New Zealand Government's Oil Price Projections - A Bad Joke?

The Ministry of Economic Developments oil price estimates are a very bad joke. It is a joke on all of us however, as their grossly optimistic projections underpin government policy not just for energy but for the broader economy.

In December 2010 the Ministry published its Energy Outlook 2010. It features a business as usual reference scenario with a variety of oil-related projections including the future price of a litre of petrol. The estimate for the retail price of a litre of petrol in 2011 is $1.92 (GST added). As we all know petrol prices have already exceeded $2.20 a litre and are presently sitting at around $2.08.The oil price had steadly risen thru 2010 and was already over $US 100 a barrel before the mid east unrest began.

The Energy Outlook contains "sensitivity analysis" for high and low oil prices and exchange rates, which might affect the reference scenario. There is an interactive speadsheet here, if you wish to have a play around with the various assumptions. The 2011 high oil price estimate of $2.38 (GST added) for a litre of petrol might prove to be reasonably accurate, with oil markets tight, China, India and oil producers all pushing up demand,  and mid-east unrest showing no sign of abating. But as you can see from the figures in the graphic below - the high exchange rate scenario -- which we certainly have now at $NZ.81/US $1, - is hopelessly over optimistic. The high exchange rate scenario projects the retail petrol price in 2011 at just $1.75 (GST added) ! Just six months out, these estimates are hopelessly wrong.

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It gets worse. Take a look at the estimates in the graphic for 2020 - (click to enlarge). These MED clowns are estimating $2.43 litre for petrol (GST added) in nine years’ time for a business as usual scenario, or just $3.10 for a litre in the "high oil price" scenario ! As for the high exchange rate scenario for 2020 -- well we have already exceeded that estimate of $2.19 (GST added) a litre in 2011!

Former Green Party co-leader Jeanette Fitzsimons repeatedly raised these issues in Parliament, as early as 2004. but got nowhere. At that time the oil price was $US 45 a barrel and was projected to "fall back" to $19 a barrel by 2020! She pointed out that reliance on the New York futures market and the International Energy Agency for oil price estimates had without fail -- year on year -- under estimated the oil price. Pleas to change the forecasting methodology fell on deaf ears.

Does anyone really believe that oil will be selling at U.S.$115 a barrel in 2030? Seriously - this is the International Energy Agency's current projection -- yet that price has already been exceeded in 2011, and MED faithfully use this figure for its own estimates.

Simon Tegg (yes my son) wrote a paper in 2007 "Oil Outlooks - Is the New Zealand Government Underestimating Future Oil Prices" pointing out the MED’s persistently wrong estimates, and how those analysts with a peak oil perspective had been universally more accurate. But the Ministry's dangerous self-delusion continues.

Why dangerous? Because these super optimistic oil price projections underpin not just government energy policy but it's planning for the whole economy. The oil price flows into projections for a whole host of other matters from future CO2 emissions to the uptake of electric vehicles and biofuels. It should be used to inform government’s budget allocations for funding roads and public transport.  But that would contradict its ideological push for more motorways.  So the clear evidence of higher oil prices reducing traffic volumes is conveniently ignored.

Of course it suits this government and the previous one to have such low oil price projections. It gives them justification to ignore the warnings flooding in from dozens of energy agencies and analysts, of an imminent oil shock, and to ignore their pleas for massive government intervention to lower our dependence on imported oil. How dare the IEA the IMF, Lloyds of London, The US and German Military, Chatham House et al  spout this socialist interventionist nonsense? The wizardry of a laisez-faire free market will solve this.

The Outlook gets one thing right -- it says "given oil's central role in the economy the international price of oil can have a material impact on the energy sector and broader economy".

But the government is still prepared to leave it to a bunch of oil speculators in New York and the International Energy Agency, with an appalling track record of grossly underestimating oil production and prices to inform its energy and broader economic policy. Go figure.