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Page added on October 14, 2010
New Zealand Parliament peak oil report: The next oil shock?
Introduction
The US Department of Energy (DoE) calls oil “the lifeblood of modern civilisation”. Around 86 million barrels (13.7 billion litres) are consumed each day. Oil supplies 37 percent of the world’s energy demand, including 40 percent of New Zealand’s energy demand. It powers nearly all of the world’s transportation, without which production and trade would grind to a halt. Studies have shown that GDP growth is very strongly related to increased use of oil. (Ed. note: footnote in original).
When the price of oil increases, the cost of nearly all economic activity rises. This often induces recessions. High oil prices have been associated with three major periods of economic recession in the past 40 years, including the lead-up to the recent global economic crisis.
The world’s oil production capacity may not be sufficient to match growing demand in coming years. The potential for short-falls arises from geological, infrastructure, and political/economic constraints limiting the ability of world oil production capacity to grow while demand continues to rise. If oil supply cannot meet demand a price spike may be triggered, with major detrimental effects on economies, especially those heavily dependent on oil imports like New Zealand.
New Zealand’s oil potential and domestic implications of oil shocks
…New Zealand’s annual oil production in 2008 and 2009 was 55,000 barrels per day. Consumption was 148,000 barrels per day. Proven reserves total 189 million barrels.
There are thought to be potentially large, unfound oil reserves. A 2009 study by the Institute of Geological and Nuclear Sciences estimates that there is a 90 percent chance that reserves totalling 1.9 billion barrels of oil remain in New Zealand and a 50 percent chance there are 6.5 billion barrels. Most of these estimated undiscovered reserves are in difficult to access deposits under deep water in the Great South Basin and the Deepwater Taranaki basin.
New Zealand’s geographical position is a serious challenge to increasing oil production. A report by Lincoln University’s Centre for Land, Environment and People (LEaP) states:
“New Zealand’s isolation from the rest of the world acts as a major constraint in the attraction of international explorers. Exploration and mining companies operating in New Zealand have to bear the cost of getting equipment to and from New Zealand as well as shipping crude oil to international refineries.”
In addition to petroleum oil reserves, New Zealand has a vast resource of lignite coal, which can be converted into petroleum products. Solid Energy and several other companies are proposing lignite to liquids plants or underground coal gasification projects to create oil products. However, the IEA estimates lignite to liquids production costs are US$60-$110 per barrel, so high oil prices are needed to make lignite to liquids viable.
If New Zealand can increase its oil production, it could be a major economic boon in the long-run. The Ministry of Economic Development projects oil exports to reach $30 billion per annum by 2025. However, becoming self-sufficient would require a massive increase in New Zealand’s oil production and refining capacity, and, as with any region, New Zealand would not be able to sustain high production rates as reserves were depleted.
No large-scale coal to liquids projects or commercial production wells of, as yet undiscovered, conventional oil reserves are planned to come online within the next five years.
In the medium term, New Zealand will remain heavily dependent on imported oil. Domestic production at any level cannot insulate New Zealand from global short-falls or price rises. New Zealand pays the world price for oil, whether that oil is produced domestically or not because oil producers will not sell their product in New Zealand if they can get a higher price overseas.
New Zealand would be affected by oil supply crunches both directly and indirectly via the effect on trading partners.
Direct effects include higher transport costs and an increased balance of payments deficit due to the increased cost of importing oil. Transport costs constitute a significant expense for exporters, especially exporters of bulk goods like timber, meat, and dairy.
Indirect effects would be felt through lower consumer demand in the markets for New Zealand’s export goods, leading to lower prices.
The LEaP report cited above details the economic consequences of oil shocks on the $9 billion a year international tourism industry, which it states is “highly dependent on affordable oil”:
- “Tourism Businesses: face an increase in their operating costs due to higher oil prices and reduced demand in response to oil shocks and price increases.
- Destinations and communities: face reduced visitation resulting in compromised regional development.
- Tourists: reduced experience due to higher proportion of holiday budget being spent on transportation.
- Government: reduced income from tourism as a result of reduced arrivals and reduced expenditure by tourists.”
