Parliamentary Research Paper: The next oil shock?
The next oil shock?
• 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-costs 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.