Oil Shock Horror Probe

Stacking Up Resources

2012-02-23T22:04:00.001+13:00

Over the past few years I have saved numerous links to various reports and other resources on peak oil and energy depletion.

When I started the blog I assembled the best of these links on the Reports and Resources page of the blog. But it was cumbersome to add new links and the page was not kept up to date.

Now there is an elegant solution. I can easily "stack" links using delicious.com. Now the Reports/Resources page on the blog links to the stack of peak oil reports and resources.

In the stack there are links to Reports, media articles, video clips, photos and other resources.

They are not in strict chronological order, but the more recent and compelling items are closer to the top.

New items will be added to the stack as they become available. Be informed and enjoy! You can follow the stack if you wish, and leave comments.

Let me know if any of the links do not work, and your suggestions for other links to add.
email me at : oilshockhorrorprobe AT gmail DOT com

Only The Good Oil News

2012-02-08T15:52:00.000+13:00

Radio New Zealand has broadcast a news item which typifies the pathological optimism of our media when reporting New Zealand's oil supply.

The story trumpeted how New Zealand could become a net oil exporter by 2030 if new oil fields are developed. The story was based on just one line in a Ministerial briefing paper to new Energy and Resources Minister Phil Heatley.

Never mind that those “oilfields” have not even been discovered yet, or that the predictions are 20 years into the future, and are based on guesses based in turn on other guesses.

The real story which went unreported was in the very next paragraph of the briefing paper. -- New Zealand faces a steep DECLINE in domestic oil production for the term of this government and beyond.

“Note, however, that we are forecasting domestic production to decline over the next few years as existing fields such as Tui and Maari peak in their production, and before any new developments - which have a significant lead time - come on stream”

The MED officials also massaged this to a more optimistic message by describing a many-year-long decline as "short-term"?

There is even a graph confirming the decline, so the stark implications for New Zealand, for the term of this government and beyond, was staring the media in the face.

In the same section officials tell the Minister more bad news which also goes unreported –

“In 2010, mineral fuels (including crude oil) made up over 16 percent (by value) of total New Zealand imports. Between 2002 and 2010, the value of mineral fuels imports increased by 133 percent - despite the volume imported only increasing by 7 percent (this being driven by increasing global prices).”

The implications for our terms of trade are already huge. It costs NZ $8 billion annually to import oil. If oil imports rose another 133% in the next eight years (a very conservative estimate) our oil import bill will be nearly $19 billion by 2018. My earlier estimates here which came up with similarly big numbers.

We are quickly heading the same way as -

Greece which now spends over 5% of its GDP on imported oil and where petrol prices have doubled in just three years, leaving that much less to pay of its voluminous debt.

Or Italy where oil imports have risen from $12 billion-$55 billion in 12 years which is close to its current annual trade deficit, and a large contributor to Italy's parlous financial state.

It’s best that our media and politicians don't talk about such things though. We cannot have anything interrupting the good oil news.

Peak Oil’s Economic Pain Is Trumps

2012-02-01T12:46:00.000+13:00

Oil’s tipping point has passed, and the economic pain of a flattening supply will trump the environment as a reason to curb the use of fossil fuels, say James Murray and David King, in an article just published in the prestigious journal Nature.

James Murray was founding director of the University of Washington’s Program on Climate Change. David King is director of the Smith School of Enterprise and the Environment, University of Oxford,. He served as chief scientific adviser to the UK government in 2000–07.

These two distinguished scientists have confirmed what many peak oil pundits have been saying for years. Nevertheless publication in the Nature journal will garner much attention.

the main points made in the article are…

Peak oil is a more persuasive argument for lowering emissions due to the more immediate and severe impact on the economy

2005 was a tipping point. Crude oil production has not risen to match increasing demand leading to wild price swings

Crude oil production has not risen to match increasing demand leading to wild price swings

Oil price spikes caused economic crises and contributed to the one that world is “recovering” from now
The future economy is unlikely to bear what oil prices have in store
Only by moving away from fossil fuels can we ensure a more robust economic outlook and address the challenges of climate change
This will be a decades-long transformation that needs to start immediately
We are not running out of oil but we are running out of world that can be produced cheaply
Non-conventional oil won't make up the difference
It wasn't just the "credit crunch" that triggered the 2008 recession, but the rarely talked about oil price crunch as well
Historically there is a tight link between oil production and global economic growth.
If oil production can't grow, neither can the economy
Climate change has driven only slow policy responses, but peak oil engendered economic consequences will drive shorter term action
Governments that fail to plan for a decline in oil production will face severe economic consequences well before catastrophic climate change
The response from governments must be greater efficiency and conservation with policies such as -

higher taxes on oil
lower speed limits
encourage public transport
redirecting tax credits to renewable energy

Australian government tries to hide its own peak oil report

2012-01-22T10:46:00.001+13:00

The Daily Telegraph has revealed how the Australian government has attempted to suppress its own report on peak oil. The response from the New Zealand government had been equally secretive and obfuscating.

The Report by the Australian Bureau of Infrastructure Transport and Regional Economics (BITRE) is called “Transport Energy Futures; long-term oil supply trends and predictions” and can be downloaded as a pdf here

The 470 page report concludes that world oil production will peak in approximately 2016 and then begin to decline for the rest of the century and beyond.

"Given the growth in deep and non-conventional oil balancing the shallow decline in conventional production, it is predicted that we have entered about 2006 onto a slightly upward slanting plateau in potential oil production that will last only to about 2016-eight years from now (2008).

After that, the modelling is forecasting what can be termed ‘the 2017 drop-off’. The outlook under a base case scenario is for a long decline in oil production to begin in 2017, which will stretch to the end of the century and beyond. Projected increases in deep water and non-conventional oil, which are ‘rate-constrained’ in ways that conventional oil is not, will not change this pattern."

The report has never been published on an Australian Government website (unlike all other BITRE reports), but has now mysteriously appeared on a French website (leaked?) and from there has now gone mainstream.

The New Zealand government approach to peak oil has been equally secretive but much more cunning.

Although the National government received very strong advice from officials in 2009 confirming New Zealand's high vulnerability to oil shocks, it has decided that the peak oil issue is altogether too sensitive to risk obtaining further advice on. NZ Report here

Better not to ask any questions when you don't have any answers.

This ostrich approach was confirmed from my official information request in late 2011. The response I received was that no specific advice on the risks and impacts to New Zealand of a potential decline in world oil production had been requested or received since 2008.

What I would now like to know now is, given the high degree of co-operation between officials trans-Tasman, whether New Zealand officials or Ministers received copies of the BITRE report, and if so what was their response to it?

Will the onset of energy descent force NZ into a steady state economy?

2012-01-17T10:21:00.000+13:00

I wish to share this excellent article by Jack Santa Barbara of Nelson. He explores NZ's unique postion in a world facing an impending energy descent, and asks whether NZ could be the first nation to have a steady state economy. Full article here

Here are a few extracts ..

"New Zealand will inevitably make a transition to a steady-state economy. The onset of energy descent — having less and less energy to use with each passing decade — will push it to do so sooner rather than later. The critical question is whether the transition to a steady-state economy will be by design or disaster.

As a “developed” country, New Zealand is highly dependent on fossil fuels for its economy: international tourism, the production and export of food and timber, domestic transportation, agriculture and housing. New Zealand’s economy will change dramatically as it loses access, whether through geologic depletion or market exclusion, to relatively cheap hydrocarbon energy.

New Zealand’s geographic isolation will be a major factor in its experience of energy descent. A relatively small market at the far end of the energy supply chain, New Zealand is particularly vulnerable to both reduced supplies and high energy prices — one of the easiest customers to drop in favour of larger, closer and more lucrative markets. A market-driven energy decline could be both unexpected and abrupt.

There is an exciting and inspiring alternative to this negative scenario: New Zealand appreciates that it will be the first developed country to seriously suffer from energy descent and prepares accordingly. New Zealand has a unique opportunity to provide global leadership in the transition to a steady-state economy unfolding by design rather than disaster.
If New Zealand is to make the transition to a culture and economy that is ecologically sustainable, socially just, healthy and invigorating, it will need to dramatically change the structure of its economy. Instead of exporting natural resources, it will need to export practical sustainability knowledge and expertise for all facets of an energy-descent economy — an expertise likely to be in high demand as the world wakes up to the impending crises ahead.

New Zealand has many advantages over other nations in terms of becoming a leader in practical sustainability:
• The capacity to feed itself (although it currently imports about half its food)
• Geographical isolation from most population centres, making mass migration difficult
• A small population relative to the biocapacity of its land
• A climate likely to be less affected by climate change than that of many highly populated areas
• A minimal number of large cities obliged to undergo radical adaptations in the face of global change
• Many small rural communities that could be expanded and redesigned to be sustainable
• Traditional frugality and practicality, still flourishing in much of the population
• A residual core of knowledge and skills required to restart essential local industries
• A literate and well-educated population with access to technical training facilities
• A tradition of parliamentary democracy helping to facilitate the increased levels of cooperation required for various groups to contribute to the transition.

A strategy also requires an honest assessment of liabilities. Some of the obstacles to such a new vision for New Zealand include:
• A widespread commitment to economic growth which has been responsible for the crises New Zealanders now face (New Zealanders have all benefited from this economic model and a new paradigm will challenge some basic beliefs about what constitutes the good life — for example, the role of material goods for wellbeing; the efficiency and innovativeness of corporations; the possibility of a highly industrialized economy.)
• Some vested interests intensely committed to maintaining the growth paradigm as it gives them considerable power (for example, some politicians and the elites that have undue influence over them)
• International pressures to provide for needs abroad, such as food, coal and immigration
• The nation’s current foreign debt and any additional debt it takes on
• Uncertainty about the magnitude and timing of the impending crises on New Zealand (This makes planning difficult as planning at leisure is different from planning on the brink of disaster and New Zealand has little way of knowing how close it is to the latter.)
• The possibility that the rate and magnitude of changes coming will overwhelm people and push the country to a disaster steady state faster than it can manage a transition that allows it to optimise its physical and social resources
• Inertia and despair as a result of coming to understand the profound harm humans have collectively done to Mother Earth and the extent of change required for a healthy, sustainable future.

It is prudent, given the uncertainty about the timing and magnitude of impending changes, to adopt a risk management approach — to assume that significant change can be rapid and to be as prepared as possible as soon as possible. The majority of New Zealanders is in denial about the nature and scale of the problems the country faces. When crises hit the majority, people will need massive support. Preparing stores of essential resources such as food and water, along with a capacity to teach the basic skills people will need to survive and thrive, would be both prudent and helpful."

This does not compute

2011-12-07T11:58:00.001+13:00

The International Energy Agency has again warned that the high oil price could strangle hopes for a global economic recovery. It also says that 90% of future growth in oil production has to come from the Mid-East, mostly from Saudi Arabia. Without a $100 billion annual investment in that region, oil prices will exceed $150 a barrel. But Saudi Arabia has just announced it is halting its $100 billion oil expansion program? This does not compute.

Oil price strangling economic “recovery”

The IEA's Fatih Birol said the world economy was in a more fragile state now than during the crisis of 2008-2009. 2011 has been a record year for oil with Brent crude at its highest-ever average above $110 per barrel. This is the highest annual oil price since 1864, during the American Civil War.

Birol said Europe was especially at risk from the high oil price, but that it could also turn into a major problem for energy-hungry Asia.

"It is a major risk for the slowdown of the economic growth in Asian countries which were the countries which brought us out of the financial crisis in 2008," said Birol.

With New Zealand so reliant on China, and the rest of Asia, the implications for us are huge.

Lack of Investment or lack of oil?

The immediate future of oil production is seen by as one of adequate investment. The IEA says that the Middle East and North Africa will need at least $100 billion a year in new investment for the foreseeable future even in a place where oil is still cheap to exploit. The problem, however, is that the rising expectations of Arab Spring is rapidly shifting oil revenues from investment in more oil production to the kinds of social spending that will keep people happy and out of the streets.

In the closest the IEA comes to predicting peak oil, Birol says that without major increases in investment (an increasingly unlikely occurrence), Middle Eastern oil production will fall sharply leading to oil prices in excess of $150 a barrel - until of course demand slumps from the high prices.

Meanwhile in the same week as the IEA was stating 90% of future oil production must come from the Mid-East, Saudi Arabia announced that it is halting its $100bn oil expansion programme, claiming that the requirement for the kingdom to increase production has "substantially reduced" in the face of emerging new oil and gas supplies.
"Has the Kingdom already reached peak production capacity as it struggles to replace depleting supplies? Is this a case of budgetary priorities shifting as Saudi moves spending to social programmes to avoid contagion of unrest from neighbouring countries? "

This does not compute

Who is wrong? My pick is that Saudi Arabia is the emperor with no clothes, or in this case with no extra oil to pump. It cannot yet admit that it is close to its maximum production capacity, and is using the much hyped development of unconventional oil in the US and Canada as a convenient excuse .

But if the Saudi production stalls out at present levels, while the IEA warns we rely on them and other Mid East producers for 90% of future production then obviously something does not compute.

The only realistic conclusion is that oil prices will stay high and move even higher until the global economy falls back into recession or even depression and chokes off demand. And a recession/depression could be coming to an economy near you, sooner than you imagine.

NZ Election 2011 - Praying to the Growth Fairy

2011-11-30T16:02:00.001+13:00

I had thought that my next post would be on the surreal lack of policy from any of the political parties in the Election addressing resource depletion and their collective failure to face the reality that "economic growth" is not returning.

Before I could get around to it I read this excellent post from James Henderson at "The Standard", and so I am re-posting it here.

_______________________________

Paradigm Shift

"In the Budget, we were told to expect 4.2% growth in 2012, which would make getting back into surplus and creating jobs possible. The Pre-election Update reduced it to 3%. Now, the OECD says ’2.5%, providing Europe doesn’t go to crap .. oh, and Europe’s going to crap’. We’ve got to accept that economic growth won’t fall on us like manna from heaven anymore and work out how to build an actual brighter future.

At the anemic rate of ‘recovery’ we’ve had since the economy reached its lowest ebb two years ago, it will take until 2018 to recover the level of GDP per capita we enjoyed in 2007. But even that is unlikely to happen – the outlook is getting worse, not better.

We keep on being told that a return to ‘normal service’, rapid growth with rising wages and more jobs, is just around the corner but that’s all reliant on external factors – higher commodity prices, low oil prices, reinsurers coming to the party in Christchurch, even foreigners wanting to buy our power companies for high prices but generously not gouging us once they have them.

The fact is, growth isn’t coming back. That’s the reason why European countries are having debt crises. They borrowed in the expectation that growth would mean a larger economy in the future to pay back the money and the interest. When growth ceased, the debt pile just grew and grew as a portion of the economy until it reached danger point.

When you think about it, lending is essentially a bet by the borrower that they will have the capacity to pay back the principal plus interest in the future (ideally, because the borrowed money has been used to create more productive capacity) and a bet by the lender that the borrower’s wealth will grow sufficiently for them to pay back the loan. In other words, the credit system is all predicated on the economy growing.

Now, it’s OK to borrow for a while in recessionary times to keep everything ticking over and stop an even deeper recession caused by lending and borrowing freezing up and people paying down debt rather than investing or consuming. But, if growth isn’t coming back, all you’ve done is dig yourself a deeper hole.

Labour, I think, got about this far in their economic thinking: if growth isn’t happening, debt is a major problem. When it became evident earlier this year that no rebound is coming, if anything another recession is coming, Labour turned its focus on to getting debt down while maintaining control of strategic, income-producing infrastructure.

But only the Greens have started to think beyond that to why growth isn’t coming back and what to do about it. Unfortunately, their policy in the area isn’t all that detailed. The Greens know that the economy is an energy system – it will grow when there is more net energy being used effectively (ie efficiently) after accounting for the energy needed to generate the energy in the first place. Peak oil means that the ‘surplus’ energy that powers the economy is starting to decrease. For a while, the fall can be countered by increased efficiency. And that’s essentially where we have been for the last five years – the net energy available, at least in terms of oil (which is by far our most important energy source because it powers transport) has been steady or falling, and only efficiency gains are allowing the weak growth we’ve seen.

As a crude measure of this, you can look at how oil imports have grown as a share of our national income, squeezing out other things. We’re paying more (ie devoting more of our productive capacity/energy) for basically the same amount of oil, and that leaves less for everything else.
So, where does that leave us? It means the growth paradigm, particularly the export-led growth paradigm is dead. Even if we had enough water and fertile land to produce a whole lot more milk powder (and we don’t), our trade partners won’t be able to pay enough for it and the costs of transport or low-value, high-bulk goods will become prohibitive.

If we’re not growing our exports, we can’t increase our imports without going into debt, which we can’t do. We need, then, to become more self-sufficient and decrease our needs for imports. The biggest import is oil, so investing in replacing oil and lessening our need for it should be a priority. This is old-fashioned import substitution for the peak oil age – public transport instead of highways to nowhere, more energy efficient housing (which also means lower health burdens from poverty and a more productive workforce in the long-run), encouraging domestic IT and manufacturing.
If this looks a lot like the Greens and Labour’s economic policies, it is. The difference is that both of them are still assuming that ‘normal service’ will resume. They both base their forecasts on Treasury’s (fair enough), which assumes that growth is just around the corner.

They need to go the step further and plan for a steady-state economy, and how to maintain a steady-state economy in a world of shrinking oil supplies. We can’t assume any more that growth will magically show up and solve our problems. A steady-state outlook needs to be at the heart of our tax system, our economic policy, and our ideas about how income is distributed within the economy.
We can no longer rely on getting paid more for the few things we export so that we can import everything else- we need to become more self-sufficient. We need to build a resilient and fair economy and society that ensures we are getting the most out of everyone (which means not consigning 20% of kids to the scrap-heap from birth by allowing them to live in poverty) and every resource.

We can actually build a better future within these constraints. We have incredible wealth as a country and nearly $45,000 of economic output for every man, woman, and child every year. We can build a New Zealand that works (and provides work) for everyone, if we choose to. But it means really planning for the future, not pulling a few economic levers and leaving it up to the ‘genius’ of the private sector to decide. It also means not allowing our wealth to be so concentrated in the hands of the few, and paying everyone else off with promises of growth to come.

Unfortunately, we’re going to waste 3 more years before we even get started because we have a government whose plan is: cross fingers, sell assets, and pray to the growth fairy."

Election 2011 Two-facedness - Saving money good - saving fuel bad

2011-11-07T23:17:00.000+13:00

All of the political parties agree New Zealand needs a long-term savings and investment plan . These elections there have been major policy announcements on Kiwisaver, reducing debt and the age of eligibility for National Superannuation. Saving money good.

But when confronted with arguably a more serious and immediate threat to New Zealand's economy, national well-being and security -- namely our dangerous exposure to oil price shocks, and oil supply disruptions and shortages, - all the main parties fail to articulate a coherent long-term plan to lower our dependence on ever more expensive imported oil. Saving fuel bad.

If you thought the need to save fuel was a minor issue compared to debt reduction, and a long-term savings and investment strategy -- think again.

A just released report from a US military think tank the Military Advisory Board (MAB) says oil importing nations like the US (and by comparison also New Zealand) need to reduce oil consumption by 30% in the next 10 years.

The report, entitled Ensuring America's Freedom of Movement: a National Security Imperative to Reduce America's Oil Dependence , describes America's reliance on imported oil as the "Achilles heel of our national security". Members include some of the US’s highest-ranking retired military leaders with 400 years of collective military experience. The report calls for immediate, swift and aggressive action over the next decade to achieve the 30 percent reduction in U.S. oil consumption. (Guardian article here )

“We have seen oil shocks before. And they have been immediate and far-reaching. But at today’s level of US consumption, a sustained disruption would be devastating - crippling our very freedom of movement,” said General Paul Kern, USA (Ret.) who chairs the MAB. “This isn't just about the volatility of gas prices at the pump. This is a national security problem, manifesting itself economically, diplomatically and militarily, and it is not just going to go away."

The Report highlights how the US (just like New Zealand) has transportation systems which rely almost exclusively on petrol, diesel, and jet aviation fuel. These three products are refined from a single basic ingredient: oil. How we get to work, how we ship materials, how we farm or produce our food, and how we transport raw products to manufacturers or finished products to or from markets depends, in nearly all cases, on this single source of materials: oil.

“We have seen oil shocks before. And they have been immediate and far-reaching. But at today’s level of US consumption, a sustained disruption would be devastating - crippling our very freedom of movement,” said General Paul Kern, USA (Ret.) who chairs the MAB.

