Need New Zealand Fear a New Oil Shock? Richard Kennaway Discusses the Prospects of a New Oil Crisis and the Implications for New Zealand
Kennaway, Richard, New Zealand International Review
It is now just on 30 years since the first oil shock of 1973. That shock came at a time when New Zealand was particularly vulnerable to its effects. It had a huge impact on New Zealand's energy policies and on the economy generally especially in the period from 1975-79. It also had a major continuing impact on New Zealand's external relations and foreign policy.
For various reasons including changes in both the domestic environment and in the international environment, much of this impact was lost in the 1980s and 1990s. In particular many of the changes in energy policies were reversed, while the impacts on foreign policy and on the economy were in some respect longer lasting. Towards the end of the 1990s, however, and now into the new century, there are some indications that the conditions that led to the oil crises of the 1970s are starting to be recreated.
In the last quarter of 1973 the members of OAPEC (Organisation of Arab Petroleum Exporting Countries) took the decision in the context of the Yom Kippur War to quadruple the price of oil from $US3 to nearly $US12 a barrel. They also decided to curtail supply by 5 per cent a month until there was some significant progress in their dispute with Israel. In 1979 the price reached nearly $US30 or $70 a barrel in 1998 US dollar terms.
The implications for New Zealand came at a time when the country was particularly vulnerable. New Zealand energy consumption had been growing very fast over several decades and primary energy availability overall had more than tripled in 30 years from 109 PJ in 1944 to 332 PJ in 1974. There was a strong expectation that this rapid growth would continue into an indefinite future. Indeed, the electricity planners were expecting that there would be a further quadrupling in electricity production by the end of the century. At the same time there had been a major shift in the relative share of energy sources from 1944, when coal accounted for 66 per cent of primary energy availability, to the situation by 1974 when the share of coal had dropped to just 18 per cent, oil had increased sharply to 61 per cent plus another 4 per cent for natural gas, and hydro-electricity and other renewables had also increased from 10 to 21 per cent. (1)
This shift in energy sources had meant a huge fall in energy self-sufficiency. In 1944 New Zealand was 73 per cent self-sufficient in primary energy availability, with just 27 per cent being accounted for by imported oil and no local oil or gas production. By 1974 self-sufficiency had fallen to 42 per cent with imported oil accounting for 58 per cent. (2) It is true that these self-sufficiency ratios could have been expected in any case to rise since the Maui gas field (also with some oil condensate) had been discovered in 1968, and the `take or pay' agreement had been signed by Bob Tizard on behalf of the Labour government just a few months before the onset of the 1973 oil crisis.
The first oil shock of 1973 had huge implications for New Zealand's domestic policy and economy and also for foreign policy, and many of these implications were compounded by the second oil shock of 1978-79.
The implications for domestic policy, and for energy policy in particular, were in some cases relatively short-lived. With benefit of hindsight it is somewhat ironic that they reached their peak in a period of Muldoon-led National government and were associated in particular with the tenure of George Gair as Minister of Energy (until he was replaced by Bill Birch in 1978). Among the most significant changes in energy policy was a noticeable increase in concern for resource and environmental sustainability and conservation, exemplified by the introduction of car-less days and government loans for solar water heating. There was also an increased emphasis on planning for the energy sector as a whole. As we shall see, many of these changes turned out to be relatively short lived.
The impact on the New Zealand economy overall and also on its foreign policy and external relations, however, were in many ways longer lasting. The main overall impact on the economy was on the balance of payments, which changed from a surplus in the early 1970s to a substantial deficit later in the decade. The crisis thus inaugurated the long process of external borrowing and growing foreign debts that hampered the New Zealand economy so greatly for much of the 1980s and 1990s.
As regards external relations, one major impact of the crises was a widening in the ambit of foreign policy. Traditionally the main emphasis had been on defence and security relations, and economic and environmental aspects had been largely taken for granted. This had already changed significantly in the 1960s as the prospects of Britain joining the European Community had awakened the need for some active economic diplomacy to counter that threat. The fall out from the French atmospheric tests in the Pacific from 1966 to 1974 and also the holding of the first United Nations Conference on the Human Environment in 1972 had foreshadowed the need to develop a new area of environmental diplomacy. But the oil crises of the 1970s brought home sharply to New Zealand that trade was a two-way process and economic diplomacy needed to be concerned not only with the development of export markets but also with the maintenance of essential imports.
