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Peak Oil and Freight

Rural Affairs and Transport Committee
Policy and Research (including BITRE)
21 October 2010

Senator LUDLAM-These questions then go to some of the longer range issues that Senator Heffernan was raising about where this country might be in the near and the medium term. In particular, I wanted to ask about oil supply, and I know that it is something that you folks have quite a bit to do with. There was a 7.30 Report not that long ago that made some pretty serious and strong claims about Australia's oil import bill doubling from about 600 billion or 300 million barrels of oil a year to $30 billion or 500 million barrels of oil a year in the next five years. That is at odds with what I have been able to find form ABARE, and I know that is not you folks, but you deal with transport and fuel issues. First of all, are you familiar with the piece that I am referring to, and with those claims that have been in press?

Dr Dolman-I am not. Not the particular report that you are talking about but, more generally, we are aware of those issues. Yes.

Senator LUDLAM-We still do not have an energy white paper. I do not know who has dropped the ball on that but it does not exist. Are you folks involved, in any way at all, in informing or coordinating on that?

Mr Mrdak-No, that is a matter for the resources, energy, and tourism portfolio.

Senator LUDLAM-I thought you might say that. All right, you do not have any formal involvement in that. The piece that I am referring to did state that oil in Australia, conventional oil anyhow, has effectively
peaked and it did that some time ago, and our import bill has been rising-that we currently import about 50 per cent of the oil that Australia consumes in an average year. In 20 years we will be importing 80 per cent, and that is going to have spectacular impacts on our balance of payments. Are you folks doing any research at all, or is there anything that you can point me to, into transport vulnerability or the impacts-what that would actually have, and ways of transitioning out of liquid fuels and oil, in particular? Is that at all within your domain?

Dr Dolman-There are a couple of pieces of work, I guess, that we are doing that is relevant to that, or maybe three. We do projections of the transport demand, and that is informed in part by oil issues. So, when
we are looking at the projections of both passenger movement and freight movement across Australia, and on specific corridors, the models that we use do take into account the price of oil and the impact that is likely to have on demand-similarly, aircraft movements and air passenger movements.

Senator LUDLAM-That is interesting because that is at odds with what I understood. The work that you have done on freight recently, which I found very useful, that shows effectively between now and 2030 freight movements in terms of tonne kilometres will double. You have based that approximate three per cent annual growth on your predicted three per cent annual growth in GDP roughly between now and 2030 or declining a little bit?

Dr Dolman-We are projecting growth above GDP growth which has been-

Senator LUDLAM-That is right; you are.

Dr Dolman-the trend, but we are actually projecting as well that it will slow compared with past trends.

Senator LUDLAM-Saturation, or whatever you have called it.

Dr Dolman-That is correct.

Senator LUDLAM-But we will have enough stuff by 2030 and we will be shipping less of it around. But my understanding is that the oil price variables that you imported into that model-just assume oil stays cheap out to 2030-you have just imported that wholesale from ABARE and there are no oil shocks in any of your freight projections, not even oil shocks, I should not say; there is not even really any material increase in oil prices.

Dr Dolman-As I said, the models that we have do enable that sort of analysis and I guess that what we have done in that report is to give our business as usual a most likely outcome, but we-

Senator LUDLAM-What makes you think business as usual is the most likely outcome, I guess is my question.

Dr Dolman-Sorry. The most likely future outcome is what we are expecting. We also find that both freight and passenger movements-cars on roads or aviation movement-are relatively unaffected by increases in prices in fuel. We have run a number of scenarios. They are sometimes not included in the report, and sometimes they are, but we look at a range of options, some of which are consistent with peak oil sorts of oil prices and others at the other end of the scale which are consistent with ABARE or International Energy Agency projections of oil price. We look at the range of options that are possible and usually, as I say, we provide an estimate based on our best estimate of a whole range of conditions that are likely to be going forward, and in most of our reports-in particular the most recent reports-we have started to include sensitivity analysis relating to those key parameters.

Senator LUDLAM-And do they provide researchers the ability to plug in different oil price assumptions to see what happens to the rest of your model?

Dr Dolman-Yes, they do.

Senator LUDLAM-Okay. Can the public do that or is that what your researchers are able to do?

Dr Dolman-At the moment that is what our researchers do.

Senator LUDLAM-I have found one particular paper-and maybe this is one of the ones you are referring to-the Road and rail freight: competitors or complements? published by you folks this year, to be a useful piece of work. The point about the fact that for oil prices around US$100 per barrel road freight costs are above door-to-door rail freight costs across all Australian intercapital corridors-I think that is highly significant because we are going above the US$100 a barrel mark at some stage into the future and yet we are still planning as though road freight will stay cheaper then rail freight indefinitely. Do you have any comment on that or any other work that backs that up, or anywhere you can show me that would persuade us that the Australian government is paying attention to that fact, that rail freight is actually more economic than road freight above approximately that threshold?