The report calls on national leaders to take the following steps (all of which apply equally to New Zealand as a nation almost totally reliant on imported oil ) to reduce U.S. oil demand by 30 percent in ten years:
• Increase efficiency: The first, fastest and most effective strategy to reduce oil consumption is to increase efficiency. The report identifies fuel economy standards for cars and trucks as a proven and effective way to reduce the use of oil, and calls for strengthening those standards,
• Diversify supply: “Our current overreliance on a single fuel is a weakness; relying on diverse fuels and vehicle types can be a strength,” the report notes. Government must take action to promote the use of a more diverse mix of transportation fuels and to drive wider public acceptance of these alternatives.
• Develop a national, cogent, dedicated and sustained energy roadmap that rises above partisan politics. The military leaders warn “security must trump ideology,” adding “the scale of impact associated with our energy use is massive.” They write that “the right energy choices can bring down our trade imbalance, lead to new jobs at home, launch new American-made technologies.”

If the US‘s military top brass are calling for a massive fuel savings plan, then I say it’s well past the time for our New Zealand politicians to grasp this nettle also. The US military can see clearly that slavish reliance on the ideology of “the market will solve it” or the occasional advert on TV urging us to keep our car tyres pumped to save fuel up is not going to cut it.

If a long term savings and investment is good, then a comprehensive fuel savings plan is very very good.

Poster from World War 11 - Oil is Ammunition

Huge blowout in NZ oil import cost

2011-11-02T14:07:00.001+13:00

In the year to September oil imports rose 22% to $7.7 billion. Oil is costing us $1.4 billion more than a year ago.

If this price trend continues then by 2015 our annual oil import bill will soar to $17 billion and will be $11 billion more than it was in 2010. That annual extra cost will be greater than the government's contribution to the Christchurch earthquake.

It gets worse.

Next decade an oil supply chasm

The current contribution to our balance of trade of $3 billion from domestic oil production is on a steep decline and will be almost zero by 2020. Assuming new oil is found (a big if) -- little new oil will flow until 2020 and most after 2030.

We are vulnerable to supply shocks

Our economy is more exposed to oil shocks

Our current low or no growth and high inflation is due to the 2007 -- 2008 and present oil price shocks

I have scoured the 2011 election media coverage for discussion of these issues by any of the leaders or candidates -- results -- zilch. Oh well never mind, we won the Rugby World Cup so no worries!

New Foundation to highlight peak oil and end of growth

2011-10-29T16:18:00.000+13:00

When I started writing this blog over a year ago, I stated my motivation was “to probe, raise awareness, encourage informed debate, and look at community responses.” But it’s often felt like I was a lonely voice in the wilderness. How come almost no one else in New Zealand – even in the blogosphere - was commenting on peak oil and its huge economic implications for our nation? How come there was not even a nascent entity or group taking up the challenge of informing the public, and generating debate that would hopefully seep into the mainstream media?

You can imagine my delight to discover that a new initiative is taking up this challenge. It’s called Energy for the Future with a mission to “seek contributions, energy and ideas to help generate a wave of consciousness that questions the validity of growth capitalism and positively advocates shared prosperity without growth.”

The website is seeking expressions of interest and ideas. Please check out the site. You will find a brief precis of the problems, the mission, goals and objectives, and how to get involved.

I am very excited about the initiative. It could well be the much-needed catalyst to generate the wave of consciousness that takes these issues into the mainstream.

Peak oil, recessions and the end of growth

2011-10-13T15:00:00.000+13:00

On Tuesday I gave a presentation to Auckland University students on "Peak oil, recessions and the end of growth"

The event was organised by AIESEC , the world's largest youth run non profit organisation.

The powerpoint version is available here

to view the video on slide 24 see here

The .pdf version is here

When might New Zealand's oil imports dry up?

2011-10-03T14:30:00.000+13:00

A Guest Post by Nigel Williams

There is a set of questions that we can never know the answer to except in hindsight. Questions like:- “How long do I have before I cannot afford to buy fuel?” “How long do I have before there is no oil in the tank of my car?” “How long do I have before there are no diesel-powered trucks running on roads bringing food to my supermarket’s shelves?”

The answers to these will be different for each one of us, possibly by many years.

But since I have a strong desire to make sure that when ‘it’ happens to me I am as prepared for the ‘transition’ as I can be, I have prepared this analysis based on the best contemporary information I can find.

Data
Raw data on country-by country production and consumption is usefully complied by the CIA. Subtracting one from the other gives the country’s import/export status. The available CIA data is generally of about 2009 vintage – good enough for overall views. The following Table 1 shows by country the Top Ten world ranking for oil production and consumption and hence (by subtraction) exporter and importer ranking too.

Outside the club containing all the net oil exporters and the top ten importers is a group of comparatively impotent countries with little or no indigenous oil production who all rely on imports to satisfy their demands.

For example New Zealand produces about 61,000 barrels per day and consumes about 151,000 barrels per day (CIA 2009 data). Virtually all New Zealand’s production goes to refineries offshore, so we import most of our domestic needs in spite of our fluctuating oil production approaching 40% of our volumetric demand. The estimates of the scale of our currently producing oil reserves have been downgraded recently, and production is now confirmed to be falling sharply.

The P50 estimates of actual oil production for the significant oil-producing fields around New Zealand each fall to the near-useless volume of 1 million barrels per year (about 2750 barrels per day) between 2020 and 2025. So even if we were to divert local production to our refinery (and then pay the going global price for it) it will only be a drop in our present daily demand bucket of 160,000 barrels. Barely enough to sustain essential emergency and security services, but maybe worth having all the same.

Increased production?
So what is the likelihood of increasing growth in production from the biggest producers?

Saudi Arabia is unlikely to increase production much beyond present levels.

After several years of steady increases, it appears that Russia’s oil companies are struggling to increase production due in part to the ongoing depletion of existing oil fields.

IEA data confirms that production from the United States is at best steady, bolstered only by shale oil and imports from Canada and further abroad.

Iran, in spite of hopes to the contrary, appears to be in decline too, and unless its political woes are resolved that is unlikely to change.

And so we go on down the list, with scant encouraging news to be found on the increasing production front.

Increased internal consumption of oil exporters
Now our dragon is eating its tail - all oil exporters are also oil consumers. It is inevitable that the local oil production of these countries will eventually be crossed by the internal oil demands of the country – if only because the country sells its oil very cheaply to its population to maintain social order and its political power base.

As Luis de Sousa noted in his presentation to ASPO in Portugal in 2008, Jeffry Brown’s Export Land Model for any country sees production and consumption run relentlessly towards each other. There are a number of well-documented recent cases of this effect, notably Indonesia, Egypt, Malaysia and recently Vietnam. The risk of Mexico crossing the zero export line is as acute as it is unavoidable due not only to the effects on the people of Mexico but on the USA’s supply situation too.

Saudi Arabia’s internal oil consumption is increasing at about 6% per year and will equal its oil production around 2030. Even Russia is expected to be consuming all its production by around 2025. Analysis of the top exporters show a persistent trend down to zero exports. Not a good look.

Making deals…
The USA obviously suffers intensely with its history of oil deals with increasingly shaky and unsympathetic regimes, with its final solution to any particularly difficult provider being to give other nations the idea that the use or threat of military force is a legitimate way to secure oil supplies. The USA’s demand is stalled for now.

The remainder of the top ten importers tend to adopt rather more conventional and successful approaches.

Japan’s oil deal with Iran may no longer be current, and it appears to be a bit behind the others in nailing secure supplies. Its state of mind right now with the demise of public favour of nuclear and the resulting economic impacts leaves it unlikely that Japan’s demand will increase markedly, although its economic clout means its basic fuel supply needs will still need to be met.

China: Deals with all and sundry, including recent and past deals with USA’s supply saviour Venezuela. Some expect China’s oil demand to increase by 9.2% next year (2012)

And the deal-making is never simple, with Germany recently providing bank assistance to India to help that country with an oil deal with Iran, over protests from US of A. The deal ostensibly led to the release of two German reporters held by Iran, but nevertheless the use of oil agreements as a bargaining chip is an interesting development.

South Korea is rubbing shoulders with suppliers in South Africa, United Arab Emirates (for a 100 years!) as well as agreements with the big corporates Shell and Total.

India is striking up useful relations with the House of Saud and Kazakhstan, and no doubt as many others as it can, and who can blame them. It’s a great example of what a state with awareness of the coming crisis should be doing. A Lamb for Litres deal between New Zealand and any anybody who eats meat and produces oil would not be a bad scheme. The odd refrigerated container as a back load on the deck of a tanker would not be a bad idea. India’s demand is expected to grow by up to 8% next year.

And even France has not been backward at coming forward – rapidly establishing working relations with the new regime in Libya.

New Zealand’s Supply Position
With the present oil supply structure the New Zealand government has no intrinsic structure or mandate with which to commence such negotiations. Thus compared to the Top Ten Importers, New Zealand is singularly timid in any effort to establish working relationships with other sovereign-state providers, preferring instead to rely entirely on multi-national corporate providers to satisfy its domestic needs.

New Zealand Refining Company’s major shareholders are BP, Exxon Mobil, Aotea Energy Limited (‘Z’ to the man on the street), Garlow Management Incorporated and Chevron. Garlow seems to be withdrawing from a number of NZ investments, including putting its stake in Rainbow’s End up for sale, but I suspect its interest in Marsden Point may be more in that facility’s ability to process the heavier sour Arabian crudes and on-ship them to more lucrative destinations in the continental United States and to its home ports in Canada than to provide any benefit here.

Only the independent brand Gull (wholly owned by Gull Group from Australia) imports its refined product directly to its terminal in Tauranga.

So in total New Zealand’s fuel supply arrangements of around 160,000 barrels a day are directly ‘owned’ by private interests, and the New Zealand government does not have any effective international agreement for supply of fuel at all; with anybody. We certainly do not have anything like the astonishing 100-year agreements secured by the likes of South Korea – that is foresight with a capital ‘F’.

We do not even have any first-call on our local oil production that hovers between 60,000 and 40,000 barrels a day, depending on the state of our tiny oil fields. Instead we take the royalty money to assist with our balance of payments, and as noted above even that meagre cash injection is set to decline sharply.

The Players
We have the net oil exporters who are enjoying the economic and social benefits of their happy positions, with the inevitable outcome (as highlighted by the Export Land Model) that their ability to export is rapidly eroding; next we have the Top Ten importers who are employing every possible shade of negotiation skill, guile and if necessary force to secure robust and remarkably long term supply agreements with those oil exporters, and we have the likes of New Zealand with no effective direct hold at all on its oil supply.

The exporting nations are of course in a prime spot as far as future global economic activity is concerned. If you are setting up a new production line will you do it in an increasingly energy poor country like New Zealand (about as energy-poor as it gets) or even one like Mexico which is close to oil-neutrality and the consequent collapse of its major income stream and Egypt-type social instability soon thereafter? No, you will pick a winner and look for the most politically-stable operating base you can find. Norway, for example, looks a good pick, and Russia too for a while if you can figure out the rules to operate there. The point is that thoughtful manufacturers will transfer operations to countries that have the best chance of being productive longest, while abandoning less well-endowed and hence riskier locations. This will of course exacerbate the failure of the energy-poor economies, and hasten the rise in internal energy consumption by the current net exporters.

There is little comfort to be gained from the fact that we are probably not alone in this unhappy condition. If we count the oil exporters on the CIA list we find that there are some 43 countries with a production surplus ranging from as little as one thousand barrels a day up to Russia with 7,800,000 barrels a day to sell.

The other group of net importers (including New Zealand) numbers 152 countries, 62 of which (again including New Zealand) have some domestic production, but not enough to cover their needs.

So we have three groups of players in the game. The first are the net exporters, the second group are the net importers who have managed to secure some decent supply agreements with the exporters, and the third is The Rest (including New Zealand) who are reliant on supplies from the net exporters, but who have no significant assurance of supply from anybody.

What then does the future hold for us?
World Energy Outlook 2010 and subsequent reports and refinements, gives a transparent view of the future oil supply situation for places like New Zealand. The key chart is shown below in Figure 1.

Figure 1: WEO 2010

The WEO 2010’s chart for the New policies scenario gives their best estimate for World Oil Production from Currently producing fields, Fields yet to be developed, Fields yet to be found, Natural gas liquids, Unconventional oil.

I will not over-analyse the meaning and energy content of these various types of oil. However when I put on my ‘prudent grandfather’ hat I find that with the combination of:

• declining energy return on energy invested for production from existing wells,
• my scepticism about the actual production of fields to be developed and fields to be found,
• the low energy content of natural gas liquids and
• the low energy return from the production of unconventional oil

I end up putting a pin in the IEA chart at about 40 million barrels a day around 2030. I find any higher figure to be non-credible.

So in terms of the raw production likely going forwards we have the production curve for existing fields, and a sliver of the production from the rest.

The Big Picture
Figure 2 shows this decline curve through 40 million barrels a day around 2030 and the demand curve of the exporting nations incremented upwards by 2.9% per year. This modest increment rate recognises the impact of the overall declining global economic situation, and the increased internal demand arising from natural growth exacerbated by transfers of production from other countries.

Figure 2: IEA WEO 2010 and Exporter's Consumption

Based on this simple chart, it appears that there will be no oil left for anybody except exporting nations by about 2031. But don’t worry yet; it gets worse.

If we add the demand of those Top Ten net-importing nations which have managed to secure some solid supply agreements to the exporter’s demand then we get a better idea of what is left for The Rest (Figure 3).

Figure 3: WEO 2010, Exporters Top Ten and The Rest.

The oil supply for The Rest is defined by the declining global production curve and the rising internal demand of exporters and the Top Ten importers. This ‘triangle of hope’ in the top left corner of the chart, terminates (and I use the word advisedly!) in about 2016, five years from today.

What it means
As the overall system is working today, things seem to be hanging on in some sort of fragile balance, don’t they? The present demand of the 152 importing countries excluding the Top Ten amounts to about 12 million barrels a day, as represented on the Now axis in Figure 3.

But that happy situation does not seem likely to continue does it?

What can be wrong with this interpretation?

• The estimate of usable crude oil production could be too low? That has the effect of giving us more time.
• The estimate of the growth in internal demand of the oil exporting nations could be too high. Giving us more time.
• The estimate of growth in demand of the Top Ten oil importing countries, and the persistence of their demand could be too high. Giving us more time.

But I rebut those
• Every indication I find confirms that there is a widening gap between discoveries and production.
• Much new oil production requires sustained oil prices that the world economy cannot afford to pay, so the oil will remain in the ground.
• Oil exporting nations will be the last bastion of conventional manufacturing and production. This will not go un-noticed.
• The momentum of the Top Ten importers (including China and India with growth of around 8% to 10% expected) will place immense stress on their oil supply lines. They will not go quietly.
• New Zealand has no political or practical infrastructure in place to take over oil supply arrangements from its present corporate providers, or to negotiate supply agreements with any producer. We are voiceless in the market.

Thus there are reasons for each curve to be steeper or flatter, for the end-point to come sooner or later.

But this extension of the Export Land model to include the demands of the most powerful importers as well shows the frightening vulnerability of the smaller oil importing nations. It is not just a matter of looking at the end of all oil exports on some far-distant date, but rather this analysis reveals that oil supplies may end for New Zealand and over 150 other small-importer nations very much sooner.

The transfer of the power represented by energy-wealth will, as the Export Land Model suggests, be surprisingly rapid. Smaller nations like New Zealand are virtually powerless to control their energy supplies, and in particular to claim a viable share of the declining resources.

The potential pace of this change in supply conditions is not well understood by decision makers, and even less accepted by New Zealand’s political leadership.

Regardless of the actual date of the end of our oil supply the risk of abrupt and sustained failure of most of New Zealand’s oil supply is acute, and immediate.

______________________________

Nigel Williams is a transportation planner and traffic engineer working out of Auckland. He has maintained a long interest in the global oil supply situation (especially in relation to its impact on viable transportation choices), together with a watch on climate change issues and the potential challenges of sea level rise. At the risk of over-working the ‘grandfather thing’ he nevertheless strives to make all possible preparations for the coming interesting times, so that, at least, he can say to his three grandsons: “Boys, we saw it coming and did what we could.”

(Un) Economic Peak Oil is what really matters

2011-09-20T21:24:00.000+12:00

In several of my recent posts, such as here, here, and here, I have argued that concentrating on the geological peak of oil production is a distraction. What really counts are the severe economic implications for New Zealand and the world economy as oil prices trend upwards and become more volatile. And I have highlighted the substantial impacts on our economy even without global oil production actually peaking, or declining. Production being on a plateau since 2005 has been sufficient.

Chris Skrebowski, an expert oil analyst and trustee of the UK-based Oil Depletion Analysis Centre (ODAC) advances these propositions cogently and persuasively in a recent article. Essentially he argues that there is economic peak oil. This economic peak oil is the point at which the price of oil becomes unaffordable to consume and therefore to produce.

Here is a synopsis of Chris Skrebowski’s arguments:-

First he maintains that Peak Oil is largely an economically driven phenomenon. It occurs when the cost of supply for oil producers exceeds the price economies can pay without destroying growth at a given point in time.

Oil production costs rising

Saudi Arabia needs an oil price of $90-100/b for its revenues and expenditures to balance. Many, if not all of the other OPEC members have revenue/expenditure breakeven oil prices comparable to those of the Saudis. The Saudis are the world’s oil price setters.

The escalation of oil development costs is being driven by the depletion of the low-cost, easily exploitable oil and its replacement by less accessible and higher-cost oil. The chances of any significant and sustained price fall, barring a major global depression, look remote.

Higher oil prices helped trigger ‘Great Recession’ and cause of current “slow recovery”

$147/b oil in mid-2008 helped trigger the ‘Great Recession’. The run up in prices to around $120/b in 2011 brought growth to a near halt in a number of western economies, and notably in Europe. A study by University of California-San Diego economist James Hamilton, links oil price spikes to 10 of the last 11 recessions.

Developing nations better able to cope with higher prices than advanced economies

In mature economies, such as the US, there is a significant economic impact at over $90/barrel whereas China can probably sustain oil prices in the $100-110 range. Why is China’s tolerance higher? Because the value of oil is higher there.

Will this higher price tolerance mean developing economies could keep developed economies in growth-less stagnation by paying oil prices that were just above those that bring developed economies to an economic halt?

Current cost of production unaffordable

In its most recent survey, Barclays Capital indicates that oil companies’ budget assumptions have risen to $87, literally the maximum carrying capacity of the US (and probably European) economies.
Thus, on current trends, the oil companies will be approving projects that deliver oil at prices which are literally unaffordable for advanced economies.

Slow adaptive responses and fast oil price rises leads to economic peak oil

Adaptive responses, on the basis of the reactions after the first (1973) and second (1979) oil crises, are slow (taking 10-20 years) while oil prices have been faster moving going from $25 to $100 in the eight years between 2003 and 2011.

All the indications are that adaptive responses have failed in terms of both size and speed to restrain the steady rise in oil prices seen after 2003. The only break in the steady oil price increase occurred as a result of the 2008 economic crisis and the subsequent ‘Great Recession.’

The adaptive response is to use oil more efficiently or to back out lower added-value uses of oil or to move to other fuels. Either way this shows up as improved efficiency in use (volume of oil per unit of GDP.

The graph below plots an oil price rise of $10/year (blue line) and a productivity gain of 3%/year (adaptive response) – red line. The graph shows the price increases, driven upwards by depletion, outrunning the adaptive responses that higher prices induce, to give a crossover in 2014. The crossover gives the timing of the economically determined Peak Oil.

The crossover point gives the economically determined Peak Oil when sustained growth becomes impossible.

Conclusion

Adaptive responses are not large and fast enough to constrain the upward trend of oil prices. The primary adaptive response will therefore be periodic economic crashes of a magnitude that depresses oil consumption and oil prices. These have the effect of shifting consumption from incumbent consumers—the advanced economies—to the new consumers in the developing economies.

This is exactly what happened in the last recession when between the start of the recession in January 2007 and 2011 demand rose by 4.3 million b/d in the non-OECD nations and fell by 4 million b/d in the OECD area.

Officials Muzzled on Peak Oil?

2011-09-02T10:30:00.000+12:00

The government has finally released its Energy Strategy. There are cosmetic changes from the Draft version but it's no surprise that the final Strategy continues to completely ignore the threat of peak oil.

There were many submissions, including my own, which detailed the raft of recent reports from oil and energy experts, think tanks and government institutions which are all pointing to an imminent supply and oil price crunch. And in 2009 government officials themselves gave strong warnings to Ministers. So since 2009, have the officials been muzzled?

