As the oil price once again breaches the psychological three-figure mark of $100 per barrel, security of oil supply is ascending on the national agenda.

South Africa’s national oil company, PetroSA, is pushing hard for Cabinet to approve its “Project Mthombo”, a new oil refinery to be built at Coega in the Eastern Cape.

Project Mthombo could become our country’s biggest white elephant – one that we can ill afford.  Why? Because it is widely acknowledged that the world has effectively reached ‘peak oil’, the time when global oil supplies can no longer rise to match demand. The time of declining oil supplies and rising prices.

The idea for Mthombo arose from the Department of Energy’s 2007 ‘Energy Security Master Plan’, which recommended that a greater proportion of SA’s liquid fuels be produced domestically.  PetroSA hopes that Mthombo would come on stream by about 2015. With a capacity of 360,000 barrels per day, it would be the biggest refinery in Africa.

According to the Department of Energy’s spokesperson, Bheki Khumalo, the projected cost of the mega-project was R110 million as of September 2010.

PetroSA’s main motivation for Mthombo is to boost security of supply in the face of an assumed continuation of growth in liquid fuel demand. It is also envisaged to supply other Southern African countries as their economies expand. Another reason is to produce better quality fuels, leading to cleaner air and improved health of citizens.

Several objections have been put forward in public against Mthombo.

Oil companies like BP have argued that there is already sufficient refining capacity in SA and a new refinery would be redundant.

Others have raised the logistical problems associated with the Coega location. To transport the fuels to markets in Gauteng and other metros would require the construction of new pipelines or shipping the refined fuels to Durban to the new multi-product pipeline.

More importantly, a new refinery would not help to wean SA off imported oil – it would merely process additional crude imports to replace the small fraction of total liquid fuel consumption that is currently imported in refined form.

This relates to the most serious problem with Mthombo: the future of global crude oil supplies.  In its 2010 World Energy Outlook, the International Energy Agency confirmed that conventional oil production reached a peak in 2006 and is set to decline by around 4% per year from now on. Total liquid fuels production has increased, thanks to expanding deepwater and unconventional oil. But these sources have production costs of $80 per barrel or more, and are thus helping to push up the price of oil on international markets. 

An emerging consensus is warning that global supplies of oil from all sources will begin to contract within the next few years. The amount of oil available on world export markets will decline even more rapidly as consumption in oil producing nations continues to grow.  The result is that oil prices will rocket upwards, curbing demand to bring it in line with diminishing supply. The oil shock experiences of 1973, 1979 and 2008 all clearly showed how price spikes bring about global economic recessions.

The power of demand destruction was demonstrated forcefully in South Africa in the recession of 2009, when the demand for all petroleum products fell by an average of 2.4%, while diesel consumption plummeted by 6.6%.

The prognosis for the future is thus of a growing glut of global oil refining capacity as crude oil supplies dwindle. Multinational oil companies like BP and Shell have seen the writing on the wall, which explains why they have been selling downstream assets in sub-Saharan Africa.

In the context of global oil decline, the only way a new refinery would make sense is if South Africa were guaranteed a sufficient source of crude oil imports at competitive prices.  But no oil producer, will be willing or able to give oil away at discount prices. So SA consumer demand for liquid fuels will be curbed by high prices whether a strategic alliance is formed or not.

Moreover, The only way to avert a seriously damaging liquid fuels supply crisis is to invest in alternative transport systems that are more energy efficient and not reliant on liquid petroleum fuels. 

In their seminal book “Transport Revolutions”, Richard Gilbert and Anthony Perl argue convincingly that grid-connected vehicles (GCVs) are the best strategy for mitigating the impact of peak oil on transport and the economy. GCVs include electrified railways – heavy and light – as well as trams and more futuristic modular electric cars that can connect to the grid.

GCVs will need extra electrical power, which should be generated from renewable energy sources like solar, wind and ocean power. Government needs to initiate a war-time style mobilisation to accelerate local production of renewable energy infrastructure, creating jobs in the process.

Hopefully the Government will see the light and pick sensible mega-projects like the mooted solar park near Upington. Upgrading existing railways for freight and passengers should be a priority over an expensive new high-speed rail link between Durban and Gauteng.

Energy efficiency – both for liquid fuels and electricity – must be promoted through awareness campaigns, regulatory standards and financial incentives.

The promise of a sustainable future for our society depends on the choices made now. Citizens need to be aware of unfolding realities and hold their elected representatives to account. There is much we can do, but time is running out.

By Jeremy Wakeford

Wakeford is an independent economist specialising in energy and sustainability. He is Chairman of the Association for the Study of Peak Oil South Africa (www.aspo.org.zaand Research Director of the South African New Economics (SANE) Network (www.sane.org.za).