Earthquake $NZ5 Billion – Oil Quake More?

The Christchurch earthquake is estimated to cost the government $5 billion in tax revenue. GDP will fall by 1.5% in 2011, as a result of the quake alone.

While attention is understandably focused on Christchurch, an oil quake is beginning to shake the foundations of New Zealand's economy. The economic impact of an oil shock (or series of shocks) could well prove to be substantially greater, and more long-lasting than those arising from the Christchurch quake.

Last Thursday, the U.K.'s Conservative party Climate and Energy Minister Chris Huhne warned that Britain is facing a 1970s-style oil shock that could cost the UK economy £45 billion (NZ $ 100 billion) over two years. The calculation is based on oil prices rising from $ US80 a barrel last year to $160. Brent Crude is already at US $118 at the time of writing.

Huhne warned

“this is not far off speculation: it is a threat here and now".

Another UK Cabinet Minister Alan Duncan warned crude could reach US$200 or even US$250.

Back home, New Zealand Green Party transport spokesperson Gareth Hughes has released figures from the Parliament Research Unit which show that every US$1 increase in the price of oil wipes around $45 million off New Zealand's GDP. Since October 2010 the oil price has risen by US$38 ($80-$118). 

In just 4 months the oil quake has already sliced close to $2 billion off our GDP. If Huhne’s fear of US$160 oil plays out, then around $NZ4 billion will be lost, and even more if the NZ dollar falls against the US dollar.

The real crunch is what high oil prices do to kiwi’s discretionary spending. The figures Hughes has obtained calculate between $23 million to $33 million of household spending is lost for each $US1 rise in the oil price. That's over $1 billion NZ effectively whipped out of Kiwi’s wallets since last October.  Again the situation gets worse if the NZ dollar drops against the US.

All of these impacts are predicated on just rises in prices, but not actual fuel shortages. As I highlighted in my first ever post last September, fuel shortages similar to those NZ suffered in the 1970s oil shocks would have an even more devastating impact.

With just 10% less fuel available, New Zealand's economy would shrink by around $115 billion in just five years. If a 10% fuel restraint continued for 20 years, New Zealand economy would shrink by $412 billion compared to a business as usual scenario, according to a University of Canterbury study. Put simply, New Zealand's economy would "be more than half the size it could have been if no fuel constraints were imposed".

With attention focused on Christchurch, the impacts of the oil quake are getting close to zero attention here. Prime Minister John Key’s only response so far is to say "there is nothing we can do".

Contrast this with the UK where in response to higher prices, their Energy Minister has heralded tough new conservation and other measures to lower their dependence on imported oil. It may prove to be just rhetoric, but it least the scale of the problem is recognised.

Once again New Zealand is asleep at the wheel.

ps. This interactive graph is a useful tool to see the link between oil prices and GDP.  But remember NZ was already in recession before the latest spike in prices  - not at 4% growth as is shown for the global economy, so the negative impact on NZ will be more severe than the graph indicates.  And GDP is a useless indicator anyway, but its what we are familiar with. I sell you something, you sell it back and I sell it back to you again.  Nothing has happened, but GDP has increased!