Summary of Submissions
The summary of submissions does acknowledge that peak oil concerns were raised by submitters:-

“32 submitters (including 23 individuals, the Green Party and the Māori Party) expressed concern about peak oil. They argued that peak oil was understated in the strategy and that the Government needed to act now to mitigate the future effects of oil supply constraints. They argued that this mitigation could not be left to market forces.”

“The draft strategy’s position of leaving consumers to respond via price signals was not supported by many. Many submitters wanted the Government to be more proactive in leading a transition away from dependence on oil for transport.”

Response - Denial and Obfuscation
The comments from officials about the peak oil submissions are typical of the denial and obfuscation that were on show in the recent MED presentation on peak oil.

All of the peak oil submissions are summarily dismissed, with no recommended action from officials. They rely on just one body - the International Energy Agency -- and its 2009 World Energy Outlook which says that global oil production is not expected to peak before 2030.

Cherry Picking
But why do officials cherry pick the 2009 IEA report when the later 2010 IEA World Energy Outlook contains a much more pessimistic view and the IEA, for the first time confirms that global crude oil production peaked in 2006 and will never be exceeded?

“Crude oil output reaches an undulating plateau of around 68 -- 69 million barrels a day by 2020, but never regains its all-time peak of 70 million barrels a day reached in 2006.” - IEA 2010 World Energy Outlook

And why are the stark warnings from the later 2010 IEA report quoted below not referred in officials’ comments? More importantly why are they not a catalyst for the government to "act more vigorously" in its Energy Strategy to use oil more efficiently and develop alternatives? If the IEA is the font of all energy knowledge and it is warning the economic burden of oil and vulnerability to supply disruption will increase, how come the government still weakly abdicates its responsibility to the magic of the market to solve everything?

“The message is clear: if governments do not act more vigorously than currently planned to encourage more efficient use of oil and the development of alternatives .... we might see a fairly early peak in oil production. "

“If governments do nothing or little more than present, then demand will continue to increase, supply costs will rise, the economic burden of oil use will grow, vulnerability to supply disruptions will increase and the global environment will suffer serious damage.” - IEA 2010 World Energy Outlook

Another mystery.
How come in their advice on the Energy Strategy, officials have not repeated the warnings they gave Ministers Joyce and Brownlee in 2009? … when they said:-
• 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 help only "marginally"
• without "sufficient incentives" New Zealand's resilience will decrease even further
• even if domestic oil production increases we still pay the international price.

Officials Muzzled?
It's pretty clear that officials have been muzzled by the government. In 2009 they gave some very compelling and concerning advice about the exposure of the New Zealand economy to a looming oil supply/price shock which the government simply didn't want to hear.

So the strategy ever since is obvious -
• Hear no evil, see no evil and speak no evil and not ask for any further advice on the subject. I know this because I made an official information request asking for documents and emails on the risks and impact to New Zealand of peak oil since 2007. Astoundingly no such documents apparently exist since the 2009 report?
• Refuse to talk about it. That's why the Acting Minister of Energy flatly refused to respond to questions about peak oil at the launch of the Energy Strategy.

As we move into an election campaign it will be up to us voters to hold Ministers and would-be Ministers from all parties to account. And maybe, - just maybe, a few journalists will ask, and keep asking, the hard questions.

Oil Royalties a Mirage?

2011-09-01T14:34:00.000+12:00

Beside the release of the government's final Energy Strategy was a report from Woodward Partners purporting to estimate the potential royalty income from existing, and yet to be discovered oilfields.

Business cheerleaders such as the National Business Review typically took the most extreme best case guesstimate and trumpeted the report with headlines of a $13 billion bonanza. But if they had bothered to actually read the report they would find that quite different story emerges.
1 The report confirms yet again that domestic oil production is falling steeply -

"Production levels from Maari are forecast to decay quite quickly between 2010 and 2015 ......to a lesser extent Tui also will decay quite quickly over this time"

2 Royalty income for oil from existing fields is just over $300 million per annum and most of the income will come in the next 1 -- 3 years and then plummet to almost zero by 2020 .

“Maari is characterised by very high current production levels of oil, with a relatively rapid decay down to low production rates. This provides the Crown with attractive royalty cash flows in the next few years, but means that nearly half of Maari’s value to the Crown ($315 million of $490 million) is received in FY2011 and FY2012. So Maari’s value to the Crown will decline fairly quickly.”

The graph shows the "likely profile in decay of royalties from currently producing fields"

3 the $3 billion royalty projection for existing fields is the total for the next 20 years out to 2030.

4 The projections for frontier, as yet undiscovered oilfields are no more than guesses. The Woodward report admits as much….

“We caution that this valuation should be seen in the context of an industry whichfaces significant uncertainties, and acknowledge that this valuation could quickly berendered obsolete”

Worse, the Woodward report relies in turn on a GNS Science report, which also admits its "findings" are no better than pure guesswork.

“ the predicted (pre-drill) volumes are fraught with assumptions, and are usually, but not always, proven to be overly optimistic……”“The business of quantifying undiscovered petroleum resources is fraught with difficulty andthere are numerous possibilities for error”

You be the judge as to whether this Report, full of guesses relying in turn on other guesses, is a joke.

5 Even if new oil is discovered, the Woodward report confirms in its mid case scenario it will not be until around 2020 at the earliest before any significant production could begin from frontier fields. And it would be well into the 2030's before royalty streams would reach $1 billion. A paltry $1 billion by 2035 is hardly going to be the economic game changer that the government is making it out to be, when the extra cost of oil imports could be $10 billion per annum by 2015

Note too that the graph above has production and royalty income from as yet undiscovered fields beginning as early as 2014 ! But no new drilling will now take place until the 2012-2013 summer, and it can take upwards of 10 years after discovery to get production in frontier fields under way. This graph has to be severely optimistic.

6 the mid-case scenario estimates the total royalty income for undiscovered fields from now until 2050 at just $5.5 billion. Hardly a bonanza for the government's coffers as it would have us believe.

Christchurch quake cost added to our yearly oil import bill?

2011-08-24T10:35:00.001+12:00

By 2015 New Zealand could face an extra $10 billion cost each year to import oil, compared to 2011 prices. That's more than the cost to government of the Christchurch earthquake each and every year! By 2020 the oil import cost each year could soar to $19 billion more than the present cost. That's the bill for two Christchurch earthquakes every year.

How come?

1. Domestic oil production is plummeting

New Zealand's domestic oil production will be halved by 2015, and be almost zero by 2020. This means New Zealand's net import cost for oil will rise steeply.

It's taken an official information request (delayed for two months) to extract from government data for projected domestic oil production out to 2020. See below for the data as supplied, and a chart showing the steep decline.
Note –
1. the decline will be even sharper as the downgrade of the Tui oilfields reserves by 1/5th reported last month, has not been included.
2. Even if new oil discoveries were made offshore soon, or a lignite coal to diesel plant in Southland could be commissioned quickly (a very big "if" with severe adverse climate change effects), New Zealand's domestic oil production out to 2015 would not be increased, and it is highly unlikely any significant flows of new oil could begin by 2020, if then.
3. one petajoule equals approximately165,000 barrels of oil

2. Exchange rate forecast

Treasury's forecast for the period 2014 -- 2020 has the exchange rate trending to 0.60US$/NZ$ (BEFU -- Budget Economic and Fiscal Update
This exchange rate for 2015 -- 2020 would make oil imports significantly more expensive than the present exchange rate of 0.80 US$/NZ$.
0.60 US$/NZ$ has been used in the calculations for 2015 and 2020.

3. Oil prices forecast to rise steeply

Oil prices are forecast to be volatile but generally rise steeply in the next 5 years and beyond. Prices have risen from $US20 a barrel in 2002 to $US147 in 2008, and had been above $US100 for the last six months.

With the global economy stalling again, and the US and Europe perhaps heading back into recession, oil prices may fall again in the short term. But after the 2007-08 great recession oil prices rose quickly again, and that pattern is likely to be repeated. Many world oil experts are predicting that an oil supply crunch is looming and will rapidly push up prices in the 2012-2015 period.

The (many would say conservative) assumption used in the calculations below is that the price of oil will double to $US200 a barrel by 2015, and rise to $US250 a barrel by 2020.

Even if the exchange rate and oil price in 2015 was identical to today's rate/price, New Zealand would still face an oil import bill for an extra $1 billion a year due to our steeply declining local production.

click to enlarge

Sources
The data sources used are the official information received - see above, the New Zealand Energy Outlook 2010, New Zealand Energy Quarterly March 2011, and the International Energy Agency New Zealand Energy Review 2010.

If I have made any errors in these calculations please let me know and I'll happily amend them. They are not intended to be the last word -- obviously there are many variables. But they do show that some very big numbers are involved. As officials rightly pointed out in advice to government Ministers Joyce and Brownlee in 2009, New Zealand's oil import vulnerability and exposure economically are matters of strategic importance.

Saving is good right? So why not save oil?

All this highlights why we urgently need an adaption and conservation plan, to drastically lower our dependence on imported oil. When you see the numbers here, it just makes good common sense.

We are constantly reminded that it’s simple good practice to be thrifty and save for a home or retirement. But when it comes to saving a commodity which could add costs to our economy the equivalent of the governments funding of the Christchurch earthquake every year, we have not started to even have a discussion, let alone take decisive action. Meanwhile the UK government is developing an oil shock response plan, and in the US President Obama has agreed with the auto industry on much more stringent mandatory fuel efficiency standards.

Sadly, none of our our corporate-owned media or political leaders, are willing to confront the huge economic and social risks inherent in our oil import dependency.

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

2011-08-16T15:05:00.001+12:00

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.

Public Receptive to Peak Oil Debate and Policy Ideas - Survey

2011-08-10T14:37:00.001+12:00

It's a common misconception that only "greenies" and "doomsters" are concerned about peak oil. This view perhaps explains why politicians and the mainstream media have marginalised or ignored the issue. However a recent US survey of public opinion reveals that, in fact, those Americans who identify themselves as "very conservative" politically or who are "strongly dismissive" of climate change are among those most concerned that rising fuel prices are harmful to the economy and public health.

Overall nearly 2/3rds -- or 65% -- of all respondents to the US survey said that if oil prices triple it would be "very harmful" to the economy, and 44% said it would be "very harmful" to public health.

These are the key findings of a study published online this week at the American Journal of Public Health.

Here is the breakdown by idealogy - note: those who identified themselves as "very conservative" were 20% more concerned than those who said they are "very liberal"

and here is the breakdown by views on climate change - ( strong concern about peak oil from those who are dismissive of climate change is not an endorsement many would wish for, but it indicates that when peak oil is couched in immediate economic terms, then climate sceptics are almost as worried about oil prices as those who are alarmed about climate change )

New Zealand Poll
The US survey findings aligns closely with a poll carried out by WWF in New Zealand in August 2010. In that poll 72% of New Zealanders believe it is the government's task to plan ahead, and invest now in public transport and alternative fuels before the price of oil rises. The NZ survey did not break down opinion among “liberals” and “conservatives” but it seems likely that ideological results would be similar here. Further polling and focus group surveys would be useful.

Latent Unease
For some time I have sensed a general feeling of unease in the public about oil prices, particularly since the latest spike began in late 2010, so soon after the 2007 -- 08 oil shock. There is a sense that this is not "normal", but for most people they cannot quite put their finger on the reasons for fuel prices rising and being so volatile. This latent sense of unease is confirmed in the US study's conclusions where they say -

"although Americans are unlikely to be aware of the concept of peak petroleum, the level of expert agreement on the issue, or the potentially significant impacts on society, the public does possess a latent sense of an impending energy problem"

What are the takeout messages from the US and New Zealand opinion surveys?

To me they are --
1   there is a broad consensus across the political divide that peak oil/oil price shocks are dangerous and damaging to people's well-being and the economy

2    to a far greater extent than previously thought "middle New Zealand" as well as those identifying themselves “far left" and the "far right" are open to engagement and debate on peak oil and its implications, from both the media and politicians.

3   there is sufficient concern to indicate that the public are already receptive to the major political parties proposing bold policies to lower our dependency on imported oil and as to how we might transition to alternative sources.

Will politicians and media have the courage?

probably not. As Dave Allen colourfully puts it -

"In a country run by responsible adults, these prudent warnings based on the best available science -- would be blaring from every political and cultural orifice. In a country run by amoral, narcissistic, opportunists, they are whispered at the fringes – in the hushed politeness of power-point presentations, on fringe websites, in meagerly-read books, and among small groups of alarmed citizens."

New Zealand’s Tui Oil Field. - Peak Oil With Bells On

2011-08-02T22:47:00.000+12:00

One of the least understood elements of peak oil is the rapid decline rate of production from the peak for any given oil field. For an example of just how severe and steep the decline rate can be, look no further than the recent announcement that the Tui oil field in the Taranaki Basin has had its remaining oil reserves slashed by 1/5, and that production will fall off a cliff. For a New Zealand oilfield, this is peak oil in action with bells on.

We are all used to seeing breathless media announcements of "huge" new discoveries of oil. What we hardly ever hear about is when oilfields inevitably start to rapidly decline. No surprises therefore when the Tui reserve downgrade from 50.5 million to 40 million barrels was buried deep in the business section of our press and never made the front pages.

The remarkable story about the Tui oil field completely missed, or ignored by the business media, is just how quickly the field reach peak production, and how rapidly it’s decline will be.

It was only four years ago on 30 July, 2007 that Tui began production. 31 million barrels of oil have been produced in those four years. But the remaining 9 million barrels of expected reserves are projected to dribble out over the next 9 years before the field is fully depleted in 2020.

The steepness of the decline can be seen from this graph from a July 2011 New Zealand Oil and Gas report -- (representing its 12.5% stake in the Tui field). If you focus on the dark blue part of the graph at the bottom of each column you can see that NZOG’s share of production will fall from 270 kboe in 2012 to 200 kboe in 2013 -- representing a decline of 26% in oil flows for Tui in just one year.

The overall decline rate for the Tui oilfield in the four years between 2012 and 2016 is a staggering 59%!

Contrast this with the super optimistic projections for Tui when it was first discovered. As Greg Peel of International Business Times points out --

"Tui's reserves have been constantly upgraded over its life, suggesting a well life beyond 2030".

The steep decline rate at Tui should not be a surprise. As I pointed out in April, the IEA noted in its 2010 New Zealand Review

"recently commissioned producing fields, like Tui for example, are relatively small and have a high rate of depletion"

Note : The same graph also shows a steep decline of 38% in 4 years for the Kupe oil field (light blue) which is also very high by international standards.

Why is this important?

It confirms that in the next four -- five years domestic oil production in New Zealand will fall off a cliff, at the very time a global oil supply crisis is unfolding. We are already hugely dependent on oil imports and vulnerable to any disruptions to supply. We will become even more dangerously dependent on a dwindling supply of oil from volatile world markets.

Meanwhile the government's "response" to peak oil is misguided and pathetic. We have no plan to lower our dependence on imported oil, other than “drill and hope”. No -- it's time to do a Thelma and Louise -- let’s all accelerate down the white elephant billion-dollar "roads of significance to National" and race over the oil crisis cliff!

New Zealand Government’s Response to Peak Oil – In time we hope something will turn up

2011-07-20T14:30:00.001+12:00

On July 8 I attended a forum on peak oil organised by the Sustainability Society. Dr Richard Hawke from the Ministry of Economic Development gave a presentation on behalf of the New Zealand government entitled "Peak Oil - New Zealand's Response". I came away with emotions ranging from frustration to anger and embarrassment.

So I thought it would be cathartic to dissect the presentation --

Dr Hawke began with a typically confusing introductory slide on electricity generation, when anyone with a basic knowledge of peak oil knows that it's a liquid fuel problem, not an electricity issue. We cannot power our cars, trucks ships and planes on electricity.

Next was a cringingly awful attempt to paint peak oil as part of an historical continuum of false prophecies on oil production. Awful because all of the examples used were from the 19th century or early 20th century before the concept of peak oil was understood. Who cares what someone said in 1865? The glaring omission from the examples given was of course the prediction from US Shell geologist Dr King Hubbert. He predicted in the 1950s that US oil production would peak in 1970 -- which it did, and has declined steadily ever since in spite of the best technology, most intensive drilling on the planet and record high prices. Similarly omitted were the projections of Colin Campbell and other peak oilists in the late 1990’s who predicted that global crude oil production would peak around 2005 -- 2006 -- which it also did.

Dr Hawke then attempted to paint peak oil proponents as pessimists who underestimated oil reserves, exaggerated future demand, while not giving enough emphasis to substitution and technological advances -- the archetypal cornucopian view. Firstly, the argument about reserves is a straw man because peak oil is essentially concerned with the flows -- production of oil -- (which have been flat since 2005 despite record high prices and advances in technology) rather than how much oil might or might not be in the ground.

As to exaggerating future demand, surely the government is not seriously suggesting that soaring demand from China, India, Middle East and other developing nations is magically going to decline? Again this is a typically Western-centric view which wrongly transposes the declining oil demand trends in OECD nations like New Zealand to the world as a whole.

The presentation then suggested that technology and alternatives will be the silver bullets that saves us. But the presentation conveniently fails to mention the higher cost, much lower energy return on energy invested and the planet-frying effects of using alternatives such as the tar sands in Canada. The slide actually shows the the extreme and dangerous depths to which drilling must go!

But what really got me wound up was the selective use of the International Energy Agency's information, which the government believes provides “credible information on the global oil market”. On the one hand the government takes as gospel the projections of the IEA that as yet undiscovered fields and unconventional oil will meet demand out to 2035. This selective faith in the IEA is maintained despite -
• the IEA forecasts on oil production having to be revised downward in huge chunks every year for the last six -- eight years
• peak oil scientists having been far more accurate with their production forecasts in the same timeframe
• peak oil experts such as those at Uppsala University providing analysis that shows the IEA’s forecasts for finding undiscovered oil fields are around three times greater than historical norms

But on the other hand the government is quite prepared to ignore other recent IEA announcements - calling for large-scale government intervention - because it does not suit its “the markets will solve everything” ideology . The IEA said in its 2010 Report on NZ that the government should “give priority to enhancing energy efficiency in the transport, commercial buildings and industry sectors by defining clear objectives for the sector supported by adequate cost-effective measures and long-term investments"

The next slide shows the government’s blind faith reliance it has in the IEA's flawed oil price modelling. The slide shows an oil price in 2035 – (24 years from now) at $US135 a barrel under the (worst-case) “existing policy” scenario. Does anyone seriously think the world oil price will be only $US15 higher in 24 years than it is now? Yet the government continues to place faith in IEA price modelling.

The next slides selectively depict various scenarios for future oil production. But only the most optimistic scenarios are shown - a “new policies" scenario and a “green revolution” -- 450 ppm Co2 or 2° of warming" scenario. Post Kyoto there is scant evidence of world governments actually implementing either of these scenarios. So why is the far more pessimistic "current policy" scenario omitted from the presentation?

Domestic policies

This is where the government's so called "response" to peak oil is set out. Four actions to "reduce our dependence on oil" are outlined –
• New Zealand Emissions Trading Scheme
• Encouraging entry of biofuels and electric vehicles to the NZ market
• Investment in public transport infrastructure; and
• The Petroleum Action Plan

I want to concentrate on the government's response on biofuels and electric vehicles and its Petroleum Action Plan, as the ETS and funding for public transport infrastructure have been well canvassed elsewhere.

Biofuels Grant Scheme
Slide 27 brazenly suggests that the government is actively encouraging biofuels and electric car uptake as serious policy initiatives as a response to peak oil. Frankly I found this an insult to the intelligence of the forum audience and the public at large. Why? -- Because these are minuscule and pathetic policy responses.

Here is the analysis of these 2 policies done by WWF....

“In the first eleven months of operation (July 2009 – May 2010), an average of 44,620 litres of biodiesel were covered by the scheme, which is roughly equivalent to 38 tonnes of fuel. Extrapolating this average over a whole year equates to 456 tonnes per year. Total oil consumption in NZ in 2008 was: 5,737,000 tonnes. At this rate, biodiesel covered by the scheme would comprise 0.008% of total NZ oil consumption.”

Road User Charges Exemption for Light Electric Vehicles

WWF “The government predicts 127 electric vehicles will obtain the exemption by 2012 when the scheme expires, with combined annual revenue foregone in road user charges over its four year duration is projected to be less than $105,000.”

$105,000 is less than 0.002% of the government’s planned spending on roads

Petroleum Action Plan
The second much touted “response” is the Petroleum Action Plan (PAP) the aim of which is to develop New Zealand's petroleum potential.