The other major impact in regard to New Zealand's foreign policy was a growing realisation of the implications of the Middle East as a potential export market, as a source of supply and also as an important focus for our political interests.
In the early 1970s, prior to 1973, the Middle East was important as a source of supply, accounting for about 80 per cent of New Zealand's oil imports. But there was very little contact in any other way. New Zealand's exports to the region were tiny, amounting to just $8.2 million in 1972-73 (0.5 per cent of its world exports). (3) There was no New Zealand diplomatic representation in the Middle East or resident Middle East representation in Wellington. The only mention of the Middle East in the Ministry of Foreign Affairs' 1972-73 annual report was a brief reference to `terrorist outrages' by the Palestinians.
All this changed rapidly after October 1973. While the share of oil imports coming from the Middle East fell, their value rose sharply. New Zealand's exports to the region rose rapidly to $103 million by 1977 and over $400 million by 1980. (4) There was a flurry of diplomatic activity. There were several New Zealand ministerial visits to the Middle East between 1974 and 1977. In return the Shah of Iran and his consort visited New Zealand in 1974. New Zealand embassies were opened in Tehran and Baghdad in 1975 and Egyptian (and Israeli) embassies were opened in Wellington in the same year. New Zealand started to take the case of the Palestinians at the United Nations much more seriously. One could hardly have a clearer example of trade considerations having a dramatic impact on policy.
There was in many respects a reaction in the 1980s and 1990s against some of the initial responses to the oil crises in the 1970s. This reaction affected domestic policies more than external policies. Some of the domestic policies were sharply reversed, first by Sir Robert Muldoon and later by Sir Roger Douglas and Ruth Richardson and their successors. The rate of growth in the energy sector was again sharply increased. Energy planning for the sector as a whole was largely abandoned and the greater emphasis on resource and environmental sustainability was again reduced. A large part of the motivation for these changes came from domestic political considerations.
There were still some major differences from the domestic situation prior to 1973. The main one was that, as the Maui gas came on stream and the field was rapidly developed under the provisions of the 1973 `take or pay' agreement, New Zealand's self-sufficiency in primary energy availability was now starting to increase quite markedly. By the late 1980s, for example, natural gas largely from the Maui field accounted for 33 per cent of total primary energy (as against just 4 per cent in 1974) and domestically produced oil for another 12 per cent (as against 2 per cent in 1974). This meant that, taking into account the relatively stable contribution of hydroelectricity and other renewables, overall energy self-sufficiency had increased from 39 per cent to a peak of 85 per cent in 1988, a figure even surpassing the 73 per cent self-sufficiency back in 1944, when New Zealand had a largely coal-based economy. (5) It was, of course, in some ways ironic that New Zealand should have achieved such a high degree of self-sufficiency just at a time when international oil prices were low and product was readily available.
Another difference from the situation prior to 1973 was that, certainly by the 1990s, the environmental and resource aspects of policy could no longer be ignored. This was partly because these aspects were now well established on the international political agenda, especially following the Rio de Janeiro Earth Summit of 1992 and the signature of the Framework Conventions on Climate Change and Biodiversity. The other influence was, of course, the passing of the Resource Management Act of 1991, even though this had been somewhat watered down by the new National government. Despite these considerations, primary energy availability continued to increase sharply from 332 PJ in 1974 to 597 PJ by 1989 and 813 PJ by 2000. (6)
In the area of foreign policy, too, some of the initial impacts were reversed, but some were also maintained. Many of the concerns about the price and availability of imported oil were allayed through most of the 1980s and 1990s. After a high peak was reached in 1979-80 the international price of oil fell quite sharply, especially after 1985, and remained at relatively low levels through most of the 1990s (see Figure 1). Indeed, by 1998 it had sunk to a level in real terms not seen since the early 1970s.
[FIGURE 1 OMITTED]
Similarly with the Middle East, again there was some reversal of the greatly increased emphasis placed on the relations with the region. For example, New Zealand's exports to the Middle East, which had grown so dramatically from just $8.2 million (0.5 per cent total exports) in 1972-73 to $437.9 (7.4 per cent) in 1983-84, failed to show further dramatic increases and in some cases experienced considerable falls, at any rate in relative terms. By 1989-90 they were worth $555.2 million or just 3.6 per cent of total exports, and by 1998-99 they were $648 million (2.9 per cent). (7) In particular, exports to Iran fell off sharply following the economic and trading difficulties experienced by that country in the Iran-Iraq War. So by the late 1990s Iran was just the fourth largest market for New Zealand exports to the Middle East after Saudi Arabia, the UAE and Egypt.