As a country that is reliant on oil imports and heavily dependent on cheap oil for its major sources of income, New Zealand is highly exposed to oil shocks. Domestic oil production is insufficient to meet New Zealand’s oil needs. Equally, increasing domestic oil production would not protect New Zealand from either the direct or indirect effects of price spikes caused by global supply crunches.
Conclusion
The global economy is heavily dependent on affordable oil.
It may seem counter-intuitive that, when oil reserves and production capacity are higher than ever, the future of the oil market appears bleak. The problem is that production capacity is not expected to keep up with demand. That fact leads to severe economic consequences.
To replace the declining production from existing oil wells and increase production, oil companies are forced to extract oil in more difficult and expensive conditions (deep-water, oil sands, lignite to liquids) from smaller, less favourable reserves. The marginal (price-setting) barrel of oil costs around US$75-$85 a barrel to produce. This will continue to rise with higher demand and exhaustion of reserves.
Although there remain large reserves of oil which can be extracted, the world’s daily capacity to extract oil cannot keep increasing indefinitely. A point will be reached where it is not economically and physically feasible to replace the declining production from existing wells and add new production fast enough for total production capacity to increase. Projections from the IEA and other groups have this occurring, at least temporarily, as soon as 2012.
The difference between the global capacity to produce oil and global demand is the supply buffer. When the supply buffer is large, oil prices will be low. When the supply buffer shrinks – due to demand rising faster than production capacity or production capacity falling – prices will rise as markets add in the risk that supply will not be available to meet demand at any given point in time.
When a supply crunch forces oil prices beyond a certain point, the cost of oil forces consumers and businesses to cut other spending, inducing a recession. The recession destroys demand for oil, allowing prices to drop. 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.
4 Comments on "New Zealand Parliament peak oil report: The next oil shock?"
Simon Wigzell on Fri, 15th Oct 2010 8:47 am
I envy New Zealand it’s geography and its geology. You have all those thermal sites that you can turn into generating plants. You have a relatively small population and a diverse landscape and temperate climate. You will be well suited to “go it alone” and be a large scale, self sufficient in food and energy community. And you are far enough away from the rest of the world that they will leave you alone. And you are far enough south not to be devestated by climate change. If there was one country I would most like to be in 50 years from now it would be New Zealand.
p.s. I’m Canadian. My country would do OK too if not for our giant and ever hungry neighbour to the south who will no doubt just take what he needs when he needs it.
Sufiy on Sat, 16th Oct 2010 9:28 pm
“This year we have quite a few warnings already about Peak Oil from main stream economists, universities, US military and government agencies all around the world. The question now is not if, but when is it going to happen.
We have time still, but it is running out very fast. After a certain point in the oil price increase the only concern we are going to have about Electric Cars will be their availibility on a mass scale to preserve our way of life and freedom.
“We expect consumers to shift – on a mass scale – from CVs to EVs, with proof that technology is viable and can provide the same utility but with a Better Experience. The Emotional Drive will be the driving force of this switch of consumer preferences.”
“China to Invest Billions in Electric and Hybrid Cars. Nothing will be left to a chance in this methodical execution of state-level plan in China: transformation of the country’s transportation system into the base of 21st century clean tech industrial revolution to further power its rise. China has already surpassed Japan as a second largest economy in the world and it is the largest auto market now.”
Reports on Peak Oil
http://sufiy.blogspot.com/2010/10/peak-oil-is-theory-way-gravity-is.html
Edward on Sun, 17th Oct 2010 6:28 am
Simon: It’s not quite like that. Most of our geothermal sites are tapped already. Several sites are running at slightly reduced levels to avoid over-tapping the fields. However, given our existing 60% hydro, and capacity for another 15% of geothermal, plus the projected 10% wind power, it’s entirely plausible we could have a 100% renewable energy supply.
Given that, and our ridiculously productive farming, New Zealand could manage a long term self-supporting country when peak oil hits hard. It’s one of the reasons I returned here.
KenZ300 on Mon, 18th Oct 2010 5:43 am
Limited, expensive oil will transform economies.
Will we transition to alternatives fast enough or will we be in for a slow, painful, and expensive transition ?