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Oil reserves budget blow out reason for quiet levy increase

Oil reserves budget blow out reason for a quiet levy increase

First published in Energy and Environment on August 8 2019.
A budget blow out in meeting NZ’s obligation to meet oil storage reserves was behind a small but relatively unpublicised rise in petrol levies.

Customs put a notice on its website and the industry was advised in late June that the Petroleum or Engine Fuel Monitoring Levy (PEFML) levy would increase on 1 July 2019 to 0.6 cents per litre (up from the existing rate of 0.3 cents per litre). There was no press release distributed by agencies or ministers about the increase, the reasons for it or why the normal gazetting rules around 28 days’ notice for a change in regulations were not followed. It also came into force the same day an already legislated for 3.5 cents per litre increase in the levy for the National Land Transport Fund, with media coverage of this not including the added 0.6 cents increase.

Cabinet papers from June show Energy and Resources Minister Megan Woods told colleagues the levy to meet the cost of international treaty obligations to hold 90 days of storage had been insufficient.

The PEFML account was forecast to go from a neutral position as 30 June 2018 to a deficit of approximately $9m by 30 June 2019. “If the levy rate remains unchanged, the deficit is estimated to grow to $63m over the next three years.”

This was due to a “multitude of factors” including the cost of oil and its storage.

The obligation to hold 90 days of oil stock is NZ’s contribution to global oil security, and was designed following the 1973 oil crisis. This obligation is part of a system managed by the International Energy Agency to mitigate the impact of oil supply shocks by providing a buffer of emergency oil stocks that can be collectively released onto the market, dampening oil price volatility.

Since 2007, NZ has maintained compliance with the Treaty by augmenting local stocks with ticket contracts with oil companies or traders in other IEA member countries. Tickets are an option, in return for an annual fee, to purchase specified quantities of stock at market prices in the event of an IEA-declared oil supply emergency.

The use of tickets is somewhat controversial in the sector as some doubt in a true oil shortage whether the supply would be available to honour the tickets, or whether they would be honoured.

The IEA has declared an ‘oil emergency’ three times since the 1970s, the last time in 2011 and NZ’s oil supply has never been placed under extreme stress other than through fluctuations in price.

The use of oil tickets has been reviewed a number of times and always concluded other options such as constructing strategic oil reserves or enforcing minimum stock levels on oil companies would be expensive and inefficient. Woods said any further review would likely come to the same conclusion.

Woods put forward three options, increasing the PEFM to cover the deficit, the Government covering the revenue gap and a third option called “international relations”. All information on this third option is redacted, but presumably it canvases the option of not meeting the obligations and the implications of this.

Woods said after reviewing the options she preferred increasing the rate from 0.2 to 0.5 cents per litre of fuel. “This 0.3 cent increase is estimated to recover enough revenue to cover the estimated deficit for 2018/19 and the estimated increased oil ticket costs over the next three years.”

A 0.3 cent per litre increase amounts to an additional 15 cents on a 50 litre tank of petrol or diesel. It was estimated this would cost the average driver an additional $5.24 per year, bringing the total cost of the levy to $10.48 per year. The paper did not cost out the rise from 0.2 cents to 0.6 cents.

The second option would cost the Crown about $15m, and would require further decisions on how to fund an expected deficit for 2018/19, and costs of about $20m per year after 1 July 2020.

The paper argued the costs of meeting the obligation should be met by oil users and not the wider taxpayer base. The paper said the levy increase should come into force from July 2019, which would require a waiver for the 28 day rule over the time regulations are made and when they can come into force.

“This will enable the timely purchase of oil tickets to ensure compliance with the Treaty.”

Cabinet minutes show ministers did not make a decision, but delegated this to the Prime Minister, Finance Minister and Megan Woods over the amount of the increase and when it should happen. There is no public paper trail about why the increase went from 0.03 cents to 0.06 cents instead of the recommended 0.05 cents, or why it was decided not to be more explicit about the levy increase.

The sensitivity over the issue shows ministerial concern over increasing petrol costs impact on households, businesses and political perceptions (even at such low levels).

This pressure will be even greater as the ministers considers lifting the price of carbon in the Emissions Trading Scheme, with many saying it is currently not sending a strong enough price signal to change behaviour.

First published in Energy and Environment on August 8 2019.

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