Wednesday, August 17, 2011

New Zealand at greater risk from oil shocks - official advice ignored

This is a guest post from Denis Tegg.

In November 2009 senior officials warned the government --
  • the risks of oil price shocks and a physical shortfall in the world supply are issues of "strategic importance"

  • New Zealand is more vulnerable and may suffer more than other OECD economies

  • new technologies and fuels will only "marginally" reduce New Zealand's vulnerability to these oil supply/price risks

  • without "sufficient incentives" New Zealand's resilience will decrease even further

  • a substantial increases in domestic oil production will not insulate New Zealand from higher oil prices because oil is traded internationally and we would still pay the international price.

This advice from senior officials was given to Transport Minister Steven Joyce and Energy Minister Gerry Brownlee in a report entitled "Oil Prices and Transport Sector Resilience" and obtained under the Official Information Act.

Astoundingly the warnings of a clear and present danger to New Zealand's economy have been almost totally ignored by government. Instead of tackling the strategic risks identified in the report, and bringing in policies to lower New Zealand's oil dependency, the government has -
  • perversely initiated policies which increase New Zealand's exposure to oil price and supply shocks. It has abandoned plans for mandatory fuel efficiency standards for light vehicles, and has vastly increase spending on motorways which perpetuate urban sprawl and New Zealand's car and oil dependence, while public transport funding has languished. 

  • other practical policy ideas in a 2008 New Zealand Transport Authority report to lower New Zealand's oil dependence have been kicked to touch.

  • having received advice in 2009 that it clearly does not wish to hear, it has steadfastly avoided asking for any further advice from officials about New Zealand's oil vulnerability. Instead it has instructed its officials to downplay and marginalise the risks posed by peak oil, as is evidenced by a peak oil presentation given recently by an MED official. That presentation is completely at odds with the clear and compelling warnings given in the 2009 Report.

How do officials assess the risk?

The report begins by documenting New Zealand's extreme reliance on imported oil. Oil accounts for 51% of New Zealand's total consumer energy, transport accounts for 80% of New Zealand's oil consumption and 14% of household expenditure is made on transport costs.

The report then tackles the issue of peak oil (without using that phrase of course). It notes that in 2008 the International Energy Agency became more pessimistic and warned that current investment in oil production is insufficient and that faster than expected decline rates in larger oil fields from politically volatile countries --
"increase the risks of a sudden oil price shocks, caused either by political tensions in major supplier countries or by a physical shortfall in supply"

The report then proceeds to pull the rug from under the government's flagship energy policy -- the Petroleum Petroleum Plan to find more oil offshore from New Zealand. The report states that increases in domestic oil production -
"would not necessarily insulate the New Zealand economy from oil price volatility or long-term price rises. This is because like all internationally traded commodities domestic oil and fuel prices are largely driven by the international price"

Effect on New Zealand economy generally

Echoing many of the points made in previous posts here and here on this blog, the report confirms that "reflecting the importance of energy to economic activity, high or volatile prices can have a pervasive effect on economic performance", citing as examples the cost of asphalt and bitumen to roads and fuel costs which dominate the operating costs of the fishing and aviation sectors.

"Our exposure to oil price changes is more acute than many of our trading partners due to a distant from international markets" and

"tourist visitor numbers are at risk from significant increases in aviation fuel costs" and

"international and domestic transportation costs largely determined by oil prices therefore play a significant role in the competitiveness of businesses right across the economy. The transport sector's exposure to increasing and volatile oil prices is therefore an issue of strategic importance"

New Zealand's vulnerability relative to other countries

  • New Zealand is a comparatively large user of oil for transport fuels. We have a low and dispersed population leading to high levels of freight between centres

  • New Zealand has a very low energy productivity at 3.6 litres of fuel per unit of GDP compared to say Sweden which is of comparable size and population density requires only 2 litres per unit of GDP - see graph below -

  • New Zealand has one of the highest per capita car ownership rates in the world

  • the fuel economy of private cars is low compared to most other OECD countries. Even if New Zealand could achieve a 20% improvement in fuel efficiency by 2030, New Zealand would still be 45% less fuel efficient than Europe in 2030

    • New Zealand has one of the highest levels of vehicle kilometres travelled per capita in the OECD while having one of the lowest levels of personal consumption expenditure per capita

    • Road transport accounts for 84% of travel in urban areas. Countries like Australia and the US with poor public transport options are however better able to cope with higher oil prices because they have higher GDP per capita

    • we are far away from key markets for goods and tourism and therefore more affected by oil prices than in most OECD countries

    Report's Conclusion
    "if real long-term oil prices continue to increase as forecast New Zealand's economy may suffer more than other economies". Overall "the transport sectors resilience to increasing all prices is relatively low"
    In complete contradiction of the 2011 MED presentation that "new technologies will save us" the 2009 report bluntly states that "New Zealand's vulnerability will be reduced marginally by the combined availability and affordability of new technologies such as electric vehicles and second-generation biofuels"

    Again completely contradicting the government's position that there is no need for government intervention and that the market will provide all the solutions, the report states "the cost, supply, convenience and reliability of new technologies are key barriers and that without incentives the transport sector's resilience will decrease further"

    Our Economic Titanic
    Unlike the global financial crisis which took most experts and our government by surprise, the severe impacts of rising oil prices on our economy are well understood and thoroughly predictable. The government has received warnings that we are far more exposed than other developed nations to these risks.

    Yet like some delusional captain of the Titanic this government accelerates the ship of state on a collision course with the oil crunch iceberg. Unlike the global financial crisis, the government cannot use the excuse that they were not warned. Its failure to heed these warnings and act decisively will surely go down in history as New Zealand's economic Titanic event.

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