In previous posts I have described this policy as "drill and hope" or “hope to drill” Guess what? The government has confirmed that is exactly what it is! There quite unashamedly in slide 29 is the statement --

"in time it is hoped this will improve our net position and reduce our dependence on imported oil".

Let's just repeat that - a major policy plank of the government's response to peak oil is -

"in time" (7 -- 10 years at best before any flows of new oil can be expected, but with the oil crisis unfolding right now)
"it is hoped" (would it help if we all got down on our knees and prayed?) that something will turn up. Yet this is put up as a credible response to peak oil which is already causing higher inflation and substantial and negative impacts on GDP?

Already huge cracks are appearing in the petroleum plan ….
• In late 2010 Exxon pulled out of exploration in the Great South Basin
• despite a record number of wells being drilled offshore of Taranaki, very little new oil has been found in the last two years
• Petrobras is angry with the government that it was confronted with major protest action offshore from East Cape which disrupted its exploration work. The company left early, and who knows whether they will return.
• Grey Wolf has withdrawn its application for offshore drilling in Golden Bay
• Not one company has taken up available exploration permits off the coast of Northland. The government surreptitiously placed this news on the MED website in the past few days with no ministerial press release. When confronted the government said the global financial crisis and the Gulf of Mexico oil spill was to blame. Well hello! Was that not blindingly obvious when the PAP was formulated.? I pointed out these issues in an earlier post .

Yet in spite of these major setbacks in five different much touted offshore oil basins, the government's presentation has the gall to put up this graphic suggesting we will be "saved" by new oil discoveries.

As I pointed out in a post in November last year about this very same graphic -- if you strip away these yet to be discovered oilfields -- you are left with the real world situation of New Zealand oil production having already peaked and declining steeply to zero by 2023.

Conclusion
This was a non-response to peak oil. It was a "let's pretend is not happening" and if it turns out it is happening "let's hope and pray that something will turn up"

Am I my feeling any better having got this off my chest? Well not really -- because there are effective policy responses that the government can make. But due to its ideological blinkers, they will continue to ignore them.

Labour has yet to announce its energy policy for this year’s election. Whether it too is unprepared to take bold and effective action on peak oil remains to be seen. I expect to be equally disappointed.

Note: Prof Bob Lloyd of Otago University also gave an excellent presentation on peak oil at the forum which you can view here

Even more pain at the pump this year

2011-07-14T14:32:00.000+12:00

I am usually loathe to predict what oil prices will do, certainly in the long term. As Yogi Berra famously said "it's hard to make predictions, especially about the future". But some pretty compelling evidence suggests another substantial upward tick in the oil price is coming in the second half of this year - on top of the already damaging current oil price shock.

International Energy Agency desperate

For years now the IEA has issued coded messages about the looming oil crisis such as "the era of cheap oil is over". But lately their statements are becoming ever more strident and urgent.

Their June 2011 report states quite plainly that unless OPEC can increase production by at least 1.5 million barrels a day, the world faces a supply/demand mismatch and price crunch in the second half of 2011. If supply cannot meet the expected demand of 89 million barrels a day this year, prices at the pump must rise again -- and sharply.

A sure sign of the IEA’s desperation was its recent decision to release 60 million barrels from members strategic reserves (New Zealand was exempted from this requirement because our stockpiles are so tiny.) 60 million barrels amounts to just 16 hours of world oil demand.

Not surprisingly the IEA release held down prices for only a week. They have already returned to pre-release levels. The strategy failed for the very reason warned about in their June report – the oil markets expect demand to exceed supply -- and soon.

OPEC upheavals continue

It is not looking likely that OPEC can increase supplies. At best Saudi Arabia can only offer heavy sour oil when the world wants light crude oil such as Libya could produce. There are no signs of an end to conflict there. And as noted before -- the excess capacity Saudi Arabia is purported to have is of the fictional variety. Attacks on oil infrastructure have increased in Iraq as US forces are set to withdraw.

Asian oil demand still on the rise

China has a major drought affecting hydro generation, and Japan has had a nuclear meltdown. Although these economies are slowing both have major power shortages forcing them to burn more diesel, leading to more demand for oil.

Convergence

All these converging trends point to an oil price crunch in the next few months. This leaves the IEA with a quandary. Will it release more oil from strategic reserves and repeat its failed strategy of just a few weeks ago?

Consequences?

We have been saved from even higher pump prices by the record high of the NZ dollar against the US dollar. Even so, average fuel prices in New Zealand are already above those seen in the last oil shock of 2007- 08.

Also, prices have already reached levels which historically have induced recessions.The IEA's January 2011 Oil Market Report uses the term ,“oil burden”, to quantify how higher oil prices impact the global economy. Oil burden is defined as global oil expenditures divided by global GDP. At $100 per barrel the oil burden is 5 per cent . Prices have been above this level for months - a level which historically causes a global recession. And the IEA warns that import‐dependent developing countries (read New Zealand) are particularly vulnerable.

Good news -- bad news

The "good news" is that oil prices may well fall sharply if we see a repeat of the demand destruction in OECD nations in 2008- 09

The bad news is that it will take another oil-induced global recession before demand is reduced and causes prices to fall again.

Happy days indeed

Infrastructure Plan wilfully oblivious of peak oil

2011-07-07T12:49:00.007+12:00

The government's Infrastructure Plan is meant to map out a strategic direction for New Zealand infrastructure for the next 20 years. It fails miserably because it wilfully ignores peak oil.

Okay, peak oil does get a mention -- just once in the 68 page document. Here is the quote...

"A number of high level trends will shape our economy (including global trends around climate change, technology and peak oil), and with it the demands for infrastructure."

But that's it. None of the subsequent analysis and strategic planning takes any account of the likely impact of higher fuel prices and shortages. This, in spite of the advice from the Reserve Bank that oil shocks are already substantially lowering GDP and causing higher inflation.

It gets worse. The transport/roading projections - see graph - totally ignore the available data that vehicle kilometres travelled have not increased and freight tonnes per kilometre have actually fallen. The plan magically conjures up substantial increases in the next 20 years which exceed even the misnamed "current growth path" ! (Even this a fiction as there is no "current growth", and it does not follow the flat or declining trend of the past 5 years or so.)

click to enlarge

One obvious reason for these absurd predictions is that they are based on hopelessly optimistic forecasts of oil prices

What would a peak oil aware infrastructure plan look like?

The Association for the Study of Peak Oil (ASPO) in Australia made a compelling submission on the Australian Infrastructure Plan in 2008.

These extracts could be applied directly to New Zealand infrastructure planning word for word!

"Existing shortcomings in transport infrastructure planning are largely attributable to discredited oil price forecasts and flawed transport projections by official government agencies, which ignore the onset of peak oil and its various socio-economic impacts.

These projections either ignore oil prices as an ‘externality’ or make unsupportable assumptions about alternative fuels and propulsion systems, in terms of scale, time, cost and the laws of physics.

Underlying assumptions about perpetual economic, employment and population growth are also highly questionable. No detailed studies into the nature and magnitude of peak oil mitigation have been undertaken in Australia to support these assumptions.

The absence of an Australian equivalent of the Hirsch Report, coupled with widespread ignorance and/or denial of peak oil, has resulted in the predominance of wishful thinking rather than rigorous, objective analysis."

The key recommendation from ASPO in Australia was therefore to:-

“Commission an independent study into the implications of peak oil for transport planning, in order to determine realistic planning assumptions.”

Here are ASPO's other recommendations (which again could be transposed to New Zealand almost without change) :-

Include the need to “reduce Australia’s oil vulnerability” in Infrastructure Australia’s goals and strategic priorities.
Mandate the conduct of oil vulnerability assessments in the feasibility studies for significant infrastructure.
Establish a strategic petroleum reserve.
The Federal Government should invest directly in renewable, distributed energy infrastructure.
Allocate a high priority for world class public transport and enhanced freight rail infrastructure.
Allocate a low priority for airport expansions.
Investigate the feasibility of high speed passenger rail to connect capital cities and regional centres.

The contrast between the rigorous objective analysis from ASPO and the wishful thinking from the government could not be starker.

Oil Shock Horror blog -- the story thus far

2011-07-06T12:17:00.008+12:00

9 months after a tentative start last September, and with 45 posts clocked up here at Oil Shock Horror Probe, I thought it was time to re-cap. What are the trends and themes that have emerged so far?

It's the economy stupid
Higher oil prices are already negatively impacting our economy

$2 billion sliced off New Zealand's GDP
$1 billion in spending power lost to New Zealand households already
reports confirmed substantial negative effects on GDP and are causing much higher inflation
an ongoing reduction of just 7-10% in fuel supply will shrink New Zealand's economy by $115 billion in five years

Our oil import dependency puts New Zealand at huge risk

we import 97% of our oil
shrinking domestic oil production is exported
reports from Ministry of Economic Development, Venture Taranaki, and the International Energy Agency all confirm New Zealand domestic oil production has peaked and will decline sharply
this will leave New Zealand even more vulnerable to oil shocks
"yet to be discovered" oil offshore and coal to liquids is at best a 7 - 10 years away, there are huge environmental and economic downsides and they will not solve our current liquid fuel crisis
comprehensive plans to lower our oil dependency have been ignored

Evidence of peak oil is overwhelming

IEA confirmed conventional oil peaked in 2006 and pushes for urgent government intervention
IMF warns of oil scarcity and end of "growth"
New Zealand Parliament Report warns of imminent oil shock
US and German military warn of serious consequences of looming oil supply shortages
UK government develops Oil Shock Response plan and President Obama mandates fuel conservation measures
traffic volumes in New Zealand are falling

But New Zealand government has ears, eyes and lips firmly closed

has no oil shock plan
believes "leaving it to the market" will solve the fuel crisis
ignores negative impact of oil shock and peak oil in its Budget, Energy Strategy, transport planning, and Defence White Paper
relies on oil price forecasts which are always wrong

NZ Media also ignores peak oil
in spite of widespread coverage of peak oil in overseas media, in a must watch Australian TV documentary , the New Zealand media continues to ignore peak oil (with a few notable exceptions)

Feedback is always welcome. Leave a comment or use the Contact Me tab

High oil prices cause "large" effect on inflation - NZ Report

2011-07-01T10:23:00.000+12:00

A 2005 study by New Zealand Reserve Bank economist Felix Delbruck ("Oil prices and the New Zealand economy" - Reserve Bank of New Zealand: Bulletin, Vol. 68, No. 4) has found that the inflationary effects of higher oil prices were "quite large". Specifically that :-

the direct impact of a $.10c a litre increase in petrol price lead to an immediate increase in the average household's living cost of about 0.3%
the indirect effect (of higher bus, taxi, train and air travel, and firms passing on higher transport costs which raised the cost of food etc) added another 0.3% onto the direct effect -- a total 0.6% increase in the CPI for every $.10c a litre increase in fuel.

At first blush a 0.6 % effect may not seem that large. But when you consider that fuel prices have risen by 40-50 cents per litre in the past year alone, and that the Reserve Bank's target is to keep inflation between 1 - 3 % per annum, - the 0.6% effect for every 10 cent /L increase assumes very worrying proportions.

The report compares New Zealand's oil use with that of other countries. Relative to GDP our oil use is high - closer to gas guzzling nations like the US and Canada than the OECD Europe and the UK. Which of course leave our economy more vulnerable to inflation, plus the strongly negative impact on GDP highlighted in my post last week.

New Zealand is a relatively heavy user of transport fuel, and….

"more than in other OECD countries, our use of transport fuel is weighted towards diesel and jet fuel. This suggests that the indirect effects of higher oil prices on inflation and the economy, through an increase in the cost of providing transport services and other goods and services, may be relatively large".

The report says while the inflationary impacts are large, they may be underestimated because the calculations do not take account of the effect international oil prices have on the non-oil imports due to higher international transport costs and to the fact that overseas products for example plastics -- are more expensive.

Other "second round" effects are identified as a series of wage/price increases that leads to medium term inflation. Alternatively if wages and prices are held down, then higher oil prices mean less spending on other consumer goods and lower profits for business.

"Third round" negative impacts arising from higher oil prices identified in the report are an increase in New Zealand's imports and net foreign debt "which needs to be paid for by lower consumption and investment later on". Also higher oil prices reduce economic activities in many of our trading partners. -- reducing demand for New Zealand exports and reducing the number of inbound tourists.

In a speech to Canterbury businessman in 2010 entitled ‘Coping with Shocks - a New Zealand Perspective’ Reserve Bank Governor Alan Bollard confirmed the extent of the inflationary impact of higher oil prices identified in the Delbruck report. He stated that since 2004 around 0.5% has been added to the CPI every year due to oil price rises.

2007-08 oil shock caused "substantial" decline in New Zealand's GDP say Reserve Bank economists

2011-06-24T15:33:00.000+12:00

In a recent report, two New Zealand Reserve Bank economists have estimated the real effects of oil price shocks on New Zealand’s GDP. The economists conclude --

a 5% permanent increase in retail fuel prices implies a decline in NZ's GDP of 0.3%
a succession of oil price shocks such as those in 2007-08 had "a substantial effect on real GDP in New Zealand"
New Zealand's oil use is different, leaving us more vulnerable to oil shocks. Faced with oil shocks New Zealand households and firms have only one third of the ability to lower the amount of oil they consume, compared with the United States.
real wages decline in response to an oil shock, as they are eroded by inflation.

Commentary

Why is the Reserve Bank not listening to its own economists?
Oil prices spiked in 2007-8, and retail fuel prices have increased by about 25% since mid-2010. Average fuel prices for the last quarter to March 2011 are now higher than those at the height of the 2007-08 price spike. (NZ Energy Quarterly March 2011)

If a 5% fuel increase implies a 0.3% decline in real GDP, then a 25% increase implies GDP falling by around 1.5%. Such a decline is in line with the projections of the UK government -- see my previous post here
Why are these conclusions of Reserve Bank economists being almost completely ignored in the Bank's most recent official forecasts for "growth". And why, given the advice from his own economists, is the Governor Alan Bollard, still prepared to "look through" oil shocks (code for ignore?) and their inflationary impacts?

The report has a very narrow focus on GDP.
It does not seriously examine the other direct and indirect and very serious impacts of oil shocks on the economy. These are summarised in the UK report on peak oil and include --

deterioration in New Zealand's balance of payments as an oil importer - set to worsen as we become even more oil import dependent
higher inflation and increased input costs - found to be large for NZ in a 2005 Reserve Bank Bulletin "Oil prices and the New Zealand Economy" by Felix Delbruck
lower investment
real wages decline (this is mentioned briefly)
higher unemployment
consumer and business confidence falling
tax revenue falling
social unrest

New Zealand is at far greater risk from oil shocks
This is because we have much less capacity than other nations to lower our oil use (one third the capacity of US). The report identifies three reasons --

much of our oil use is essential for agriculture and forestry, or for long-distance transport between New Zealand cities. Similar conclusions were reached in a 2005 Reserve Bank Bulletin "Oil prices and the New Zealand Economy" by Felix Delbruck
compared to the US we use less oil for leisure, so we have less capacity to voluntarily reduce consumption
New Zealand households do not have the wealth to substitute to newer and more fuel-efficient cars. We are one of the most car intensive nations on earth, but our fleet is one of the oldest (average age 12 years)

Oil shocks cause recessions
A graph from the report shows that in 2007-08 oil as a percentage of NZ GDP moved above 5%.

Studies from other economies confirmed that once this threshold is reached, nations go into recession
Why would we expect New Zealand to be immune? Mainstream commentary has concentrated on sub-prime mortgages and the credit/debt bubble as the cause of the global and New Zealand's financial crisis. But the price of oil is another underlying cause of New Zealand's recession that has been totally overlooked by business commentators and politicians

As far as I can judge this is the only recent New Zealand-based report examining the effect of oil shocks on our economy. The focus on GDP is narrow and tells only a small part of the story. But at least it's the beginning of a discussion. The Report should now become a catalyst for an urgent debate on these issues by business commentators and politicians. The Report was presented at universities late last year and was published in February 2011. Since then there has been no mainstream commentary on it’s conclusions that I can discover. So sadly, I'm not holding my breath on that one.

UK Ignores Peak Oil Warnings - NZ Pretends It's Not An Issue

2011-06-16T13:07:00.003+12:00

It has long been suspected that Western governments have been investigating peak oil and its impacts on the economy, but keeping the information hidden from the public. In the case of the UK government we now have definitive proof that this has been happening. The Guardian has reported (15 June) that UK ministers have ignored peak oil warnings.

The UK government commissioned a report five years ago in 2007 -- "Report on the risks and impacts of a potential future decline in oil production" (PowerPoint). The report was finished in June 2009 but has only been made public in the last week, and only after protracted official information appeals due to the UK government trying to keep the report secret.

The first part of the report written in 2007 begins with a generally dismissive approach to peak oil, but the updated sections written in 2009 contain many stark warnings should peak oil happened before 2015.

"if peak oil happened before 2015, this would have significant negative economic consequences for some of the main importers of UK goods and services resulting in a negative impact on the UK economy in the longer term."

A report also examined the direct and indirect impact on the UK economy -- as you can see from the extract below the impacts are many and profound.

Click to enlarge

And the report has a bleak outlook for those cornucopians who suggest that there will be a smooth transition to alternatives –

“In the event of peak oil, the ability to substitute away from oil consumption will be crucial to the economy’s resilience. However, few viable alternative energy sources exist for road and air transport and demand remains fairly unresponsive to rising prices.” and

“Alternative fuels are available, however few are yet commercially viable and there are still concerns around sustainability and wider deployment. Mass deployment of alternative fuels will take time and it will take time before it will have a significant impact upon fossil fuel consumption in the transport sector. Government may have a role to play in increasing the speed with which these alternatives are brought to market.”

To its credit, the UK government has recently had a major rethink and has agreed to engage with, and consult peak oil experts. It has also released other papers on peak oil on its Department of Energy and Climate change website.

It seems the UK government has finally seen the elephant in the room.

Meanwhile the response from the New Zealand government is to continue to pretend that peak oil is not a problem. Either no NZ reports on peak oil have been obtained, or if they have they have been kept secret. There is certainly no engagement with peak oil experts or the public here.

This in spite of the fact that New Zealand has a much higher net oil import dependency than the UK, (UK close to zero - NZ 70%) and New Zealand is one of the most oil intensive nations in the OECD, while UK is one of the least intensive.

New Zealand's oil security. How dependent are we on oil imports?

2011-06-12T21:17:00.002+12:00

New Zealand imports 97% of its oil. Oil is the lifeblood of our economy. So a vital question must be -- how vulnerable is New Zealand to oil supply shocks? -- Whether from short term disruption, or due to an on-going and perhaps permanent decline in world oil exports?

You would think that discussion about this vital issue would be front and centre of political and economic debate, given the current high oil prices, unrest in the Middle East, and with the UK government developing an oil shock response plan. Instead there is close to zero public discussion about New Zealand's oil security.

What are the key facts?

1. New Zealand imports 97% of its oil. About 39 million barrels was imported as crude oil for the year ended March 2011 and was refined at the Marston Point refinery. About 13 million barrels per ann was imported as already refined petroleum products. ( source -- NZ Energy Quarterly 2011)

Click to enlarge

2. New Zealand’s oil fields produced 18.3 million barrels in 2011 (down from 20 million in 2009) but only 1 million barrels of this domestically produced oil (3% of our consumption) is refined in New Zealand. The remaining 17 million barrels is exported because of its high quality and therefore high value on international markets.

So where does this leave us in terms of oil import dependency? The blue line in the graph below is the official position government on oil dependency. This takes oil imports and deducts domestic oil production. On this basis the government rated New Zealand's oil import dependency at about 65% in 2010.

click to enlarge

But should there be any disruption to oil imports could the Marsden Point refinery be re-engineered to accept New Zealand's domestic oil, and if so how quickly? 41% of New Zealand's oil consumer energy is diesel and 6% is aviation fuel. But according to the July 2010 report of the Parliamentary Commissioner for the Environment on Biofuels "New Zealand crude oils are generally too light and waxy to make good aviation and diesel fuel". If these limitations are correct then New Zealand's oil import dependency is closer to 97% -- as shown in the red line in the graph -- than the 65% official position.

In the event of an oil supply shock, New Zealand’s almost 100% import dependency would remain unchanged for months, perhaps years, until the Marsden Point refinery could be transformed to accept New Zealand oil. The government has powers to require New Zealand oil to be refined within New Zealand and prohibit its export in the Crown Minerals Act. Even then we would remain around 70% dependent on imported oil.

3. New Zealand's long supply chain is another vulnerability.
Hale and Twomey prepared a report on oil security for the government in 2005. They pointed out..