Mr Mrdak-The short answer is yes. I think the Australian government has been very conscious of the need and, if you look at the investment program that governments have been undertaking in the national rail freight system, it acknowledges the need for a reinvigoration. The discussion we were having with Mr Marchant a little earlier of the national rail freight system-but having said that, you have also got to factor in that price alone is not necessarily the only determinant of a modal shift from road to rail. In fact, rail has been considerably cheaper on a number of corridors for some time. What has often driven the shift away and then back to road has been reliability, and in fact it has been the quality and reliability of the rail infrastructure and rail services which has been a much more important determinant than price as to modal shift.
I think the bureau's analysis highlights the price projections quite rightly and we have seen that, but certainly on the east coast where we saw spikes in fuel price and how that flowed through, what we also saw was companies moving to rail then moving back because of the reliability issues. In fact, that is where the focus has been, on investment, and if you look at our investment program under Nation Building it has got quite a strong focus through the ARTC but also through state governments on improving the reliability of rail, particularly through capital cities like Sydney. We have got a major investment program in the north; we have got northern Sydney, the north coast rail line improvements that the ARTC has been doing. That is where we have put a lot of focus because, until you get that right, price alone will not determine that modal shift because of the reliability and benefits that road can provide.

Senator LUDLAM-All right. I take that on board. That is helpful, although in your future projections out to 2030 you still assume that road freight is going to take up the bulk of the task. You do not seem to have assumed at any stage that oil price is going to go above $100 a barrel and tip us into that slightly different pricing regime.

Mr Mrdak-The point Dr Dolman made about price sensitivity I think is very important and what is the real world experience of the elasticity.

Senator LUDLAM-But if you go out into the industry-you go and talk to local government or you talk to people in the industry-they are reading the document that says oil is going to stay cheap and freight task is going to double and most of it is going to go on road. It is excellent if the model gives you the flexibility to play with some different scenarios, but it not what people are reading and it is not what they are planning for.

Mr Mrdak-I think the bureau's analysis remains probably the most robust analysis of the issues by anyone.

Senator LUDLAM-But is it correct-or let me put that in another way because we do not know what is going to happen in the near future. How well prepared is Australia right now for an oil shock that takes us above $2-3 a litre?

Mr Mrdak-That is a matter of conjecture, Senator. I am not sure we can go into that.

Senator LUDLAM-So we do not know.

Mr Mrdak-No, what I am saying is it is a matter of conjecture at this point.

Senator LUDLAM-We are planning for oil to stay cheap indefinitely, is my point, and it is not going to.

Mr Mrdak-I do not think that is what we are saying at all.

Dr Dolman-As Mr Mrdak was saying, and the report that you are actually referring to makes the point that to some extent there is limited substitutability between road and rail because people have an expectation about how quickly things would be delivered. Even though rail might be cheaper with a higher oil price, it still does not make people make the decision to move to rail because of a whole range of other factors.

Senator LUDLAM-Yes.

Dr Dolman-We provided some advice in a question on notice to you which suggested that our middle point projection for oil price in 2020 would be over $100 a barrel, so we are doing our projections and in fact that freight projection would be based on the mid-term price which we are estimating in 2020 to be US$117 or thereabouts a barrel, and by 2030 we would expect it to be $150-odd a barrel.

Senator LUDLAM-Okay, so those numbers you have fed me there and the ones that you returned as a question on notice, are they the same numbers that you fed into that model about the freight task doubling out to 2030?

Dr Dolman-I can double check that-

Senator LUDLAM-If you could.

Dr Dolman-but that would be my expectation. That is the mid-point projections.

Mr Williamson-I think our answers to you were to 2020, whereas the report-

Senator LUDLAM-Yes, I think you are right. I did not ask that much further but I had not read that study.

Mr Williamson-Yes.

Senator LUDLAM-My last question then on this subject, and then I will pass you back to the chair, is have you done any modeling at all? For example, the CSIRO study of about two years ago looked at an oil crunch, or an oil crisis-whatever you want to call it-a supply crisis that took metropolitan petrol over $8 a litre. Have you folks done any thinking at all about what will happen if that occurs not in 2050 but much, much sooner? Have you been tasked at any time to do any kind of research or thinking into what the country looks like in that event?

Dr Dolman-I am not sure exactly which piece of work you are talking about but we have been involved in research with CSIRO that looks at those sorts of scenarios. That is a very extreme scenario and there is a whole range of other scenarios that were also considered in the work that we did with CSIRO. Also, looking back, we continue to publish data that shows the effects of high oil prices a couple of years ago as well, and that did show that there were significant shifts in behaviour; not so much a reduction in traffic-people still use cars-but there was a small reduction and, in particular, a shift to public transport. The share of public transport use went up quite significantly when oil prices went up and we are doing modeling to try and understand that better and be able to provide projections about what we expect to happen with urban public transport. Also, we examined the car fleet and we saw changes where people, rather than reduced travel, shifted to smaller and more fuel efficient cars, so again there is a whole range of responses that come and, as I said before, often it is not about reducing the travel, it is about making choices that reduce the costs of travel and make that more fuel efficient.

Senator LUDLAM-All right; I will leave it there. The CSIRO piece I am referring to is The potential future petrol prices under alternate international oil market conditions, published in 2008. It got a bit of press because their abrupt shock scenario took petrol over $8 a litre. I do not know how much it would cost to fill up a Commodore at that kind of price. On notice, if you can provide us with whatever you think-you can see where I am going-that your agency has done in the recent price that most closely answers the question that I am asking about an oil shock. I do not believe it has really been done, but if you are saying you have, I would appreciate a chance to see it.

Dr Dolman-I will come back to you on that.

Senator LUDLAM-Thanks very much. Thank you, Chair.

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