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Part 4: Role of fuel in the economy

This part provides an overview of the importance of fuel in Australia. It examines which fuel types meet Australia's energy needs, the sectors that use particular fuel types and future oil supplies. Box 4.1 at the end of this part poses a number of questions on which the Inquiry seeks comment and views.

4.1 Which fuel types meet Australia's energy needs?

There are two broad categories of fuel types. Primary fuel types are sourced directly from nature, such as coal, crude oil, natural gas and renewable fuel types including hydro-electricity and solar energy. Derived fuel types, such as petrol and electricity, are produced from primary or other derived fuel by conversion processes. It is important to examine both fuel types to provide a complete picture of total fuel use in Australia.

Chart 4.1 shows that energy from coal and crude oil comprised around three-quarters of Australia's total energy use in 1997-98. These two primary fuel types are mostly converted to electricity and petroleum products, the latter mainly in the form of petrol and diesel.

Chart 4.1: Contribution to energy use by primary fuel type, 1997-98

Chart 4.1: Contribution to energy use by primary fuel type, 1997-98

(a) The major renewable fuels are hydro-electricity, bagasse (sugar cane waste) and wood.

Source: Australian Bureau of Agricultural and Resource Economics, Australian energy: market developments and projections to 2014-15, AusInfo, 1999.

In some energy applications, most fuel types can be used as substitutes. For example, heating is commonly provided by electricity (generated from coal, natural gas or renewable sources), heating oil and natural gas. While petrol and diesel are the dominant fuel types used in internal combustion engines, there are a number of government programmes in place to encourage the use of natural gas and LPG in internal combustion engines (see Part 5).

The extent to which derived fuel types substitute for others has changed over time. For example, diesel and electric powered trains have replaced coal fired trains, and electric lights have replaced gas and kerosene lamps. Other changes will occur as technologies, incomes and policies change to make different fuel types preferable for economic or other reasons.

Chart 4.2 shows the contribution of derived fuel types to energy used by final consumers, in the forms that they are ultimately used. The chart shows that a major change between 1980-81 and 1997-98 was a shift in the contribution to energy use from petroleum products to natural gas, reflecting oil price shocks and the development of gas resources and pipelines. Gas also replaced oil products in boilers and kilns in manufacturing, and in cooking and heating appliances in residential and commercial sectors.

Chart 4.2: Contribution to energy use by final consumers by fuel type(a)

1980-81

1997-98

Chart 4.2: Contribution to energy use by final consumers by fuel type (a) 1980-81

Chart 4.2: Contribution to energy use by final consumers by fuel type (a) 1997-98

(a) Coal includes coke, coal by-products and briquettes; renewable includes wood, bagasse (sugar cane waste) and solar; petroleum products includes LPG and crude oil; and natural gas includes town gas.

Source: Australian Bureau of Agricultural and Resource Economics, Australian energy: market developments and projections to 2014-15.

4.2 Who uses fuel in Australia?

There is considerable variation between sectors in the types of fuel used to meet their energy needs. Chart 4.3 shows the contribution of derived fuel types to the energy needs of particular sectors in Australia in 1998-99. For many sectors, one type of fuel contributed to more than half that sector's energy use and in some cases, one type of fuel contributed to almost all of a sector's energy use.

Diesel contributed the largest share of energy use by the agriculture and construction sectors. Petroleum products also contributed the major share of energy use by the road transport sector (including private motor vehicles), with petrol contributing around 65 per cent and diesel 28 per cent. Electricity meets just over half the combined energy needs of the commercial, services and residential sectors. Natural gas accounts for a significant share of the energy needs of the manufacturing (33 per cent) and the combined commercial, services and residential sectors (28 per cent). The chart indicates that natural gas contributed only 6 per cent of the energy needs of the mining sector. However, this does not include the significant amounts of natural gas acquired by this sector to produce electricity.

The variation between sectors in the types of fuel used largely reflects differences in the types of applications for which energy is required. For example, there are currently few economic substitutes for petroleum products in an internal combustion engine. A wider range of fuels can be used for heating, for example, natural gas, heating oil, electricity and renewables. Hence sectors that require energy for heat have a wider range of fuel options.

As technology develops it is possible that fuel types which are not currently substitutable for petroleum products in certain uses may be so in the future. The taxation of all fuel types, as well as associated rebates, subsidies and grants, may be an important consideration in the development of these technologies and use of these fuels in the future.

Chart 4.3: Contribution to energy use by fuel type and sector, 1998-99

Mining

Chart 4.3: Contribution to energy use by fuel type and sector, 1998-99 - Mining

Agriculture, forestry and fishing

Chart 4.3: Contribution to energy use by fuel type and sector, 1998-99 - Agriculture

Construction

Chart 4.3: Contribution to energy use by fuel type and sector, 1998-99 - Construction

Manufacturing

Chart 4.3: Contribution to energy use by fuel type and sector, 1998-99 - Manufacturing

Road transport(b)

Chart 4.3: Contribution to energy use by fuel type and sector, 1998-99 - Road Transport (b)

Commercial, services and residential

Chart 4.3: Contribution to energy use by fuel type and sector, 1998-99 - Commercial, services and residential

(a) Renewable includes wood, bagasse (sugar cane waste) and solar.