“Whatever the level of New Zealand domestic production (current production has declined from historical levels), it is likely that NZRC would continue to source the majority of its feedstock from these international sources. Therefore the length of the supply chain will continue to be characterised by the time required to ship crude oil and feedstock from these regions.”

Click to enlarge

4. Unfriendly Sources.

click to enlarge

Where does New Zealand’s oil import come from? Less than 20% of our crude oil imports come from "friendly" nations who might be sympathetic to New Zealand in an oil crisis -- Australia, Papua New Guinea, Korea, and Malaysia.

The other 80% of oil suppliers are either politically unstable, run by despotic dictators, or are nation's decidedly unsympathetic to the West. Iran, Iraq, Saudi Arabia and other Middle East Nations supply 60% of our imports, and other contributors include Russia, Nigeria, and Indonesia.

5. Small is big.

History tells us that a relatively small disruption to imports can cause chaos. The oil shocks of the 1970s reduced imports to New Zealand by about 7%-10% and lasted just a few months. Yet they plunged New Zealand into a deep recession and caused major disruption to our transport networks. -- carless days, lowered speed limits and "think big" energy projects.

6. What really matters is peak world net exports

As an oil importer what is absolutely critical for New Zealand is how much oil is available for export from producers ie. net exports.
Net exports are far more important to New Zealand then the level of world oil production per se. Why? Because net exports are the amount of oil left after deducting the internal consumption of oil producers.

As Jeff Rubin points out, OPEC has an "insatiable thirst for its own oil. With the price of gasoline less than bottled water, Saudi Arabia already burns 3 million barrels a day with internal demand claiming a third of its oil production. At the country’s current rate of growth in domestic oil consumption, Saudi Arabia would burn a staggering 8.3 million barrels a day of its own oil by 2028. That is almost its current level of production.”

Geoffrey Brown has studied world net export trends. He :-
1. calculated the rate of increase in domestic oil consumption of oil producers
2. calculated the rate at which China and India (Chindia) are taking an ever greater slice of world oil exports and

3. assumed a very modest decline in overall world oil production of 0.5% per year from 2005 to 2015.

His startling conclusion from these projections is that for every three barrels of oil non Chindai countries like New Zealand imported in 2005 they would have to make do with just two barrels in 2015.

click to enlarge

Why the Kiwi "she'll be right" attitude?

The stark conclusion has to be drawn that New Zealand is almost totally dependent on imported oil, and that we will become even more dependent as domestic production rapidly declines. Even if new oil fields were discovered off shore of New Zealand, it takes between 10 - 15 years to bring any such oil into production.

The kiwi "she'll be right" attitude pervades our response to our precarious oil security situation. Yet the reality is that we are a far worse position than other oil importers. The government commissioned Hale and Twomey Report sums it up like this -

"New Zealand has an unusual combination of supply vulnerabilities. It faces the same broad range of possible external supply disruptions as do all IEA members but these are exacerbated by such things as its current level of import dependency, remote geographical location at the furthest extent of the international supply chain and relative isolation from other countries from whom relief could be expected in some situations."

In a future post I will look at options New Zealand has to reduce it's dependency on imported oil.

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

2011-06-03T10:48:00.000+12:00

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.

click to enlarge

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.

UK Government to Develop Oil Shock Response Plan - When Will NZ ?

2011-05-26T21:47:00.001+12:00

UK Energy and Climate Change Secretary Chris Huhne has agreed to develop an 'Oil Shock Response Plan', following a meeting with the UK Industry Taskforce on Peak Oil and Energy Security (ITPOES).

Specifically, Huhne agreed that the UK government and ITPOES would work together on peak oil threat assessment and contingency planning.

Members of the taskforce said they would also explore steps that would need to be taken now to protect the UK economy from rapidly rising oil prices and possible oil shortages.

Huhne also called on ITPOES to present their concerns to the UK Chancellor and Treasury - a meeting that the group is now seeking.

ITPOES has published 2 authoritative reports on Peak Oil. The latest in 2010 contained a stark warning that the economic impact of the next Oil Crunch will be as bad as, if not worse that the Global Financial Crisis.

As one cynic observed – “Britons can breathe a great sigh of relief. The government is planning to work on a plan to consider contingencies” But it’s a start – a senior UK Cabinet Minister is willingly to talk openly about peak oil, and to seek advice from peak oil experts in the private sector and academia, who only a few years ago were pilloried as doomsayers and fruit loops !

A pleasant and surprising contrast with New Zealand, where ignorance, or at best denial and obfuscation still characterise the attitude of the PM, Ministers and officials.

Here is a fantasy to conjure with…. Gerry Brownlee (or Hekia Parata the new Minister of Energy) and Steven Joyce The Minister of Transport meet with New Zealand peak oil experts in the Beehive, agree to develop an oil shock response plan and invite further discussion with Finance Minister Bill English and Treasury !

But hang on why should this be a fantasy? …This is election year folks. We need to demand from all political parties that they publically acknowledge the threat of peak oil and spell out their contingency plans and policies. A Conservative government in the UK has begun that process, and so must our politicians.

NZ Budget 2011 Ignores Oil Shock Impacts

2011-05-23T22:39:00.002+12:00

The Times [article behind a paywall] has just broken a story that the UK government has been undertaking research on the likely adverse effects on their economy of an oil price spike.
The Times reports that

"A sudden huge increase in oil prices would cut more than £102 billion from the economy over the next five years, wrecking Britain's economic recovery, increasing unemployment and provoking industrial action, according to government research."

The simulation undertaken for the UK government indicates a decline in the level of real GDP - of around 1.7% in each of the first two years (2011 & 2012) as a result of around 102% oil price increase in 2011. (The oil price has already risen 50% since October 2010). The advice suggests the impact of the shock is concentrated in the first two periods, then slowly diminishes through time, as the economy returns to its long run steady state equilibrium. View documents.

Of course this research assumes that the oil shock is temporary. It does not calculate the effect of a series of oil shocks with attendant recessions, interspersed by weak recoveries.. This is the scenario thought to be most likely by peak oilists - as global oil production inexorably declines. See NZ Parliamentary Report on Peak Oil.

A breakdown of the impact on UK GDP from the oil price shock shows that consumption, investment, and terms of trade are all adversely affected....
• Consumption is adversely affected due to direct affects – this is a reflection of the inability of consumers to switch their bundle of goods away from oil intensive commodities (low elasticity of substitution).

• Similarly investment is adversely affected due to adjustment and direct affects – again this is due to rising costs, and the inability of companies to completely switch away from oil intensive inputs (low elasticity of substitution).

• Net trade is also affected as the UK is a net oil importing country. The shock results in a transfer of income from oil importing to oil exporting countries – as the price of oil rises. (NZ would be similarly adversely affected as a net importer of oil (around 2/3rds net imports)

Higher inflation and higher unemployment also flow from oil price shocks, according to the UK report.

See also my earlier post with calculations provided by the NZ Parliamentary Research Unit of the costs to NZ of rising oil prices.

The report demonstrates that the effects of peak oil are known to the UK government, but there is still no urgency to take serious action.

Meanwhile in New Zealand there is no recognition (at least publically) that oil price shocks are a threat to our economy, let alone any suggestion that it should get advice as to the likely impacts on GDP inflation and unemployment .

For confirmation look no further than Treasury’s most recent advice to the NZ government in its Budget Economic and Fiscal Update 2011 - Published 19 May 2011

While a range of global risks are identified the effects of an oil price spike is almost completely discounted ….

“Political instability in the Middle East and North Africa has the potential to further disrupt oil supplies, leading prices to spike. There is uncertainty about the impact of the Japanese earthquake. We have assumed a short-term negative impact, largely offset by the subsequent recovery.”

Here are Treasury’s forecasts ..

So there you have it --- the UK government is concerned enough about the oil shock to get advice, with estimates of a decline in GDP of nearly 2%, for each of the next 2 years, greater inflation and unemployment, (arising from a 100% oil price rise),

But in NZ, NZ Treasury and Finance Minister Bill English both discount or ignore the threat and present ridiculously rosy projections for GDP growth, inflation and unemployment.

Must Watch Australian Report on Peak Oil

2011-05-17T14:09:00.003+12:00

The Australian Broadcasting Corporation’s Catalyst programme has just broadcast the best peak oil documentary in recent times. In just 12 minutes it covers many of the essential points, and is a great way to get yourself up to speed on peak oil. Please take the time to watch it, and share this Youtube link and the ABC Catalyst link with your networks, and with anyone you believe is unaware of, or in denial about peak oil.

Highlights --

The International Energy Agency (IEA) has confirmed that global conventional crude oil production peaked in 2006
The IEA's estimate as to how world production will be maintained and grow marginally in the next 20 years is impossibly optimistic and simply not credible. The IEA's projections imply a rate of production which is three times higher than historical levels
Even so the IEA's chief economist Dr Fatih Birol issues several stark warnings. He says existing oilfields are depleting so fast that just to maintain production at present levels we need to find four new Saudi Arabia's
Birol warns of rapidly rising oil prices, a greater risk of oil wars, and severe economic impacts globally
And Birol warns that governments (including New Zealand’s which relies heavily on the IEA advice) should have started tackling the peak oil problem at least 10 years ago.
Dr Jeremy Leggett and Chris Skrebowski of the UK Taskforce on Peak Oil offer even more dire warnings of an oil crunch no later than 2015 and possibly much earlier. They say the decline in world exports will be rapid and may even generate a collapse as oil producers keep more of their own oil. The outcome for New Zealand which imports two thirds of its oil will be especially severe.
The program also examines the environmental and economic risks of drilling for extreme oil in ultra deep-water, as proposed offshore in New Zealand.

The Catalyst website has extended interviews with Fatih Birol, and peak oil experts Kjell Aleklett of Sweden, and Dr Jeremy Leggett and Chris Skrebowski of the United Kingdom. These are well worth taking the time to watch. The projections from Leggett in particular are clear, coherent and as he puts it "blowing a big whistle". There is also extended comment from Prof Robert Bea - a US expert in the offshore oil industry.

The ABC documentary has another message. It once again reveals the parlous state of current affairs reporting in New Zealand. Australia's state broadcaster tackles meaty issues like the oil crisis, while Kiwis are fed a relentless diet of cooking shows and other trivia. Where is the coverage on Sunday, 60 Minutes, CloseUp or Campbell Live or in feature articles in our print media?

New Zealand Joins Peak Oil Club - IEA

2011-04-20T16:27:00.000+12:00

The International Energy Agency has published it's “New Zealand Energy Review 2010" which confirms that New Zealand's oil and gas production has peaked and will enter a period of rapid decline. This was exactly the conclusion I reached in my earlier posts in January 2011 regarding the Venture Taranaki report, and the presentation by Dr Peter Crabtree of the Ministry of Economic Development to the Petroleum Conference in November 2010

Here are some of the quotes from the IEA report relating to New Zealand's oil production --

"Production is expected to decline progressively if no new fields are discovered. This will have a significant impact on the country’s oil security. The fast rate of expected decline owes to the fact that recently commissioned producing fields, for example Tui, are relatively small and have a high rate of depletion."

"As the Maui field has depleted, more diverse sources of oil (and gas) have been found but New Zealand’s domestic production is forecast to decline significantly over the coming decade if new fields are not discovered and developed."

"Domestic crude oil production was almost 54 kb/d in 2009, and is expected to be similar in 2010. No sizeable new fields are forecast to come on line in the coming years, and production will decline rapidly if no new oilfields are discovered."

"New Zealand is self-reliant in natural gas but faces a decline in domestic production as output from the Taranaki Basin falls. The oil industry is similarly affected as production is forecast to decline rapidly."

Consumption

Looking at consumption the IEA says --

"Oil consumption has grown steadily since the mid-1980s, reaching almost 150 thousand barrels per day (kb/d) in 2009 (including international transport). Although there was notable domestic crude oil production, approximately 54 kb/d in 2009, imports still met around two-thirds of New Zealand’s oil demand."

Policy recommendation

One of the key recommendations in the IEA review is that New Zealand should -

"Finalise and implement the New Zealand Energy Efficiency and Conservation Strategy and give priority to enhancing energy efficiency in the transport, commercial buildings and industry sectors by defining clear objectives for the sector supported by adequate cost-effective measures and long-term investments"

This advice will be ignored by the New Zealand government even though – as was pointed out in a previous post -- there is a comprehensive blueprint for fuel conservation commissioned by the New Zealand Transport agency, which is just gathering dust.

And to those who say declining domestic production is even more reason to search for oil offshore, or convert Southland coal to lignite, or go electric, the response must be that apart from the obvious environmental and climate change issues - the timing is all wrong --
It will take 10 – 15 years at least to –
• Change even a fraction of the car fleet to electric
• Bring any new offshore or coal to liquid fuel or other unproven “solutions” into production
Meanwhile the oil crisis is upon us now…….

which means the only sensible option is for the government to do what the IEA suggests .. give priority to enhancing energy efficiency in the transport, commercial buildings and industry sectors.

IMF Warns of Oil Scarcity And End of "Growth"

2011-04-16T15:49:00.003+12:00

What is going on? The International Monetary Fund -- a body that states its mission is to "foster global growth and economic stability" has produced a major report which concludes the world has entered an era of oil scarcity, and openly discusses a peak oil scenario in which global GDP doesn't grow, but declines steeply !

IMF's Main findings

global markets have entered a period of increased scarcity
scarcity is due to supply and demand fundamentals of rapid growth in demand in emerging economies and a "downshift in the trend growth of oil supply" -- IMF speak for peak oil.
the impacts of oil scarcity are "important and far-reaching" on "growth, inflation, external balances, and poverty"

Optomistic Scenario
The report centres on three scenarios for oil scarcity. The most optimistic one has been seized upon by mainstream media such as The Economist, Bloomberg and the Wall Street Journal and paints a picture of an almost perfect world where oil production declines smoothly and gradually and the effect on world GDP growth is minimal. While the story has gained some traction in overseas media, it seems only Brian Farrow in the New Zealand Herald has picked up the story in New Zealand. He makes a reasonable fist of summarising the main findings, but like the overseas reports, fails to mention the more pessimistic peak oil scenario outlined in the report.
Even in the IMF's most optimistic scenario the oil price will spike immediately by around 60% and induce a reduction in GDP in oil importing countries such as New Zealand.

IMF Peak Oil Scenario
But the report itself points out that the adverse effects could be much larger depending on the "extent and evolution of oil scarcity". This is where there second and more pessimistic (realistic?) IMF scenario makes for fascinating reading. Fascinating because the IMF economists give serious consideration and credence to a scenario where oil production declines at 3.8% annually -- which is the type of oil decline scenario projected by peak oil proponents for many years.

In this scenario the effect on GDP and nation's current accounts is to put it mildly severe and downright scary. As you can see from the graph left - (blue line = optimistic scenario and red dotted line = peak oil scenario) for the USA (the closest to New Zealand's oil dependence situation?) there would be a 4 to 5% reduction in GDP within five years and a 14% reduction in 20 years .

But the most striking aspect of this scenario is that supply reductions of 3.8% would lead to an oil price spike of 200% immediately and 800% over 20 years. The IMF admits these price rises would be "unprecedented" and so huge that they blow their modelling off the chart. More likely is that the world economy descends into severe recession or a depression and prices never reach these heights?

How Is The Report Relevant to New Zealand?
Alarmingly for New Zealand the most severe impacts arise from particular vulnerabilities idendified by the IMF which all apply to New Zealand -

we have high oil intensity
we have weak export links to oil exporters -- most of our exports are to other oil importing countries such as Australia China etc
our economy relies very heavily on on "airlines, trucking, long-distance trade and tourism" which the IMF points out " would be affected by an oil shock much earlier and much more severely than others"
the effects of large-scale bankruptcies in such industries could spread to the rest of the economy
what is even scarier for New Zealand as an oil importer is that the IMF acknowledges that it's scenarios for oil decline do not take account of oil exporters keeping more and more of their own product for domestic consumption. Studies show this is already happening , that exports are declining faster than production and the export decline rate accelerates with time. Which means the extent of oil scarcity is even more severe for New Zealand as an oil importer. What matters to us is not the scarcity levels of oil production per se, but how much oil is available for export.

Policy recommendations for government

The IMF suggests two broad policy review areas --

get ready to adjust to any unexpected changes in oil scarcity
lower the risk to oil scarcity including through the development of sustainable alternative sources of (transport) energy

But expect the New Zealand government to ignore this advice, just as they have ignored International Energy Agency calls for critical government intervention

Tthe IMF also suggests that governments could also "pre-emptively reduce oil consumption through taxation or support for new oil-saving technologies". Fat chance of that happening. Our Energy strategy is not to pick winners and there is next to zero support for bio fuels and electrification, and the government won't impose an earthquake levy even when most kiwis support it.

Whichever way you cut it, it is quite remarkable that a group whose aim is to foster economic growth and stability is warning of not just oil scarcity, but resultant declines in world growth. No doubt our mainstream media and politicians will ignore this report as they have done with dozens of others. But unlike the global financial crisis, they will not be able to say that they were not warned.

Obama’s Oil Plan Picks Winners – We Can Do That

2011-04-12T13:12:00.002+12:00

Last week President Obama released a new Oil Strategy. Like every President before him since Richard Nixon, Obama's aim is to reduce America’s dependence on imported oil. The plan openly picks winners. The strategy has been widely criticised for failing to address the scale and urgency of the end of cheap and abundant oil. But at least it’s a plan, which is 100 steps ahead of where we are here in New Zealand, - a nation even more dependent on imported oil than the USA. The New Zealand government has no plan other than to leave it to the market.

So what does Obama propose and how does New Zealand measure up?

Mission Statement
Obama – “Rising prices at the pump affect everybody – workers and farmers; truck drivers and restaurant owners. Businesses see it impact their bottom line. Families feel the pinch when they fill up their tank. For Americans already struggling to get by, it makes life that much harder. That’s why we need to make ourselves more secure and control our energy future by harnessing all of the resources that we have available and embracing a diverse energy portfolio. With an ultimate goal of reducing our dependence on oil…..”

Have you ever heard Prime Minister John Key or any NZ government Minister articulate the economic imperative to reduce our dependence on oil?

We could do that, but we haven’t.

Target to Reduce Oil Imports
Obama has set a target to reduce US imports of oil by one third by 2025.

We could do that but we haven’t.

Jeff Rubin points out that meeting that target will require the US to have an on-going recession. Nevertheless it’s an aspirational target which is totally absent from NZ’s just-released Energy Strategy. The International Energy Agency has strongly criticised the New Zealand Strategy for its lack of milestone targets.

Fuel Economy Standards for Cars and Trucks
Obama’s Plan.. “Standards for model years 2012-16 will raise average fuel economy to 35.5 miles per gallon by 2016, and save 1.8 billion barrels of oil over the lifetime of the vehicles covered. National fuel economy for commercial trucks, vans and buses built in 2014 – 2018 will be introduced.”

We could do that but we haven’t.

Government Incentives for Electric vehicles
Obama has set a goal of putting 1 million electric vehicles on the road by 2015, with a $US7500 tax credit for consumers, competitive grants for communities that encourage the adoption of electric vehicles, and funding for R&D to drive innovation in advanced battery technology.OK the target is less that .5% of the USA's 250 million vehicles but its a start.

We could do that but we haven’t.

What have we actually done? Woop de do ... we have exempted electric vehicle from road user charges until 2012 ! WWF estimate the NZ government revenue foregone is just $105,000 for the entire duration of the scheme! That’s it !

Central and Local Government Vehicle Fleet
Obama has directed Federal agencies to ensure that by 2015, all new vehicles they purchase will be alternative-fuel vehicles, including hybrid and electric vehicles.

We could do that but we haven’t.

The mantra from government is that they will not “pick winners” and will leave it to the market to determine our energy direction and future. – see these answers – 11 March 2011 here 16 March 2011 here and 7 April 2011 here from Finance Minister Bill English to questions asked in Parliament recently.

Yet in the USA – the bastion of the free market, their President is proposing a raft of direct government interventions to lower dependence on oil. Granted these measures will only scratch the surface of the oil dependence crisis, but at least the threat has been acknowledged and some planning has begun. As I suggested in earlier posts, the NZ approach has all the hallmarks of ideology trumping common sense and turning a blind eye to credible reports, such as this one from the NZ Transport Agency which has a blueprint on how New Zealand could lower its dependence on oil.

Government’s Energy Strategy -- Grade F for Fail

2011-04-06T13:21:00.001+12:00

The government has mistakenly released its Draft Energy Strategy, which is still to be signed off by Cabinet. Despite hundreds of public submissions it remains almost word for word identical with the version published in July 2010.

