Peter Strachan: Political inaction on oil unforgivable

04/06/2008 - 22:00

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Faced with rising energy prices, Australia's politicians, like most politicians on the planet, are scrambling around looking for places to hide, or behaving like stunned rabbits in the lights of an oncoming vehicle (which unfortunately is not electric).

Peter Strachan: Political inaction on oil unforgivable

Faced with rising energy prices, Australia's politicians, like most politicians on the planet, are scrambling around looking for places to hide, or behaving like stunned rabbits in the lights of an oncoming vehicle (which unfortunately is not electric).

Instead of taking urgent action to rapidly upgrade public transport, and providing incentives and other support for the use of alternative fuels - such as natural gas powered trucks and buses or hybrid and electric vehicles - what do we have? We have the small minded men and women in Canberra trying to curry favour with voters and bickering about reducing tax on petrol. Really, is this a long-term solution to a global energy crisis; more to the point, is this the sort of leadership we deserve in this time of change?

Briefcase thinks most voters, who are smarter than the pollies give them credit for, are embarrassed by the circus going on in Canberra. Lets get some real action to prepare for the new energy environment before we are swept away by it.

Briefcase is convinced that all governments urgently need to swing into disaster mode to cope with the massive change to the fabric of our communities now before us. With the advent of peak oil production this year or next, communities are facing a situation akin to a war, or a major natural disaster of mammoth proportions. The availability of cheap oil has underpinned much of the economic growth over the past 100 years and now there is no more cheap oil, so we need to make massive adjustments.

Briefcase believes governments everywhere need to effectively establish 'war cabinets' to deal with the situation. Instead of bickering over cutting the petrol price by four or five cents a litre, like a flock of seagulls fighting over a crust, a more appropriate move would be to slap an extra five to 10 cents on the top of the price and use the additional revenue to fast track upgrades to rail networks (and introduce natural gas vehicles into the fleet, as is already the case in Perth, where several Euro 4 compliant compressed natural gas buses ply the suburbs).

Australia's prime minister needs to acknowledge the situation, formulate a plan, appoint a 'general' to run the project and make an address to the nation to explain the situation. At this time he might say something like: "Well, what do you know? All those tie-dyed, long-haired hippy types who for years have been calling for more bicycle tracks and improved public transport were right and we are running short of transport fuels!"

My impression is that the current management of most public transport networks, who I bet drive white Commodores to work, are focused on running a system within a budget, so that it can more efficiently cope with the current passenger load, rather than planning to expand services to cater for a tripling of passenger numbers over the next five years.

Why would the powers-that-be in Perth build a brand new, two-carriage platform at Grant Street instead of a four-carriage facility, if they didn't have their heads firmly planted in the sand? For a start, all senior decision makers in public transport should be required to travel to work on their systems. Train stations need to be upgraded to take longer units and systems introduced to increase service frequencies.

At present, companies manufacturing commuter train carriages and engines, such as Downer EDI and United Group, are running flat out to keep pace with demand, so getting additional rolling stock is going to be a challenge as rail networks across the world all scramble to increase their fleet simultaneously. Downer and United are already busy making new rail cars for the booming iron ore and coal trade, so their businesses are absolutely busting at the seams when the increased demand for passenger carriages is added.

The share price of United Group has slipped back from 2007 highs and Downer is recovering from a series of stuff ups, but they both now represent fair prices for long-term investors, given also their strong exposure to other infrastructure development and the resources industry generally.

In response to rising fuel costs, another initiative which should be urgently addressed is the roll-out of universal broadband. Access to high-quality internet will reduce the need for people to commute, and more generally increase business efficiency. Video conferencing will become much more prevalent as air fares continue to skyrocket.

Governments need to look at their town planning and population planning. Because of rising transport costs, the price of quality rural land on which food can be grown in close proximity to the market is likely to rise to a point where it is more valuable as agricultural land than for factories or housing. There will need to be a revolution in planning for both housing and food logistics to cater for the new economics of food production, arising from higher cost of diesel.

Already, larger farms use 200,000 to 300,000 litres of diesel each year to set and harvest crops and run pumps. Add to this the cost of seed, labour, fertiliser and pesticides, and a decent wheat crop is going to cost $1.5 million to produce each year. Under these circumstances, and in the light of competing uses for crops such as soybean and corn for bio-fuels, we should not expect that the price of food will fall significantly any time soon. In fact, with current world weather conditions, we should expect massive famine later this year, which will put further pressure on global politics and possibly lead to massive and uncontrolled movement of peoples.

During the past month, the price of oil has risen to an overbought situation. Fundamentals are actually supporting this rise, but the movement has run well away from trend, so in the short term the oil price is likely to retreat, perhaps back to $US100 per barrel. It is strange how good $US100/barrel looks when you are coming from $135/barrel, compared with how devastating it looked when we had $US65/barrel oil.

- Peter Strachan is the author of subscription-based analyst brief StockAnalysis, further information can be found at Stockanalysis.com.au

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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