(b) Includes passenger motor vehicles.

Source: Australian Bureau of Agricultural and Resource Economics, Australian energy: market developments and projections to 2014-15 and unpublished data (forthcoming).

4.3 Oil supply

4.3.1 Imports and exports

Chart 4.4 shows the position of Australia's trade in fuel products. In 2000-01, exports of these products were around $25.2 billion and accounted for around 21.1 per cent of the value of Australia's merchandise exports. Both coal and petroleum products accounted for around 43 per cent each of Australia's exports of fuel products.

In 2000-01, imports of fuel products were around $10.5 billion and accounted for around 8.9 per cent of the value of Australia's merchandise imports. Almost the total value of Australia's fuel product imports (98 per cent) was attributable to petroleum products.

Even though Australia exports significant quantities of crude oil, Australian refiners also import significant quantities. This is because different types of crude oil are needed to produce the range of petroleum products sought by consumers. Australian crude oils tend to be light which makes them less suitable to produce some refined products, such as diesel and kerosene. In recent years, around 40 per cent of the crude oil used in Australian refineries has been sourced from Australian oil fields.

Chart 4.4: Australia's trade in fuel products, 2000-01

Chart 4.4: Australia's trade in fuel products, 2000-01

Source: Australian Bureau of Statistics Cat. No. 5422.0.

4.3.2 Future crude oil supplies

A recent study by the Royal Institute of International Affairs canvassed the issue of long-term oil supply.3 The study found that since 1980, world oil discoveries have been outstripped by world production. It notes that there is debate as to the longevity of world conventional oil production,4 though forecasts of peak production vary from as soon as 2010 to as far off as 2030.5 The International Energy Agency (IEA) expects conventional oil production to peak between 2010 and 2020.6

These estimates include assumptions about the price of oil over the forecast period. The amount of oil available is strongly dependent on price. If price levels increase it becomes economic to spend more on exploration and to use techniques to extract a higher proportion of oil from existing reserves. It also becomes more economic to exploit the known large reserves of so-called unconventional oil resources, such as heavy oil and oil sands or to convert natural gas to liquid fuels. The study concludes that, on balance, resources will not be a key constraint on world oil demand up to 2020. It quotes the IEA as stating `more important are the political, economic and environmental circumstances that could shape developments in oil supply and demand'.7

Policies to reduce oil consumption after the price shocks of 1973 and 1979 led to reductions in oil use in many OECD economies from 1980 to 1990. Energy efficiency increased due to conservation and technology advances. Oil use has become increasingly concentrated in sectors such as transport, for which alternative sources of energy are less readily available, while oil used for electricity generation was replaced by nuclear energy, coal, and gas. Although Australia currently has, on balance, a high level of self-sufficiency in oil production, the current reserves of 3.43 billion barrels are less than required to maintain present levels of production in the medium term. Estimates of future production of oil and condensate suggest that without further exploration activity, production rates will decline by 33 per cent by 2005, and 50 per cent by 2010.8

Box 4.1: Issues on which the Inquiry seeks comment

The Inquiry is interested in the community's views on how the current fuel tax, rebate, subsidy and grant arrangements influence fuel use decisions.

Business and consumers

To what extent, if any, do these arrangements affect the following decisions:

• total use of fuel?

• the use of particular fuel types both now and in the future?

• the use of particular technologies now and in the future (eg the type of motor vehicle purchased, or heating appliance purchased)?

Petroleum producers and distributors

To what extent do the current arrangements affect decisions to produce and import fuel types, both now and in the future?

Manufacturers of fuel based engines and appliances

To what extent do current arrangements affect medium and long-term production decisions (eg motor vehicle technology or heating appliances)?

What is the scope to substitute other transport fuels for petrol and diesel?

• To what extent is this likely to change in the future?

What is the scope in other sectors to substitute other fuel for petrol and diesel?

• To what extent is this likely to occur in the future?

Is the price elasticity of petrol and diesel used in transport similar to petrol and diesel used by other sectors?

Oil supply

What is the likely trend in Australia's production, imports and exports of crude oil and petroleum products in the medium and long-term? What implications, if any, should this have for government policy on fuel taxation, rebates, subsidies and grants?

3 Mitchell, J., Morita, K., Selley, N., and Stern, J., The New Economy of Oil - Impacts on Business, Geopolitics and Society, The Royal Institute of International Affairs, 2001, p. 52.

4 As per the International Energy Agency's definition, oil is considered conventional if it is produced from underground hydrocarbon reservoirs by means of production wells and/or if it does not need additional processing to produce synthetic crude.

5 Production forecasts are canvassed in Mitchell et al., The New Economy of Oil, pp. 37-47.

6 Mitchell et al., The New Economy of Oil, p. 58.

7 Mitchell et al., The New Economy of Oil, p. 60.

8 Powell, T., `Understanding Australia's petroleum resources, future production trends and the role of frontiers', APPEA Journal, 41 part 1, pp. 273-88.

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