jones said the major problem for Australia was that no one in politics wanted to comprehensively address the big picture.

“On one side, we have the Commonwealth Government saying it will review the situation every two years, while on the other side, the Federal Opposition acknowledges there is a problem but has only one policy suggestion which falls well short of a comprehensive solution,” he said.

“No single measure will close the gap. The Liquid Fuels Emergency Act is a last resort measure for when a major sustained supply problem occurs. The market will handle short term domestic based disruptions, just as it has done in the past.

“We should be taking action now to minimize both the economic implications of a growing gap and the social and economic implications of a major sustained supply interruption.”

According to APPEA – the peak body representing Australia’s upstream oil and gas industry – Australia needs to take five significant actions to minimize both of these risks.

As a matter of urgency Australia needs a national comprehensive oil exploration policy. In a supply risk sense this will potentially cut the supply gap by half to 1270 million barrels over 10 years. In an economic impact sense it will save the country $US38.1 billion of import costs and generate about $19 billion in tax revenues for governments.

The Commonwealth needs to be expanding its commitment to offshore geological research. It needs to be enhancing its 2004/05 budgetary commitment to make frontier exploration more attractive. It needs to be encouraging seismic surveys in frontier areas. It needs to be freeing up its acreage release processes, streamlining its marine environment management policies, looking at company tax depreciation policies that will make the development of marginal fields more attractive, and it needs to be introducing flow through shares.

The states (particularly Western Australia, South Australia, Victoria and Queensland) must expand their commitments to pre competitive geological research. They need to be matching New Zealand with lower royalty rates for new developments. They need to be streamlining approvals processes (which they acknowledge are cumbersome, fragmented and inefficient). They need to be avoiding acts of sovereign risk. They need to be appropriately funding groups of indigenous Australians so as to modernise native title processes.

Australia also needs as a national priority to be encouraging maximum liquids recovery from existing fields. Both the Commonwealth and the states must consider lower tax rates applying to marginal production for mature oil development projects.

But at best these measures might close the demand supply gap in a decade by 253 kbd. Other policies will be needed.

The third strand of policy that is needed is a long term alternative fuels strategy. Alternative fuels - be they gas to liquids based, bio fuels or coal gasification based or hydrogen - are capital intensive, high cost, technologically sophisticated and greenhouse gas emissions intensive.

An alternative fuels strategy needs to focus on labor market and technology policies directed at lowering capital and construction costs, mitigating taxation burdens (there is minimal economic rent in a gas to liquids project) and addressing actively technology and public perception issues associated with long term greenhouse mitigation measures (including the current activities on carbon capture and storage).

It is not sufficient to say these alternative technologies are viable at today’s (speculation drive) high oil prices. It is only if high oil prices persist in real terms for 15 or 20 years that there will be commercial drivers for these projects. It is only if consumers are willing to change their transportation habits that a national market for these products will exist. It is only if investment conditions encourage adequate investment in refinery, transportation and distribution infrastructure that these options can be practicable.

The fourth strand of a comprehensive strategy is the implementation of numerous demand side management measures.

Fuel switching from oil to natural gas or renewable energy could potentially cut today’s oil consumption in Australia by between 10% to 15% and have significant greenhouse gas mitigation benefits.

But this is not enough. We need to be looking at our transport fuel consumption and our liking for large powerful motor vehicles and personalized transport. We need to be looking at intelligent transport systems. The end use efficiency of the transport fleet has to be improved and greater use of public transport and changed urban planning has to be debated. These are not just matters of who pays. They are vital social issues that will generate a lot of heat when they are appropriately debated.

The fifth step is to do some good political risk management. How do we ensure that the so called arch of instability to Australia’s north does not threaten our transport fuel supplies? How do we ensure that if a sustained long term crisis occurs we are not disadvantaged in terms of access to available supplies due to political perceptions in other countries about Australia?

“While none of this is simple, the choice is clear,” Jones said.

“Do nothing and pay more and increase risk levels. Tackle the problem comprehensively, lower costs, minimise risk and produce environmental benefits as well.”