Of the 12 specific goals "developing petroleum and mineral fuel resources" is first and "reduce energy-related greenhouse gas emissions" is last. The Strategy contains this cute graphic which puts these totally contradictory goals side-by-side!

The strategy has been universally caned by commentators.

Bob Lloyd, director of energy studies at the University of Otago says

"the government is trying to increase growth and increase energy consumption. It's just not going to happen. The priorities are completely round the wrong way"

WWF climate change campaigner Peter Hardstaff says
"this is not a strategy, it is a series of vague intentions"

Green Party energy spokesman Kennedy Graham said “the leaked paper offered no protection against the rising price of oil, despite acknowledging the problems in its first pages.”

Even the International Energy Agency is critical saying "the draft proposals lacked a firm commitment to actions that will contribute to achieving the energy saving goals" and that "detailed action plan is targeted specifically on the transport, commercial buildings and industry sectors must form part of the final strategy”

Green party leader Russell Norman and Prof Bob Lloyd were both scathing in this TV1 interview

Hope to Drill

Making the development of oil and gas the first priority is an incredibly risky strategy. It’s akin to buying tickets in Powerball, and for the Titanic.

Attracting oil companies to invest in New Zealand has already proven to be difficult. Exxon has drilled in the Deep South Basin but cited New Zealand’s isolation and rough waters as reasons for pulling out.
Volatile oil prices hinder investment. Billions of oil discovery investment was withdrawn following the rapid drop in prices in 2008. Price volatility looks set to continue.
The global financial crisis means fewer funds are available for investment. To offset this, the government is proposing one of the lowest royalty regimes in the developed world.

What if the drillers don’t come? Where is Plan B?

Drill and Hope

Even if a major discovery is made quickly it still does not save us from the next global oil shock -- which we are entering now. It takes at least 5 years, more likely 10 to get any oil flowing, but the oil crisis is unfolding now.
Most NZ oil is exported because we cannot refine it here. So even if new oil is discovered we still remain at the mercy of oil exporters. Global exports are declining at a faster rate than oil production per se.
What if no or little oil is found? In spite of more wells being drilled recently domestic production is declining rapidly. All of the wells drilled in the last 12 months were dry. Where is Plan B?
No matter how much new oil might be discovered we still pay the world price. And when prices rise over US$85 a barrel, New Zealand heads back into recession.
By the time any new New Zealand oil might start to flow, the price will be at a level we cannot afford to burn anyway.
The Deep Horizon oil spill disaster has highlighted the extreme environmental risks. A recent report from the Environmental Defence Society reveals the total lack of environmental regulation in New Zealand's Exclusive Economic Zone.

When asked about how government's strategy to prioritise fossil fuels, Lord Stern, former chief economist of the World Bank and economic adviser to the British government said

"fossil fuel investment is risky and getting riskier, clean tech investments are risky and getting less risky" and

"global changes mean that these investments are going to become more risky. The very expensive methods of extraction are likely to become more and more unprofitable. To talk of hydrocarbon growth as a growth scenario is to fly in the face of what would happen in the long term.”

At a time when enlightened nations are desperately trying to leave the fossil fuel age, our strategy is a great leap backwards right into it.

Next oil induced recession -- are we there yet?

2011-04-01T14:07:00.001+13:00

Research in the US confirms that there is a strong correlation between high oil prices and recessions. Recessions emerge when oil prices reach around $US85 a barrel (currently $US115 a barrel) or when the aggregate cost of oil for the nation equals 5.5% of GDP.

Price Tipping Point

This research lines up strongly with the analysis done for The Standard blog which shows the petrol price tipping point for New Zealand to go into recession is around $NZ 1.77 a litre (about US $85 a barrel).

"Of the 8 quarters in which petrol has averaged over $1.77, 5 were followed by a quarter of recession and the other 3 were followed quarters with 0.1% growth. Of the 17 quarters where petrol was below $1.77, the economy shrank once in the following quarter, was flat once, and grew 15 times."

$NZ1.77 a litre was the price last October, but with petrol now at $NZ 2.20 a litre and oil prices now at $US115 a barrel, the nagging question for our economy and the next recession is - (like the one posed by kids in the back seat on a road trip) - are we there yet?

A recent Bank of New Zealand weekly newsletter pointed to the impact of high fuel costs on householders -- in June 2010 the average New Zealand family spent $40.90 a week on petrol, but at $2.20 a litre the weekly expenditure rises to $53 -- a 30% increase. That’s without factoring the flow on effect of high fuel costs into freight, food, and a myriad of other oil-dependent goods and services.

Most commentators employed by the financial press or financial service firms take an optimistic view. They say it will take US$120 a barrel of oil over an extended period to cause real harm to the global economy and they point out we are nowhere near the 2008 record high of $147 a barrel. But that price was sustained for only a few days and the average price in 2008 was more akin to the prices we are seeing now. It also ignores the historical precedence (see below).

Are We De-Coupled?
The other common argument is that energy consumption/prices and economic growth can be decoupled by increasing the efficiency with which energy is used (this has occurred between 1973 and 2008, but can it be sustained ?)

A Richard Heinberg points out, this decoupling trend of the last 40 years can be explained by concealed factors.

Efficiency gains from energy switching- eg gas to electricity- which still use the same amount of total energy
Production has been outsourced to China and other developing nations. Such as the New Zealand derived domestic GDP growth from commerce at The Warehouse (US – WalMart), while China expended the energy producing those consumer items
the "financialisation" of the western economies like N Z. Less manufacturing and building, but more services, lending and investing withdrawal used much less energy

When these trends are considered much of the historic evidence for energy – economy decoupling disappears.

Learn from History

Leading energy economist James Hamilton in a recent 2011paper called "Historical Oil Shocks" shows that all but one of the 11 post-war recessions - including the 2008 “Great Recession” - was associated with an increase in the price of oil. (According to Jeff Rubin the 2008 price spike, measuring from 2002 to the $147 high in 2008 was 500%+, far greater than any of the past price spikes.)

Whilst the Christchurch earthquake has been the centre of analysis of what might push New Zealand back into recession, the underlying and more severe impact of an oil shock is largely being ignored in New Zealand commentary.

And as this chart suggests New Zealand is more vulnerable to oil shocks because we rely on a greater volume of imported oil the the USA does. The impact here is more closely aligned with what has happened in Europe, Japan or other OEDC nations.

With New Zealand narrowly avoiding a double dip recession by just 0.2% and with historical evidence that there is a six -- 12 month lag between oil shocks and recessionary impact, all the evidence is pointing to New Zealand heading back into recession about right now. But it's a sure bet that the blame will be laid at the door of the Christchurch earthquake. It saves for the moment having to face up to the harsh reality of a series of recessions for which the real culprit will be oil shocks.

Ideology Trumps Common Sense

2011-03-22T13:39:00.001+13:00

It's said a picture is worth a thousand words. Take a look at these graphs and see if you can make any sense of the government's response to oil prices rising and it's transport policy. Damned if I can.
(hat tip to Auckland Transport blog and frog blog)

Traffic volumes on State Highways have not increased since 2005.

The pink line is heavy traffic, the blue line is all traffic. Source: New Zealand Transport Agency

Patronage of Public Transport in Auckland has increased since 2005

Source: ARTA

Spending on improvements to State Highways has increased dramatically since 2006, but spending on public transport and road maintenance has languished

Source: Cabinet papers.

And if you are still unconvinced about the connection between fuel prices and a recession in the New Zealand economy - take a look at the graph compiled by Marty G at The Standard

"Of the 8 quarters in which petrol has averaged over $1.77, 5 were followed by a quarter of recession and the other 3 were followed quarters with 0.1% growth. Of the 17 quarters where petrol was below $1.77, the economy shrank once in the following quarter, was flat once, and grew 15 times."

With petrol at around $2.15 a litre and rising, and leaking billions out of our economy and wallets, and with the transport trends staring us all in the face - why would a government that prides itself on good economic management be so myopic and not have a plan? Ideology trumping common sense?

Oil Price Response Plan For New Zealand Ignored

2011-03-17T14:21:00.002+13:00

Prime Minister John Key's only response to rapidly rising oil prices has been to say "the government is powerless - there is nothing we can do". Not so. A 2008 report commissioned by the New Zealand Transport Authority sets out a comprehensive blueprint as to how both central and local government can at low cost, reduce New Zealand's dependence on imported oil, with huge economic benefits to the economy and consumers. The independent report is entitled "Managing Transport Challenges When Oil Prices Rise".

In this and subsequent blogs, I will detail the report's findings and recommendations.To kick things off, here is a summary of the report's major findings.

Setting

The price of oil is a key driver of the cost of using, maintaining, constructing, and operating the transport network.
Oil prices may be expected to reach approximately $150 USD/barrel in 2012; this is expected to combine with a depreciating New Zealand Dollar to push petrol and diesel prices up to $2.80 and $2.50 per litre respectively.

Future travel demands modelled

Future travel demands were modelled with respect to the three fuel price scenarios - high, average and low, as well as assumed trends in economic growth, vehicle ownership, labour force participation, disposable income, and population growth.
Under the Average fuel price scenario total NZ vehicle kilometres travelled is expected to remain below 2007 levels until circa 2016 – even without taking into account the impacts of higher prices dampening economic growth and vehicle ownership

Toolbox of responses

The report identifies a toolbox of potential responses that government agencies could use to lower dependence on imported oil.

Fewer parking spaces in cities and higher parking fees
Road pricing so drivers pay directly for the roads they use
Charging businesses for how many car parks they provide to help fund road maintenance
Encouraging businesses to offer cash or public transport subsidies instead of company cars and car parks
Requiring new workplaces to provide showers and lockers so people can walk or bike
Turning roads into cycle and pedestrian-friendly streets – reducing speed of traffic
Tax incentives for fuel- efficient vehicles
Encouraging denser land use with a mix of housing, retail and commercial properties so people have less need for cars
More investment in public transport – bus and carpool lanes, park and ride stations, buses and trains, and electronic ticketing

(I will examine these and other recommendations in subsequent blogs)

Impacts of the Recommended Responses

The analysis found that the responses cause a pronounced shift in travel demand growth away from light passenger vehicles to alternative transport modes
The responses contain future growth in vehicle travel at or below current levels for the next twenty years.
They reduce per capita dependence on oil based transport fuels by approximately 20%.
These gains ensure that average consumer expenditure on oil based transport fuels increases only marginally from current levels even under the high oil price scenario.
The economic benefits included consumer savings, such as fuel and vehicle operating expenses, and welfare benefits, such as congestion reduction, air pollution, and greenhouse gases.
annual benefits in the order of $5 billion by 2028

Conclusion

The responses recommended in the report are likely to deliver improved energy efficiency and permanent on-going economic benefits to consumers, business, and public bodies.
They are “no regrets” measures that deliver “win-win” outcomes – regardless of the price of fuel.

Yesterday MP. Gareth Hughes asked Finance Minister Bill English during Question time whether he would act on the Report's recommendations, and respond to higher oil prices. His replies reveal the just how far his head is buried in the sand.

Do Saudis have spare capacity? And why your standard of living hinges on it.

2011-03-10T15:15:00.004+13:00

The conventional response to a supply disruption like from Libya is -- no worries, the Saudis have heaps of oil and can immediately pump more to take up the slack. But do they? And what happens to oil prices if they can't?

Many astute oil experts have grave doubts about the Saudis much vaunted spare capacity. This is vital because Saudi Arabia is the world's largest producer, and up till now has been able to influence the world price by opening the oil taps.

1. Jeff Rubin -- Canadian economist and author is convinced the Saudi spare capacity is the "fictional variety”. He says reports that producers in OPEC, particularly Saudi Arabia, will able to cover a shortfall in oil production from Libya are greatly exaggerated.

“The four million barrels-a-day of excess capacity that Saudi Aramco claims is of the fictional variety. I think that we’re going to find they’re hard pressed to make up even the Libyan shortfall because what they’re supplying isn’t the same quality of oil that Libya was supplying to European refineries."

Thise interview with Rubin should be compulsory viewing for every economist, business writer and politician

2. Chris Skrebowski, editor of Petroleum Review, said the long-denied oil crunch is starting to bite.

"We cling to the comfort blanket that spare capacity exists, but it is mostly fictional, or inoperable. If you take 2m bpd off the figure, the whole dynamic of global oil supply changes,"

3. Jeff Currie, Goldman Sachs oil guru, said

“assumptions that OPEC has added 1.9m bpd over the last two years are wishful thinking. These new fields have been "largely offset" by attrition in old fields. "We believe that OPEC spare capacity has already dropped below 2m bpd. The question therefore arises how much spare capacity is left to absorb potential supply disruptions in other countries,".

If this picture is broadly correct, spare capacity is already close to the wafer-thin levels that led to wild price moves in mid-2008. The flow of Libyan oil has so far fallen by 1m bpd. This may not sound much against global supply of 88m, but oil prices are determined by levels of spare capacity once supply tightens.

4. Kent Moors, said

“soaring international requirements for oil may effectively reduce the Saudi surplus to about 2 million barrels a day. That reduces the effective Saudi surplus after Libyan replacement to about 400,000 barrels a day. Period. As stunning as it may seem to investors, Saudi Arabia might not have enough oil to go around.”

Recent Histoy Lessons

Recent past history also tells us the Saudis are pumping flat out. At the height of the 2008 oil price spike George Bush II flew to Riyadh to beg the Saudis to increase production. Result: just a pitiful 300,000 barrels a day extra. Our own Energy Minister Gerry Brownlee was in Riyadh the day of the Christchurch earthquake. Maybe he was also pleading for greater production too?

Why it matters to every Kiwi.

If Rubin and others are right and the Saudi spare capacity proves to be fictional, the oil markets will freak out big-time and the oil price will go ballistic. The penny will have finally dropped that Saudi Arabia has reached peak oil (as WikiLeaks cables confirm) and with it the world has also reached its peak production.

As Richard Heinberg put it so well "the party is over"

I told you so.....

Peak Oilist Colin Campbell wrote this in 2000..

"An oil crisis is bad for politicians.
• Blaming OPEC or the oil companies will not wash much longer.
• It would be better to make a proper analysis of the true position and inform people.
• No one blames the government for an earthquake. So they wouldn't blame it for an oil crisis either if they realised it was a natural phenomenon
"If you don't deal with reality, reality will deal with you"

Earthquake $NZ5 Billion – Oil Quake More?

2011-03-08T13:22:00.000+13:00

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!

N Z's oil policy based on flawed forecasts

2011-03-05T14:38:00.001+13:00

Independent oil experts have been saying for many years that the New Zealand government's almost religious reliance on forecasts of the International Energy Agency (IEA) is a big mistake because they have been consistently and grossly over optimistic. The result has been a decade of lost opportunities to prepare for the looming oil shocks and shortages.

New Zealand along with other OECD nations is a member of the IEA, and our Ministry of Economic Development relies very heavily on its forecasts for global oil prices, production, and supply.

Simon Tegg revealed with empirical data, as far back as 2007 in his paper "Oil Outlooks" that the Agency has an appallingly bad record in these matters. But successive government ministers, including Gerry Brownlee, have continued to respond to concerns about peak oil by citing the Agency's forecasts and saying we have nothing to worry about until 2035.

David Strachan, The UK Energy Research Centre and Global Witness have all written convincingly of the Agency’s flawed methodology

In November 2009 The Guardian reported …

“The world is much closer to running out of oil than official estimates admit, according to a whistleblower at the International Energy Agency who claims it has been deliberately underplaying a looming shortage for fear of triggering panic buying.
The senior official claims the US has played an influential role in encouraging the watchdog to underplay the rate of decline from existing oil fields while overplaying the chances of finding new reserves.”

More here

Now a new report Future oil supply: The changing stance of the International Energy Agency, published in the Energy Policy Journal, shows how IEA forecasts in recent years have shifted from optimistic to pessimistic and back again, as assumptions changed, and how its methodology is flawed.

The report's author, Dr Richard Miller said,

"Events in the Middle East have grabbed attention, but the flaws in the IEA's analysis are potentially more serious in the longer term. We are flying blind into an even more dangerous crisis."

The conclusions of the Report is the IEA's oil supply forecast are not credible, and that global oil production is likely to peak with a few years.

Given the vital importance of oil to the NZ economy, surely our government must to reassess its reliance on the IEA's forecasts, and begin urgently to prepare for an oil crisis far more severe than the current upheavals in the Middle East and North Africa.

Oil prices were rising steeply before the unrest in the Middle East

2011-03-02T13:10:00.002+13:00

Here is the best analysis I have found about what’s been happening on the global oil scene.

It also confirms that peak oil pundits like Canadian economist Jeff Rubin, and Richard Heinberg and dozens of others, have been uncannily accurate.

This is a précis of Jeff Rubin’s recent article.

oil was already at $US100 a barrel BEFORE the unrest in Egypt
these are the kind of prices that one might expect to encounter at the end of an economic cycle, not at the beginning of one.
world oil demand grew almost twice as fast as the oil experts at the International Energy Agency were expecting.

serious doubts exist as to whether the world can produce another two million barrels a day of new supply to meet another year of demand growth – in addition to the nearly four million barrels a day of new production that must be brought on simply to replace what is lost every year in depletion.
these were troubling issues before the chaos began sweeping through the Middle East and North Africa. Now it’s even less certain how supply will match demand.
the region of the world that was expected to pump that additional oil supply, utilizing its supposedly ample spare capacity, is now falling into anarchy.
this supposed official spare capacity hasn’t existed for years. Wikileaks cables confirm what peak oil pundits have been saying for years - Saudi Arabia, OPEC’s biggest producer, and the country holding the world’s largest oil reserves, has little more to give.
instead of the 12 million to 12.5 million barrels a day of official capacity, Saudi Arabia is barely able to pump out between 8 million and 9 million
consider former president George W. Bush’s desperate pilgrimage to the kingdom in 2008, during the height of the last oil crisis. This was able to elicit only a token 300,000-barrel-a-day increase in production, in spite of record high prices.
the Saudis still has the capacity to raise oil prices should it withhold supply.

but the Saudis no longer has the capacity it once did to prevent prices from rising, because it can no longer boost its production to meet increases in world demand.
nor does Saudi Arabia have spare capacity to make up for supply disruptions in neighbouring Arab countries such as Libya, Algeria or Egypt.
supply disruption in the region could easily see prices spike and test the $147-a-barrel mark set in 2008, just before the crippling global recession
the real danger from the Middle East is not the risk of temporary supply disruptions, or the speculative betting that it will encourage.
the real danger is that we lose sight of the levels that oil prices had climbed to even before this latest crisis began, and the basic supply-and-demand forces that pushed them there.

Starting to Join the Dots .... finally

2011-02-25T13:12:00.000+13:00

Suddenly the world's media is awash with concern that the recent rise in oil prices will stall economic growth worldwide and cause another global recession. Guardian and here BBC Wall Street Journal

Finally, even in New Zealand, Brian Fallow economic commentator for the New Zealand Herald expresses concern about the implications for the New Zealand economy from rapidly rising oil prices.

It has taken the uprising in Libya to finally focus the mind of commentators on the dire effects on the world economy of oil prices. But most of this analysis fails to acknowledge that prices were already rising rapidly well before the uprising is in the Middle East due to accelerating demand in developing nations, as well as in oil producing countries. And that the Libyan crisis and the speculation that has followed is a “fear premium” on the price -- which was already rapidly rising due to fundamentals of supply and demand.

As I pointed out a few days ago, none of this is news to people like Jeff Rubin and other more astute energy savvy economists who have been warning for over two years that once the global economy improves, increased demand will force up prices into triple digit territory.

Despite warnings from a New Zealand Parliamentary report, Lloyd's Of London, the International Energy Agency, the US military and a host of other credible groups, our mainstream media has failed to report this looming crisis.

Likewise our politicians avoid this issue like the plague, and no risk management planning has been done. We are no better prepared than we were in 2008 when prices last spiked. They need to be held to account. In an election year hard questions need to be asked as to why these clear and urgent warnings have been ignored and not shared with the public, and what policies the main parties have to urgently lower our oil dependency, and to plan for an imminent oil-induced recession.

Ostrich-like Denial Continues

2011-02-16T10:55:00.010+13:00

In August 2009 I wrote an opinion piece published in the New Zealand Herald - "Country Oblivious to Next Oil Shock". I opined that “the spike in oil prices to US$147 a barrel in 2008 helped trigger the global recession. And soon after a global economic recovery, the inevitable return to triple-digit oil prices will lead the world right back into recession.”
Back then the oil price was around US$70 a barrel – today Brent Crude is indeed over US $100 – in triple digit territory.

