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Oil and NZ’s Department of Economic Mythology

3 November 2004, Wellington

Oil and NZ’s Department of Economic Mythology

A key assumption held by New Zealand’s Ministry of Economic Development (MED) covering the period between 2000 to 2025 is that oil prices will rise from US$20/bbl in 2000 to US$25 a barrel by 2020 and remain constant thereafter.

Nevertheless manifest evidence points toward an emerging and permanent supply shortfall in world oil and gas markets due to increasing demand growth and a marked downward trend in discovery rates. Discovery has been steadily falling behind consumption since the late 1970s. The years between 2005-2010 will be increasingly dogged by supply bottle-necks and shortfalls during which time oil prices will continue to steadily rise. At some point in the next few years oil and later gas, will move past peak production into the depletion side of the graph, a downward trend in physical worldwide supply depleting at a compounding 3% per year.

The initially optimistic and brave claims by NZ’s MED are beginning to look increasingly foolish in the face of continuing evidence to the contrary. The only way oil prices can fall to the levels predicted by the MED is if the supply increases, or the demand wanes. Neither of these two options currently appear on the foreseeable horizon and nor are they likely to. It is increasingly likely that oil will infact never drop below US$40bbl for any extended period of time.

World wide economic growth is wholly dependant upon increasing oil, gas and electricity consumption. Our current urban, suburban and industrial economies and infrastructures are virtually 100% dependant upon the ever-increasing consumption of these largely non-renewable resources. Furthermore the entire production, distribution and supply systems that support agriculture and food production including fertiliser, insecticide and pesticides are heavily oil and gas reliant.

Even so one of the key goals of the Labour Government, The National party, New Zealand First, and most of the minor parties is that of “sustainable economic development”. Of course this goal represents the objective desires of the entire OECD group of nations. It translates as the potential demand for non-renewable fossil fuels to be virtually unlimited. Given that the ability to recover fossil fuels is not unlimited there is every likelihood that increasing consumption on current demand outlooks beyond 2006-2010 will eventually lead to physical rationing and command based allocation as structural supply shortage and physical depletion becomes a reality.

Current economic indicators point progressively more towards a “hard landing”. Contrary to the IMF, world financial leaders, including New Zealand politicians and commentators the present oil price is having little if any effect on economic growth. Economic growth rates continue to soar in transitioning economies such as China and India. New Zealand and Australia are experiencing low unemployment and high GDP rates. Growth has been such in New Zealand that the Reserve Bank has successively raised interest rates six times. Any economic downturn would result in a decrease in oil demand growth. However contrary to the economic myth as oil prices have increased, demand growth has correspondingly increased!

According to Andrew McKillop an Energy Economist the current surge in oil prices actually contributes to economic growth. Higher oil prices are actually contributing to world wide economic growth and this is likely to continue at least until US$75bbl. It is only at extreme high prices that an economic crisis will emerge. Slowing current economic growth and hence demand growth for oil would involve double digit interest rate hikes across the OECD. Such extreme measures would put the brakes on economies that are currently barrelling towards the peak oil cliff. This would in turn dampen demand but maintain relatively stable high oil prices.

Once structural supply shortages begin to materialise, almost certainly by 2008, it is likely oil prices will quickly exceed US$100. Such prices will contribute to a severe economic crisis across the energy hungry OECD nations.

This approaching event is likely to result in several imaginable scenarios. Increasing geopolitical tension between the US the UK and allies and the Middle East with the possibility of further resource wars. Widespread collapse of monetary systems as oil-price-shock-induced inflation and economic collapse take hold. Rapidly growing unemployment, de-globalisation and the requirement for significant restructure of the energy hungry suburban way of life and all that that entails. Worse case scenarios involve a departure from current democratic systems of governance to a command structure involving rationing and strategic allocation of resources.

PowerLess NZ urge the Government and other political bodies to carefully consider this issue and act accordingly.

Steve McKinlay for Powerless NZ


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