The Sky’s Not Falling

AUTHOR: Professor Robert Marks   DATE: 17.05.06   ISSUE 1, 2006
Forty-two years ago Australian crude oil was first delivered to Sydney refineries. That same year BHP teamed with Esso to begin searching for oil and gas in Bass Strait, on the advice of geologist Lewis Weeks. Success there and elsewhere meant that by the late 1980s Australia needed to import less than ten percent of its oil and petroleum products to satisfy domestic demand.

This was encouraged by a pricing regime that rewarded new discoveries with the world, or import parity, oil price. At the moment, Bass Strait supplies are dwindling, but Australia is still about 75 percent self-sufficient in oil and petroleum, and our production of natural gas will continue to rise significantly. There is broad agreement, however, that, absent the unlikely event of a another Bass Strait being discovered, our oil self-sufficiency will only fall.

Should we worry? If so, what should we do? If there is not enough exploration effort looking for the new Bass Strait, why is this so? Industry representatives are always keen for more tax incentives to explore, but would this be tax-payers’ money well spent? Exploration efforts on-shore have been falling, and costs are rising with the depths of the off-shore exploration rigs. But some argue that it is the low chance of successfully finding new commercial oil wells that inhibits exploration, not lack of government support. And Australian capital is being invested in overseas provinces, usually at a higher expected return than Australian exploration has resulted in recently.

Despite the resources boom, export volumes have grown at an average rate of only 0.6 per cent a year since 2000-01, well below the average global rate of 5.9 per cent. We are not a great trading nation, and unfortunately many have the outlook of the autarch: self-sufficiency.
Photo: Professor Robert Marks

Nonetheless, at a recent industry conference the Australian Petroleum Production and Exploration Association argued that incentives are needed to raise the level of exploration effort, in order to maintain our rate of oil production by finding millions of barrels of crude oil reserves each year.

Well, as Mandy Rice Davies said in another context, another country, and another century, "They would say that, wouldn’t they?" Imagine that no oil had been found in Australia, that Lewis Weeks had not been invited here by BHP’s lan McLennan. Other things equal, we would have been slightly poorer, having to import all our crude oil and petroleum. But it would not have been the disaster that some foreshadow. Indeed, our natural resources riches could be a curse, if we refuse to invest sufficiently in the human resources of our children. Leaving aside industry pleading, there may be some genuine concern at the prospect of Australian oil’s exhaustion, often in terms of energy security. This, I argue, is the perspective from inhabitants of what the late Jane Jacobs called a "supply region," a place rich in natural resources, but not exporting much that was manufactured there to the "city regions" of the world, the dynamos of economic growth. Think of Singapore, or Switzerland, or Austria, or Finland.

For, despite the resources boom, export volumes have grown at an average rate of only 0.6 per cent a year since 2000-01, well below the average global rate of 5.9 per cent. We are not a great trading nation, and unfortunately many have the outlook of the autarch: self-sufficiency.

In the ’70s and ’80s the phenomenon of a country with a strong export sector and its depressing effect on other sectors was variously known as the "Dutch disease" or the "Gregory effect". The modern-day Cassandras reveal themselves as the mercantilist descendents of this tradition. Why should we care whether our next barrel of oil comes from Bass Strait or Alaska or the Caribbean or the Middle East? Answer: we shouldn’t! So long as we can finance our purchases of foreign oil with our exports or from foreign capital inflows, and so reduce our net foreign outflowings. That’s what matters.