I suggested that we have not learned “ the lesson that global Gross Domestic Product is inextricably linked to cheap and abundant oil? As prices rise, global GDP falls.”
I criticised the government for failing to plan for this looming crisis and the media for failing to report it, and concluded with a fear that “this ostrich-like denial will continue through several more price shocks and recessions.”

So what has changed in the past 18 months ?
… well nothing really. Both the government (and opposition) continue to pretend that there is nothing to worry about, in spite of NZ seemingly headed for a double dip recession and warnings of an imminent oil shock coming from the IEA and heaps of other credible sources.

Our mainstream media have, with a few rare exceptions, ignored the issue like the plague. When the issue does get attention it’s invariably a “cut and paste” from an overseas newspaper , but lacking any New Zealand perspective. For example this from the Economist, on 20 January 2011 re-printed in the NZ Herald (but not available in their online version). It repeats many of the points I made 18 months earlier (what took them so long?)……

“The oil price has pushed the world into recession in the past.”
“Blame for the recent great recession is typically laid at the door of the financial crisis, but it is often forgotten that America’s (and New Zealand’s) economy was shrinking for nearly a year before the collapse of the investment bank Lehman Brothers.”
“James Hamilton, an academic at the University of California, points the finger at oil. He reckons that the rise in the oil price from early 2007 largely explains the downturn between the end of 2007 and the third quarter of 2008.”
“the balance between oil supply and demand is a concern... the rise in the oil price is due to strong demand and stagnating production……. a full recovery from the financial crisis will push the oil price back to its highs of mid-2008.”

Are we headed for inflation or deflation?
There are divergent views on how the next oil shock will impact on the economy.

1. Jeff Rubin says the main threat is inflation.

“As the prices of petrol, diesel and home heating fuel rise, consumers’ energy bills eat up a growing share of their after-tax income, forcing cutbacks in more discretionary areas of spending.”
“by far the greatest impact that oil price shocks have on the global economy is the one they make on inflation and, hence, interest rates. This linkage is the means by which they have typically delivered a mortal blow to economic growth. Oil shocks have always given rise to growth-ending increases in interest rates as central banks are forced to respond to the inflationary fallout they leave behind.”
“The last recession was no exception. As oil prices soared from $35 per barrel in early 2004 to almost $150 per barrel in the summer of 2008, consumer price inflation in the US tripled to a rate of almost six per cent. It didn’t take long before interest rates caught up to inflation and, in the process, blew up the massively over-leveraged subprime mortgage market and the economy with it.”
“Oil prices caused the last recession, and oil prices will cause the next one as well. Energy inflation is already on the march. In fact, this time around oil prices are rising much earlier and much more rapidly than they did last cycle. Inflation is already running at nearly a five per cent rate in China; as oil prices go on to set new record highs, it’s only a matter of time of before we see those inflation rates in North America and in the rest of the OECD. And when we do, get ready for another oil-induced global recession.”

2. Nicole Foss of the Automatic Earth blogspot on the other hand believes the next financial crisis will be caused by deflation and debt deleveraging (with super inflation coming later). I thoroughly recommend this video – it’s one of the most insightful analyses of the links between energy and the economy.

Simon Tegg (yes my son) takes sides in his blog Maximum Power.
Take your pick inflation or deflation …. Neither will be pretty

Converging troubles.
In the past couple of weeks a series of converging issues have emerged:-
1. Unrest in the Middle East
a)   Dr. Nafeez Mosaddeq Ahmed writes….

“What is happening in Tunisia and Egypt, however, is only a manifestation of a deeper convergence of fundamental structural crises which are truly global in scale. The eruption of social and political unrest has followed the impact of deepening economic turbulence across the region, due to the inflationary impact of rocketing fuel and food prices.”

b)   Jeff Rubin is also convinced that rising food and fuel prices point to a looming return to recession.

“What’s most disconcerting about today’s food prices (as it is with oil prices) is not so much their record level but how little time it has taken for basic resource prices to rebound from the post-war’s deepest global recession. At the very beginning of a new cycle, we are already seeing the same record food and energy prices that ended the last cycle.
I wonder what that says about the sustainability of growth?”

c)   Chris Martenson pulls together the strands as to why Egypt was ripe for political and financial upheaval once it reached its own peak oil

d)   Alarmingly, a deep US-Saudi rift has emerged over Egypt: Saudis turn to Iran.

2. Energy Agency Warns of Another Global Recession due to rising oil prices

“The global recovery will drive oil prices dangerously higher this year, possibly to the level where they could push the economy into a marked slowdown”

"the global oil burden could rise to 4.7 percent in 2011, getting close to levels that have coincided in the past with a marked economic slowdown,"

3. Surplus capacity falling - causing another oil shock in 2012?
Steven R. Kopits - heads the New York office of Douglas-Westwood, energy business consultants.
He predicts that in 2012 surplus global oil capacity may fall below one million b/d, and an oil shock cannot be precluded. "Thus, in the better case, the world is facing tight oil markets in 2012; in the worst case, the country may be heading into another oil shock and recession.”

4. WikiLeaks cables: Saudi Arabia cannot pump enough oil to keep a lid on prices

Conclusion :
The evidence was compelling in August 2009 when The NZ Herald published my op-ed. The evidence is screaming at us 18 months later. All the warning signs are there for another oil shock and global recession, as early as 2012, perhaps even this year.
As Jeremy Leggett of the UK Peak Oil Task Force says ..
"We are asleep at the wheel here: choosing to ignore a threat to the global economy that is quite as bad as the credit crunch, quite possibly worse."
This is criminal negligence by our government on a grand scale.

Peak Oil for Saudi Arabia confirmed by WikiLeaks

2011-02-09T22:56:00.002+13:00

Projections by peak oil people that Saudi Arabia oil reserves have been grossly overstated (by 40%) and that the country can no longer prevent world oil prices rising have been confirmed in confidential cables from the US Consulate, released by WikiLeaks

Saudi Arabia is a "swing" producer and for many decades has been able to influence the world price for oil. Peak-oilists have been saying for years that Saudi Arabia has already, or will soon reach "peak oil", and that when it does the world's oil production will peak also.

The cables show that the US fears that Saudi Arabia, the world's largest crude oil exporter, may not have enough reserves to prevent oil prices escalating. Al Jazerra English News item here. Hell - even Fox News is worried !!

Sadad al-Husseini, a geologist and former head of exploration at the Saudi oil monopoly Aramco met the US consul general in Riyadh in November 2007 and told the US diplomat that Aramco's 12.5m barrel-a-day capacity needed to keep a lid on prices could not be reached.

According to the cables, which date between 2007-09, Husseini, said Saudi Arabia might reach an output of 12m barrels a day in 10 years - but before then – possibly as early as 2012 – global oil production would have hit its highest point. This crunch point is known as "peak oil".

Husseini said that at that point Aramco would not be able to stop the rise of global oil prices because the Saudi energy industry had overstated its recoverable reserves to spur foreign investment. He argued that Aramco had badly underestimated the time needed to bring new oil on tap.

Seven months later, the US embassy in Riyadh went further in two more cables.

"Our mission now questions how much the Saudis can now substantively influence the crude markets over the long term. Clearly they can drive prices up, but we question whether they any longer have the power to drive prices down for a prolonged period."

A fourth cable, in October 2009, claimed that escalating electricity demand by Saudi Arabia may further constrain Saudi oil exports, as the country would have to “canabalise” more of its oil production for internal use such as water purifying and to generate electricity.

More proof if we needed it that the US and other western nations (including NZ) have known from some time that an oil crunch is looming, but they have chosen not to tell us !

Auckland airport -- where pigs fly and bring untold prosperity

2011-01-27T21:56:00.007+13:00

An Auckland airport report estimates the airport corridor’s contribution to the economy for the next 20 years, but outrageously fails to even mention the future risks to the airline and tourism industries of higher oil prices and/or fuel shortages.

The report by Market Economics simplistically takes tourism and freight growth figures for past decades and projects these into the future. Based on these historic patterns it suggests a business as usual scenario where international and domestic travel will generate $17-24 billion by 2031, with a cumulative difference in growth between 2006 and 2031 of 19%.

But nowhere in the report -- I repeat nowhere -- is there any mention, let alone discussion, of the risks to the airline and tourism industries of rises in global oil prices in the next 20 years. As for the possibility of aviation fuel shortages, this is also completely beyond the pale for the report's authors.

Even under the "low growth" scenario, the protection is for the airport “corridor” to grow faster than the region by 10%. You will search in vain for any suggestion that there could be a no growth or negative growth scenario arising from a constrained world oil supply. And yet it was only in 2008 that scores of airlines went broke due to rapidly rising oil prices, and the numbers of tourists flying to New Zealand fell sharply.

These gaping holes in the analysis of the Auckland airport report mean it lacks any credibility. It seems to be following a trend evident in other recent reports -- for example a report by Venture Taranaki on the contribution of the oil and gas industry to the local and New Zealand economy, and the “head in the sand” approach of the government in its Energy Strategy and Defence White Paper. In all of these reports the impending oil shocks and possibility of fuel shortages are simply ignored.

There are dozens of credible reports available on which to base a more balanced approach.

One highly relevant such report was published in December 2009 “Impacts of Oil Prices on New Zealand Tourism” by Susanne Becken, Mai Nguyen, and Aaron Schiff

Unlike the Airport report this paper provides a robust economic framework for understanding the effects of higher oil prices on New Zealand tourism.

The report makes the following cogent points:

1. In the tourism industry, the ability to substitute oil for other sources of energy is relatively low. This is particularly true in aviation, where the price of oil will continue to be a major cost driver for airlines and therefore a key determinant of the price of air travel for the foreseeable future. Recent efforts by Air New Zealand to use Jatropha as an aviation fuel may literally fall on stony ground. Jatropha a biofuel-producing plant once touted as a wonder-crop, is turning out to be much less dependable than first thought.

And there is zero prospect of electric planes.

The graph from the tourism report shows fuel costs as a percentage of commercial airlines’ operating costs and crude oil prices. Over the past decade, fuel has approximately doubled as a percentage of airline operating costs, in line with the change in oil prices over the same period. The close relationship between fuel costs and crude oil prices reflects the limited ability of airlines to reduce their fuel usage.

Fuel costs as a percentage of an airline’s operating cost are disproportionally high for long haul flights, -e in the order of 30%. New Zealand relies on long haul flights for 60% of incoming tourists, so will be more severely impacted than other destinations.

2. An examination of past oil shocks clearly demonstrate that countries that are net importers of oil have, and will experience lower incomes and other negative economic effects from higher oil prices.

These findings are relevant for international tourism to New Zealand. The second graph shows the top ten countries of origin for international visitor arrivals to New Zealand and the percentage of net oil imports or exports in their GDP. Only Canada is a net oil exporter. All other countries are net oil importers. The Asian countries are the most exposed and therefore potentially most likely to be affected by income effects of higher oil prices, yet they are often touted as markets from which future tourism growth will occur.

3.Tourism is a luxury good and is therefore relatively income-elastic. Income changes have quite a large effect on the demand for international tourism, not only for trip generation, but also with respect to level of expenditure, length of stay and type of trip.

4.Long distance destinations are more dependent on high-income tourists than short haul destinations. There is a strong correlation between consumption spending in origin markets and tourist arrivals to New Zealand.

All of these factors, and many others identified in the tourism report, point to the New Zealand airline and tourism industries facing extremely turbulent times in the next 20 years. There is a very real chance that these industries will face zero or even negative growth in the years ahead. But investors or anyone alse reading the Auckland airport report will have no inkling of this possibility , and cannot help but be misled by its grossly ill-informed and over-optimistic projections.

NZ Survey - Elected Local Councillors Ill-informed on Peak Oil

2011-01-23T12:36:00.000+13:00

Becky Wardell at the University of Canterbury has surveyed technical transport staff and elected officials in three representative local councils in New Zealand – (rural, a provincial city and Auckland) to determine what influences them and what their attitudes are to peak oil.

She found that the majority of elected officials had either minor or no concerns about peak oil and only 27% had a major level of concern about peak oil. The level of concern about peak oil amongst technical transport staff was much higher than elected officials, with 65% of them considering peak oil to be of major concern.

Those who have a lower level of concern generally consider that alternative fuels and new technologies will mitigate any effects of peak oil in the future.

“This belief could be a major reason why planning for peak oil is not prioritised. The differences in attitude towards peak oil and beliefs about alternative fuels and new technologies expressed amongst elected officials results in a lack of clear consensus about the level of planning needed for peak oil.”

The author also analysed council planning documents and confirmed that the major concerns of technical staff about peak oil are not being directly translated into policy. Dunedin has just released its Peak Vulnerability study. It will be interesting to see if any concrete policy changes emerge in Dunedin to mitigate peak oil and whether any other councils follow Dunedin's lead ?

Here is her more detailed breakdown of knowledge of, and attitude towards Peak Oil by transport policy makers:

• Technology or another energy source will mitigate any peak oil problems 50%
• We live in a car dominated society which makes it hard to change travel behaviour 39%
• Peak oil is hard to plan for because it is too far away and there are no tangible effects
• Currently 30%
• The council is too small to plan for peak oil, there are other more pressing issues 7%
• The debate about the timing of peak oil provides little certainty for planners 22%
• The market will respond to mitigate any problems 20%
• It will need to take a crisis before we start planning for peak oil 17%
• People will adjust to rising fuel prices and any shortages in supply 15%
• Peak oil will not be a problem in the future 15%
• Technology or alternative fuels will not be able to mitigate peak oil problems 9%
• There is plenty of oil available for transport 4%
• Elected official: thinks the majority of tech staff not concerned about peak oil 9%
• Tech staff: thinks the majority of elected officials are not concerned about peak oil 28%
• Elected official: thinks the majority of elected officials are not concerned about peak oil 17%

Lack of Funding and Direction from Central Government

A lack of funding from Central government was a dominant theme to emerge from the research. The majority of respondents considered the amount of investment in sustainable transport to be inadequate in their city and that much of the responsibility for investment lies with the Central government. It is also clear from the results that not only is Central government influential through funding but also in terms of the strategic direction transport policy takes at the local and regional level.

We Plan for Natural Disasters but not for Peak Oil
“The likelihood of some key emergency events in New Zealand has been estimated as follows (adapted from Department of Internal Affairs, 2008):
• 15% chance of a major earthquake in Wellington in the next 50 years;
• 20% chance of a major earthquake on South Island alpine fault in the next 20 years; and
• 4% chance of a volcanic eruption in Auckland in the next 50 years. An eruption in Auckland could trigger as much as a 14% decline in GDP for New Zealand.

Despite the relatively low probability of such major natural disaster events occurring, planning and procedures are in place to help to prepare for and mitigate against the effects of a natural disaster, including a comprehensive National Civil Defence Emergency Management Plan (Ministry of Civil Defence and Emergency Management, 2009) and public education campaigns.

Obviously peak oil impacts are not seen to be directly life-threatening, as a natural disaster would be, however, some predict the impacts of a worst case peak oil scenario to be widespread and severe, and on a much wider scale compared with a localised natural disaster.

Possible reasons for such comprehensive planning for low probability events include the fact that planning for a civil defence emergency does not require people to significantly change their lifestyles or habits, nor does it threaten major business interests or the economy. If we compare this to peak oil or climate change, it is much more difficult for policy makers to develop and introduce policy that plans for such events, because such policy involves a major shift from the status quo and current thinking and often poses a threat to major business interests and the economy.”

What Will it take to Change Attitudes?
“In order to be effective in changing the status quo, a peak oil movement would need to be on the same scale as those movements against nuclear weapons, smoking and drink driving. In order to gain the support of the public such a movement would require robust scientific evidence to back it, some sense of urgency to act (in the form of major fuel price rises or shortages), and an influential ‘champion’ to bring it into the media spotlight. Unfortunately the current conditions (disputable scientific evidence, a lack of urgency and a lack of influential supporters) do not encourage a social movement on such a large scale.

Ultimately, what is needed as part of this social movement is a major shift in how society conceptualises prosperity in terms of the dominance of the economic growth paradigm. As long as economic growth is linked with prosperity, is coupled with fossil fuel consumption, and is the ultimate goal of governments and society, it will be very difficult to implement planning for an era in which fossil fuels are in very short supply.”

INFLUENCES ON TRANSPORT POLICY MAKERS AND THEIR ATTITUDES TOWARDS PEAK OIL - A thesis for the Degree of Masters of Engineering in Transport - 2010

NZ oil and gas in steep decline - Taranaki Report

2011-01-19T15:36:00.002+13:00

Venture Taranaki have produced an immaculately presented report entitled "The Wealth Beneath Our Feet". The report is essentially a glossy public relations exercise of trying to talk up the contribution of the oil and gas industry to the local and New Zealand economy.

But even a cursory examination of the data, and the Report’s own graphs, shows that actually, reserves, production, and the contribution of oil and gas to the economy, have all reached a peak, and are all in steep decline.

As the graph shows, this decline has been happening at the very time that drilling activity and the number of wells being drilled has risen sharply. There is no foreseeable increase in production likely, because no new major discoveries have been made in the last few years.

Interestingly, there are no graphs on oil reserves or production. When there is so much other optimistic material in the report, one has to question why the oil production, including future production projections are omitted. Maybe it's because the projections for oil are even more dire than for gas -- as was pointed out in my post last November about the oil production projections from a Ministry of Development official at the Petroleum conference. They showed oil production halving by 2015. The Venture Taranaki report confirms a similar trend for gas production.

Buried beneath all the public relations optimism of the Taranaki report is the disturbing revelation that our domestic oil and gas reserves and production are in steep decline. This must lead to New Zealand's net oil import dependency increasing to much higher levels than the current 63% ( the figure cited in the report).

With global oil production projected by many credible organisations to be headed for an era of permanent decline, and global net exports of oil likely to decline even faster -- the outlook for New Zealand with its increasing dependency on imported oil - is bleak.

The report contains some interesting information regarding the level of current oil production, -- 19.6 million barrels were produced in 2009 of which 17.9 million barrels were exported and just 1.7 million barrels refined locally.

And in what must be one of the most prescient namings of a petrol brand the report reveals that the finding of oil at Motoroa, near New Plymouth spurred the formation of an oil company trading as "Peak Petrol", which operated until the 1950s!

Could it be that the operators of "Peak Petrol" were aware of Hubbert’s 1950’s peak oil projections even before Hubbert himself, and foresaw a decline in global oil production as steep as the slopes of Mt Taranaki itself?

Peak oil reported in mainstream NZ media -- a sea-change ?

2010-12-15T14:04:00.001+13:00

Peak oil has been discussed in the mainstream New Zealand media in the past week. What is pleasing and maybe a sign of a sea-change is that unlike previous flirtations with the subject which have been disparaging and condescending, the latest articles take the issue seriously.

First up the Christchurch Press printed a feature article by John McCrone called "The End of Consumerism" with a byline

"cheap energy has driven the past century of un-checked economic expansion. All our glittery possessions and technological marvels have depended on the basic fact that a vast pool of easy-to-tap oil has been available. But now it's drying up"

The article contains much information familiar to peak-oilists, including graphs showing how oil production and GDP have tracked, and how conventional oil is set to decline rapidly. There is discussion on "energy return on energy invested" together with several quotations from Clint Smith's Parliamentary report "The Next Oil Shock"

There is also extensive discussion on limits to growth and how reaching those limits might lead to the end of consumerism.

In a related article the "Signs of Change" conference involving many Transition Towns folk is mentioned with examples of how building local resilience is being tackled around New Zealand. A Conference statement is here

This is by far the most comprehensive and informed NZ article I have seen on peak oil.

Is it something in South Island drinking water ? -- the Christchurch article was backed up by this article, this local TV report, on the Dunedin Peak Oil study. There has even been a supportive editorial in the Otago Daily Times stating...

Peak oil is an issue over which individual communities, this city and region included, will have no control. Identifying how the council might play its part in managing its economic impacts and potential risks, in particular with respect to energy efficiency, is a responsible approach to local government, regardless of intervening technological innovation.

Surprisingly the New Zealand Herald business pages also had a "passing" reference to peak oil,
although those dreaded words were not used of course. Lian Dann quoted from a report by independent oil economist Mamdouh G. Salameh, stated ...

"One of the scariest commodity stories this week was, somewhat predictably, about oil. As pump prices in New Zealand creep back towards $2 a litre a report from independent oil economist Mamdouh G. Salameh this week predicted that this year's projected supply shortfall of almost 5 million barrels is likely to widen to 9.2 million by 2015.

