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Tuesday, August 16, 2011

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

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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.


    Martin Hanson said...

    What can one say? After a somewhat terse exchange of views on my doorstep during an electioneering visit by Dr Cam Calder, I have long ago given up on conventional politics to deal with peak oil. Even the Green Party don't seem to 'get' it, as they talk about the need to promote tourism (how will they get here?
    The implications of peak oil are so profound that even most peak oilers don't seem to grasp the full implications. In his 'Crash Course' (available on the web), Chris Martenson alludes to the change from a more complex to a simpler society. In plain English, this means (among other things) that most of the occupations we take for granted will disappear. Brain surgeons, bus drivers, software engineers, and a thousand other careers will be replaced by farmers, leather workers, carpenters, and a few others.
    Most scary of all, our attitude to the sanctity of life will of necessity undergo a radical overhaul. On reflection, it might be better to leave readers to think about that one, rather than explicitly going into specifics.

    Nigel Williams said...

    Well said Denis! I find it amazing that NZTA and most council strategic planners are still working to business-as-usual scenarios that run out through 2030 - 2040 factoring constant growth all the way at historic rates.

    With that mindset among the policy drafters it is impossible that the advice they give to their elected 'representatives' will even give these people any formal inkling of the coming 'interesting times'.

    It seems that no amount of 'truth' like the paper you discuss here is going to tun them around. And we haven't got long eh!

    azeo said...

    re-posted from Celsias, and seems quite apt.

    "New Zealand's Energy Strategy- Coal and Oil Here We Come" !

    China has been observed by those in the know to be using it's economic growth to fund renewables and renewable development and research in a big way, realising that windows of opportunity are limited and small.

    Yet we hear our own economic optimists spout off about the potential growth and income from our own minerals as some wonderful opportuinity, but opportunity for what and whom? Certainly not for developing alternatives, and ignoring the obvious hole when *they* are depleted. How rediculous, the growth/exploitation-barons playing with our children's future for some "magic" short-term recovery.

    There is certainly mostly unseen activity in bio-diesel and forestry/biomass to energy and fuels in this country, but what effort and activity do we really see for a range of local and regional energy solutions, and who gets upset when windmills spoil the asthetic view but demand a reliable grid as of right? hmmmm

    Palmerston North said...

    "and who gets upset when windmills spoil the asthetic view but demand a reliable grid as of right? hmmmm"

    This statement is incorrect, Wind is an extremely expensive and intermittent source of energy and has to have spinning backup for when the wind is not blowing - almost always at peak demand during winter months. It is a fantasy to think wind will replace fossil fuels. We are always hopeful of some other new technological breakthrough. Fingers crossed!

    Anonymous said...

    you picked on the wrong point, it wasn't said at all that wind would replace fossil fuel, the point was that people (and government)expect business as usual, but aren't prepared to engage in the solutions - whatever they are, and we all know it will be a *range* of solutions required - Azeo

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