As regards imports, the source of New Zealand oil imports has fluctuated very considerably from year to year. But by any standards the Middle East has remained a substantial supplier. In 1998 for example about $ 521 million (38.1 per cent by value of New Zealand's `mineral fuel' imports) came directly from the Middle East, another $543 million (39.7 per cent) came from Australia (much of this also apparently being sourced originally from the Middle East) and the remaining 22 per cent from other sources. (8)
Over the past two years there have been some signs that the international situation is changing and that New Zealand may again need to be more concerned with problems arising in the international oil market. At the international level there were some significant oil price rises (see Figures 1 and 2). From March 1999 to November 2001 the crude oil price roughly tripled from around $US10 a barrel to over $US30 a barrel and then settled for most of 2001 at around $US25 a barrel.
[FIGURE 2 OMITTED]
The price rises were the more worrying since it did appear that the shares of the Middle East/North Africa and of OPEC in world production and trade were also starting to rise again quite substantially. In 2000, for example, their respective shares in world production rose to 36 and 41 per cent and the share of Middle East/North Africa in world exports rose to just on 51 per cent. (9) It seemed inevitable that these percentages would continue to rise because of the huge differences in the Reserves/Production (R/P) ratios between these regions and the rest of the world. For example, at the end of 2000 the R/P ratio for the Middle East was estimated at 83.2 and for Libya (the major producer in North Africa) 55.2, while the ratio for the former Soviet Union was 22.7, the United States 10.4, and the United Kingdom just 5.3. The only other countries outside the Middle East/ North Africa with a R/P ratio over 50 were Venezuela and Azerbaijan. (10) The prospects for development of Caspian oil may well be great, but they are hardly likely to reduce the political difficulties over the extraction and supply of oil, as current American policy in the region bears witness.
Just at a time when it appears that the price if not the availability of oil in the international market might be about to present new difficulties, the availability of local oil and natural gas has been starting to decline. The main factor is, of course, the depletion of the Maui gas field, which remains by far the largest source of local oil and gas supplies. The latest reports are that Maui gas is likely to be commercially exhausted by 2007 or two years earlier than formerly anticipated. The effects of the declining availability have already been evident in the statistics. In the period from 1988-2000, for example, the share of local gas in New Zealand primary energy supply fell from 31 to 29 per cent and the share of local oil (net) more substantially from 11 to 3 per cent. (11) Again, it seems ironic that local supplies are declining just at a time when supplies on the international market are becoming more questionable.
Now, of course, there have been some recent sensational events whose medium-term impact is at present hard to foresee. At first sight one might have expected that the uncertainty and renewed hostilities in the Middle East region consequent upon the tragic events of 11 September 2001 would have the effect of substantially raising the price of oil. In fact, the short-term impact has been to the contrary (see Figure 2). The oil price rises of the previous 18 months have been largely reversed, and prices have fallen from around $US25 to around $US18 for most of the last few months.
It appears that the dampening effects on the prospects for a revival of the world's economy and for increased demand for oil have outweighed the greater doubts about political stability in the region. To that extent the New Zealand economy and consumer have gained a respite from the tendencies of the previous 18 months. It would, however, be extremely rash to assume that that balance of effects will be maintained.
What then would be the effects for New Zealand if the price tendencies that were evident through most of 2000 and 2001 should be resumed and if the availability of oil from the troubled regions of the world should again come into question? Despite the fall-off in the availability of Maul gas, it does seem that in a number of respects there are some positive factors in both the international and domestic situations, and overall that New Zealand is much better placed to face such a prospect than was the case in 1973.
At the global level there is still plenty of oil available. The R/P ratio is close to 40 years, which is rather higher than it was in 1973. Even though the share of the Middle East/ North Africa in world production and trade has been rising recently, it is still lower than in 1973, accounting in 1999 for 36 per cent of world production and 51 per cent of world exports as against 43 and 68 per cent respectively in 1973. The West still has the benefit of fundamentally co-operative regimes in some of the major Middle East oil producing countries, notably Saudi Arabia and Kuwait, which between them account for 50 per cent of total Middle East oil production.