That'll mean new record highs - topping the last peak in July 2008. But, Salameh says, the gap between supply and demand is likely to be too big to reconcile with even higher prices.

His best-case scenario is shortages curtailing economic growth. His worst-case scenario is conflict and potentially war."

Interestingly the peak oil reference was buried amongst reports of a spike in the price of other commodities such as rubber and cotton.

I would have thought that a report on oil which said shortages will curtail economic growth and may lead to war, would have warranted a special NZ Herald feature - like the Press article.

But it seems this is still a bridge too far for the Herald. Its time they caught up. Even the super-optimistic International Energy Agency has admitted that global conventional oil production peaked in 2006, and the US military Joint Command warns of the global security risks of peak oil.

10 reasons why converting lignite coal to diesel is insane

2010-12-10T14:52:00.000+13:00

The Parliamentary Commissioner for the Environment (PCE) has released a report "Lignite and climate change: The high cost of low grade coal"

The PCE report also covers using lignite to make urea and briquettes, but this post will focus on the insanity of plans by Solid Energy and L & M Group to convert Southland lignite to diesel

1. The taxpayer subsidy for one lignite-to-diesel plant would be likely to be billions of dollars over its lifetime, (and 1 billion dollars annually by 2020)

"In its current form the ETS exposes the Government – and therefore the taxpayer – to potentially enormous financial risk. This is because of the rules governing the allocation of free carbon credits. For ‘free carbon credits’, read ‘taxpayer subsidy’. New lignite developments may well qualify for significant subsidies under the scheme. The taxpayer subsidy for one lignite-to-diesel plant would be likely to be billions of dollars over its lifetime."(PCE)

2. It means a doubling of our Co2 emissions, compared to using crude oil and 20 times greater emissions than using biomass

3. It increases the gap between the international climate change commitment we have made and where our greenhouse gas emissions are headed by 20%.

If both proposed lignite-to-diesel plants were to be built, the gap would increase by 50% (PCE)

4. It will not lead to cheaper diesel because we will still pay the world market price, and lignite diesel will be at a price likely to be over $US100 a barrel. - the same prices that were the root cause of the global financial crisis. ... just like we don't have cheaper milk or cheese here

5. It does not mitigate against oil shocks.
Even if the projects could get approval, Solid Energy's General manager Brett Gamble admits there will no production for around 8 or nine years (more likely 15 years? ) ...meanwhile oil shocks and fuel shortages are forecast in the next 2-5 years, and prices have been moving steadily higher and are likely to reach triple digits soon. There is no "cushion against oil shocks" as the industry asserts.

6. Slim chance of necessary funding
The chances of getting multi-billion dollar funding in the midst of ongoing global recession are very slim. More financial meltdowns are yet to come as the oil price spikes again and debt de-leveraging continues unabated

7. The projects are still in a pre-feasibility stage, have licencing problems, carbon storage and sequestration is unproven technology, and no site has been identified for it in Southland

8. It represent a return to 19th century "dig it up and burn it " thinking which trashes our tarnished but still vitally important clean green image

9. We can use wood rather than lignite with much lower emissions

"a plant making diesel, urea, or electricity from lignite could also run on wood as
well. When wood is substituted for lignite, emissions can be reduced. New Zealand’s existing plantation forests are a huge source of low-quality wood suitable for fuel. Wood can be at least as good as lignite, especially if pre-treated to make it easier to process and to improve energy density." (PCE)

10 It must be wiser to take adaptive measures and use conservation to tackle the looming oil shocks as recommended by the Dunedin City Council Peak Oil Report

please add your reasons in the comments…

Dunedin City Leads on Peak Oil

2010-12-07T15:35:00.000+13:00

In a first for NZ, Dunedin City Council has commissioned a Peak Oil Vulnerability Analysis Report, which included surveys on travel habits, private fuel consumption and vehicle dependence and the effect of petrol prices . Appendices to the Report here

It assesses the city’s vulnerability to increased fuel prices and reduced availability of oil. It helps identify the associated challenges and opportunities for Dunedin’s communities.

In welcoming the report, Mayor Dave Cull said “We aim to make Dunedin resilient in the face of impending energy challenges and it’s better to be proactive rather than reactive. This report will be of immeasurable help in identifying such challenges and framing the appropriate responses.”

The research was co-ordinated by Associate Professor Susan Krumdieck from EAST Research consultants based at Canterbury University. She was assisted by Dr Bob Lloyd from the University of Otago, who provided background research on economic conditions

The consultants recommend that Dunedin should work on five objectives to
enhance adaptive capacity, social, economic and cultural wellbeing, while
requiring significantly less expenditure on transport fuel:

1. Plan to reduce oil consumption by 50% by 2050

2. Transition Dunedin’s urban form with central city lifestyle development,
and urban villages, accessed by 100km of safe bikeways and pedestrian
zones and served by public transport

3. Build an electric trolley bus system using efficient modern technology
made in New Zealand

4. Improve Dunedin’s average vehicle fleet efficiency to 5 litres per 100km
by 2030

5. Audit and track fuel use in all sectors, organisations and households and
develop action plans

Go Dunedin ! So when will the government commission a Peak Oil Vulnerability Analysis Report for the nation ? Its only 10 years overdue.

Staring down the barrel of oil shortages - but seeing nothing

2010-12-05T21:56:00.004+13:00

Business writer Rod Oram and Transport Minister Steven Joyce have been debating the government's current and potential roading and rail projects ( Sunday Star Times) The essence of their spat seems to be "my cost benefit analysis is bigger and better than yours - nah nah na nah na".

Meanwhile there is a very large elephant in the room that both protagonists refuse to, or fail to see. This is something blindingly obvious to the even the super - optimistic International Energy Agency, namely that NZ, along with all other OECD nations is going to have to start living with less oil, starting now. Oil -- you know --- that black stuff that fuels 95% of our road transport.

The cost benefit analyses that Oram and Joyce are bickering over do not take into account the impact of higher oil prices or shortages. A 2008 Land Transport Authority report did start to make the connection between higher oil prices and future roading plans, but the incoming government has ignored its recommendations.

So the Oram/Joyce debate is taking place in this vacuum, without consideration of the likelihood that fewer, not ever increasing numbers of vehicles, are going to be using our roads within 2 - 5 years.

Neither of them mentions this possibility, although to be fair to Oram, at least he sees the benefit of an Auckland rail loop.

Why less oil and fewer vehicles? China, India and all oil producing nations are growing rapidly as is their demand for an ever-increasing share of global oil production. For every new car hitting the streets of Shanghai or Mumbai - that's one OECD car taking the exit lane.

Because it's not just higher fuel prices which will drive this change to a smaller transport fleet. A supply shortfall of almost 5 million barrels is forecast for this year, widening to 9.2 million by 2015, according to the latest in a string of similar reports published this year. Independent oil analyst/economist Mamdouh G. Salameh projects this gap between supply and demand will be too big to reconcile even with prices soaring beyond the record $US147 per barrel ($2.20 per liter for petrol) we saw in 2008.

In other words the theory of mainstream economists that higher prices will always draw new oil production from the ground is simply not working. We are staring down the barrel of oil shortages.

So the question has to be asked -- how is it that Oram and Joyce along with their economist and political peers inhabit this fantasy land in which the NZ they foresee is somehow magically immune from the looming oil supply shock? They stare down the barrel of higher oil prices and shortages and see nothing.

NZ will live with less oil -- its official

2010-11-16T22:39:00.001+13:00

Whether you are a petrol head or a mum and dad happy motorist you will be living with less oil in the future. That's the sober conclusion of the New Zealand government's most trusted energy adviser -- the International Energy agency (IEA) in its latest annual report.

The graph below (click to enlarge) shows that starting now, and year after year, there will be less and less oil used per capita for transport in OECD nations -- including New Zealand (refer to the Pacific OECD section)

The IEA's latest report completely contradicts our government's policy direction of lets build more roads, roads, roads.

And, in what has been described as a cry for help, the IEA calls on governments including New Zealand's to take concerted government action.

"The World Energy Outlook to 2035 hinges critically on government policy action and how that action affects technology, the price of energy services, and end-user behaviour" , and

"The future of renewables hinges critically on strong government support"

Here again our government is failing to heed the advice from its most trusted energy adviser. Its "plan" is not to provide "strong government support". Instead our draft Energy Strategy proposes to address New Zealand’s vulnerability to oil price rises and scarcity with a ‘wait and see’ approach ...

page 13 “The Government will not pick winners: ultimately uptake of new energy sources and technologies will depend on the decisions made by consumers as they respond to oil prices.”

As the WWF analysis of the Energy Strategy says -
"The government is effectively saying that it plan is to do little or nothing, and instead let the ‘market’ and consumers determine how New Zealand will address the challenge of increasing oil prices."

So, what is the Government actually doing ? There appear to be just 2 policy initiatives, of which they seem very proud - as they are always quoted in ministerial letters responding to peak oil related correspondence :-

1. Biodiesel Grants Scheme

"In the first eleven months of operation (July 2009 – May 2010), an average of 44,620 litres of biodiesel were covered by the scheme. Biodiesel covered by the scheme would comprise 0.008% of total NZ oil consumption." (WWF Analysis)

2. Road User Charges Exemption for Light Electric Vehicles

"In June 2009, the government announced that electric vehicles would be exempt from road user charges from October 2009.

There were only 23 vehicles that qualified for the exemption in 2009. But the government has stated the scheme will expire at the end of 2012 by which time the impact statement predicts 127 electric vehicles in New Zealand with combined annual revenue foregone in road user charges of $60,466. The total cost of the scheme (revenue foregone) over its four year duration is projected to be less than $105,000.

$105,000 is less than 0.002% of the government’s planned spending on roads. $60,466 is less than the Wellington accommodation allowances for 3 government ministers in the first 6 months of 2009." (WWF Analysis)

Is this the "critical government policy" action the IEA is calling for? You be the judge.

NZ Defence Report Ignores Peak Oil - US / German Military Warn it’s a Big Threat

2010-11-05T23:08:00.001+13:00

The just released Defence White Paper on New Zealand's strategic and security interests to 2025, as Gordon Campbell points out, is long on rhetoric, and short on coherence and detail. But worse still it fails to even mention a very serious and imminent threat to our security which both the US and German military have warned about - namely the peaking of global oil production leading to dwindling world oil supplies.

In February 2010 the United States Joint Forces Command published The Joint Operating Environment 2010. (JOE 2010) This is the equivalent of our White paper, as it sets out to consider likely “future trends and disruptions” that will affect the US military over the next 25 years. And yes, one of the key identified threats to US security is a dwindling global oil supply.

It dropped a bombshell (excuse the pun) by stating plainly what civilian arms of the US and other western governments know about, but have kept quiet ..

"By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels a day"

The JOE 2010 states that such a shortfall would reduce the prospects for growth in both the developing and developed worlds. Such an economic slowdown would exacerbate other unresolved tensions, push fragile and failing states further down the path toward collapse, and perhaps have serious economic impact on both China and India. At best, it would lead to periods of harsh economic adjustment, at worst outright conflict for dwindling resources.

In August a German military think tank analyzed how peak oil might change the global economy. The report "Implications of Resource Scarcity on National Security" shows how carefully the German government has considered a potential energy crisis.

Probable geopolitical shifts will include a move away from democracy and human rights, and the decline or complete failure of free market mechanisms in favour of “protectionism, exchange deals, and political alliances between suppliers and customers.”

There will be an overall reduction in the standards of living across the globe, but it will be felt worse in countries “that are a) highly dependent on imports (read New Zealand) and b) are susceptible to price-increases of food products.(read New Zealand again ) "

Western nations face “systematic risks” and non-linear events, where a reduction of economic output caused by Peak Oil leads to market-driven economies ceasing to function altogether..

The German military report states with peak oil....

"investment will decline and debt servicing will be challenged, leading to a crash in financial markets, accompanied by a loss of trust in currencies and a break-up of value and supply chains – because trade is no longer possible. This would in turn lead to the collapse of economies, mass unemployment, government defaults and infrastructure breakdowns, ultimately followed by famines and total system collapse."

Get the picture… ? This is very serious stuff we are talking about here, and with grave implications for our national security. Yet our esteemed PM, Minister of Defence and his boffins don't think any of this is worthy of mention other than a vague one sentence reference to "resource pressures" !

And then there is the not insignificant issue of how the large NZ Defence force vehicle fleet, and our planes and ships are to be fuelled?

In the USA a highly influential Washington national security and defence think tank, ---The Center for a New American Security (CNAS) has warned of these looming problems in Fueling the Future Force: Preparing the Department of Defense for a Post-Petroleum Environment, published September 27 2010,

It states that 77 % of the US Department of Defense’s “massive energy needs” are met by petroleum (NZ is likely to be as large?) – but

“given projected supply and demand, we cannot assume that oil will remain affordable or that supplies will be available to the United States reliably three decades hence.” To remain as an effective fighting force, the entire US military must transition from oil over the coming 30 years."

Once again this issue does not warrant any discussion in the NZ White Paper. Maybe the Defence Department has a secret plan to run its vehicle fleet, planes and ships on an vast untapped unconventional energy source ....the hot air generated from Defence HQ?

This says it all ….

NZ Hits Peak Oil in 2010. Zero oil production by 2023 -- MED official

2010-11-03T14:09:00.002+13:00

This year NZ reaches peak oil. We then face a steep decline in our domestic oil production from currently producing oilfields. This is a double jeopardy for New Zealand's economy as the domestic decline will coincide with global oil supply shocks, rapidly rising oil prices, ushering in a period of sustained recessions - according to a New Zealand Parliament report published last month.

The disturbingly steep drop off in New Zealand's domestic oil production was revealed by Dr. Peter Crabtree of the Ministry of Economic Development, in his presentation to the recent New Zealand Petroleum Conference.

Dr. Crabtree's presented the graph above, no doubt intended to concentrate on three scenarios for possible future oil production from as yet undiscovered offshore New Zealand oil fields.

But if you strip away from the graph these (let's repeat again -- not even discovered) oil fields you are left with the graph below which shows the real world situation -- ie. historical production and forecast production from existing fields in millions of barrels per annum

The graph shows a clear peak of production this year. If you scale off figures from the graph this reveals the following approximate levels of domestic oil production --

2010 25 million barrels per annum
2015 12.5 million barrels per annum
2020 4 million barrels per annum
2023 zero million barrels per annum

If Dr. Crabtree's projections are correct on the rate of decline of domestic oil production from existing fields (and they may well be optimistic - the decline may in fact be steeper) -- New Zealand's domestic oil production will have halved in just five years by 2015, and be down to zero by 2023.

Even if major discoveries offshore in New Zealand are made as early as 2011 (no new discoveries were made in 2010, and Exxon abandoned exploration in the Great South Basin), it takes at least five years and more likely 10 years to bring any such oil into production.

The domestic decline will occur at the worst possible time. Fuel prices are already steadily rising. The price of oil is currently around US$83 a barrel and many analysts believe NZ fuel prices could very soon match or exceed the 2008 level of $2.20 a litre. And as the recent Parliamentary Report pointed out - a lack of spare global capacity is very likely to lead to oil shortages, and recessions in the 2012 -- 2015 timeframe.

Surely this must lead New Zealand highly vulnerable -- in the 2010 -- 2020 decade. We face a perfect storm of plummeting domestic oil production, little if any new oil production likely within that timeframe, and global oil price shocks and shortages as world oil production fails to keep up with escalating demand.

All of this puts to one side another huge problem for New Zealand as an oil importer -- net global oil exports are declining at a much faster rate than the rate of decline of world oil production -- but more on that subject in a later blog.

Mining group believes in tooth fairy -- "New Zealand cushioned against oil shocks"

2010-10-19T21:46:00.002+13:00

Straterra, a body representing mining companies has said, "New Zealand is in an excellent position to withstand any future oil shocks, thanks in particular to our lignite and geothermal resources". Straterra was commenting on the Parliament's research unit report called "The Next Oil Shock". The Report says major international organisations are warning of another supply crunch as soon as 2012.

What planet are these guys on ? Let's be clear -- geo-thermal energy produces electricity. It cannot power New Zealand's internal transport system - or carry our imports and exports -- 99% of which relies on liquid fuels. If our transport systems cannot run efficiently the economy heads south into recession.

Pinning your hopes on electric cars? There are currently just 27 electric cars registered in NZ. Even if we were to build 50 million electric cars per year starting right now, it would be ten years before half the cars in the world had been replaced. And this does not even factor in the implied massive upgrades to the electrical grid and power stations, or the lithium needed for car batteries (peak lithium?) .

It is perhaps understandable that the general public is confused about various types of energy. But Straterra knows damn well that geothermal resources cannot cushion New Zealand from liquid fuel oil shocks. This is misinformation on a grand scale.

Staterra's other touted "solution" -- converting dirty lignite coal to fuel, similarly has zero chance of cushioning New Zealand from an oil shock expected within 2-5 years. It is a complete fabrication to say that it will.

The graph is from Don Elder's (CEO of Solid Energy) presentation to the Petroleum Conference. It shows that even with the rose tinted glasses firmly in place Elder is saying no unconventional fuel will be produced from lignite in Southland until at least 2015, and then only at a trickle and making up a minuscule part of our liquid fuel needs. Meanwhile the Parliamentary report says an oil supply crunch and petrol price hike may come as soon as 2012. And these are only projections from Elder. The lignite to fuel technology is still in the pre-feasibility stage. There is no guarantee that the technology will work, that it will receive multi-billion-dollar investment, when the world is in recession, or that it will receive the required environmental consents.

Elder's projections already seem highly optimistic. In May 2010 with much fanfare, Solid Energy announced plans with Australian company Ignite Energy Resources Pty to install a trial lignite to fuel plant in New Zealand. But those negotiations have already turned sour and Solid Energy has been unable to conclude a final licence agreement with Ignite.

The reality is much different from the rose tinted projections from Straterra. Geothermal energy and lignite has zero chance of cushioning New Zealand from the next oil shock.

Note : The Parliamentary report said:-

major international organisations are warning of another supply crunch as soon as 2012.
The world may be entering an era defined by relatively short periods of economic growth terminating in oil price spikes and recession.
New Zealand is not immune to the consequences of this situation. In fact, its dependency on bulk exports and tourism makes New Zealand very vulnerable to oil shocks.

NZ Parliament Report Warns of Imminent Oil Shock

2010-10-13T22:08:00.005+13:00

New Zealand is highly vulnerable to oil price shocks that are nearly certain to occur in the next few years according to a research report published by Parliament yesterday. Its an excellent report on peak oil and will be huge wake-up call for government and opposition MP's and their advisers. It deserves the widest circulation.

The report states that another supply crunch is likely to occur soon after 2012, and high oil prices will be sustained in the future because low-cost reserves are rapidly depleting. It warns that the world and NZ's economy could suffer recurrent recessions as the price fluctuates.

It also warns NZ is highly dependent on oil imports and that our key export generating industries are vulnerable to oil shocks. The report also points out that domestic oil production will not insulate NZ from global oil shocks because NZ pays the world price for oil.

This is not a government initiated report . It was written by Clint Smith a Parliamentary Library economics and industry research analyst. The report has been published on the NZ Parliament website.

Here is the summary of the Reports findings....

Oil is "the lifeblood of modern civilisation ". This paper provides an overview of the global oil market. In particular, It examines the outlook for oil supply and demand over the next five years, and the economic consequences.Low-cost reserves of oil are being rapidly exhausted, forcing oil companies to turn to more expensive sources of oil. This replacement of low-cost sources of oil with higher- cost sources is driving the price of oil higher
While the world will not run out of oil reserves for decades to come, it cannot indefinitely continue to produce oil at an increasing rate from the remaining reserves. Forecasts indicate that world oil production capacity will not grow or fall in the next five years while demand will continue to rise. If oil production capacity does not rise as fast as demand, the buffer of spare production capacity disappears. In such a ‘supply crunch ’ the price of oil ‘spikes ’ to high levels. High oil prices can induce global recessions.Organisations including the International Energy Agency and the US military have warned that another supply crunch is likely to occur soon after 2012 due to rising demand and insufficient production capacity.
There is a risk that the world economy may be at the start of a cycle of supply crunches leading to price spikes and recessions, followed by recoveries leading to supply crunches.
New Zealand is heavily dependent on oil imports and will remain so for the foreseeable future. While there is potential to substantially increase domestic production, domestic oil production cannot insulate New Zealand from global oil price shocks because New Zealand pays the world price for goods like oil.
Key export-generating industries in the New Zealand economy including tourism and timber, dairy, and meat exports are very vulnerable to oil shocks because of their reliance on affordable international transport.