Furthermore, at the international level there is now much more awareness of the prospects and possibilities for alternative non-fossil energy sources than in the 1970s. Many of the major multi-national companies in both the motor vehicle and oil industries are now engaged in projects going beyond the internal combustion engine and its dependence on fossil fuels. Companies like Toyota and General Motors are reported as developing new types of engines and of `hybrid vehicles' that use fuel cells and hydrogen as a fuel rather than fossil fuels. Shell is reported to have established a Renewables Division as one of the five or six major divisions of the company. BPAmoco has undertaken a marketing campaign re-branding the BP logo from British Petroleum to Beyond Petroleum. Of course, it is hard for an outsider to know how many of these reported developments are Greenwash and how many represent a significant commitment to reduce dependence on fossil fuels.
As regards New Zealand's situation, the country is still much better placed in energy self-sufficiency than in the early 1970s. As noted above, New Zealand's oil sufficiency in 1999 was 18 per cent and overall self-sufficiency 65 per cent as against 3 per cent and 39 per cent respectively in 1974. Furthermore, despite the rapid depletion of the Maui gas field, it seems that the prospects for maintaining self-sufficiency are reasonably good in the short to medium term.
Second, at the New Zealand level a great deal of research work has been undertaken on alternative fuels, especially by the Liquid Fuels Trust Board in the 1980s, when the price of oil was still expected to rise to dizzy heights by the end of the decade. A full investigation was made into New Zealand's lignite and sub-bituminous coal reserves. Research was also conducted on a range of alternative fuel sources including methanol and ethanol from biomass, Chatham Island peat and tallow ester. It is to be hoped that some institutional memory remains of this research despite all the organisational changes of the past 15 years.
Third, since November 1999 New Zealand has had a government that is more committed to considering a wide range of possibilities in the energy field and to maintaining resource and conservation values. In September 2001, for example, the government released a National Energy Efficiency and Conservation Strategy. This strategy established the targets of a 20 per cent improvement in energy efficiency and an increase of between 19 and 42 per cent in energy from renewable sources by 2012. The minister confirmed that the strategy `will require adopting more renewable sources of energy -- such as solar, wind and biomass -- which New Zealand has in abundance but has been slow to utilise'. (12)
Overall, then, it would appear that the prospects for a new oil crisis are not particularly high. As noted above, there have already been some substantial price rises since early 1999. The chances of a further substantial rise, above the levels maintained for much of 2001, are not particularly great; nor does there appear to be much chance of a major restriction of supply.
Even if these contingencies should occur, the impact on New Zealand is unlikely to be as dramatic as in the 1970s. Economically New Zealand is now better prepared with a lower degree of dependence on oil overall, a higher degree of energy self-sufficiency and a broader range of energy alternatives.
Politically, too, there is unlikely to be such a major impact. We have become well accustomed to a gradual widening of the ambit of foreign policy to cover a range of economic and environmental issues. Even though the Middle East has faded as a major export market to just 2.9 per cent of New Zealand total exports in 1999, we have experienced an extensive process of trade diversification overall and also diversification in our political contacts. We have become much more accustomed than in 1973 to the need for political sensitivity over a whole range of contacts, including but not limited to the Middle East.
Recent developments in the energy field do raise some concerns about a matter that cannot be ignored in New Zealand's domestic and external policies. Fortunately in some respects we are better prepared today than we were in the 1970s for whatever shocks may arise in the near to medium term.
In the 1970s New Zealand was confronted by a series of oil crises, which profoundly affected its economy and had a major impact on its foreign policy. Considerable efforts were made to overcome the adverse affects of these developments, but during the 1980s and 1990s many of the short-term implications were reversed, especially in the field of energy policy. In recent years, however, a number of developments have led to fears that a new oil crisis is possible. New Zealand is, however, better placed to deal with such a situation than it was in the 1970s.
(1.) New Zealand Official Yearbook, 1983, p.535.
(3.) R. Macintyre, `New Zealand and the Middle East', in R. Kennaway and J. Henderson (eds), Beyond New Zealand II (Auckland, 1991).
(5.) New Zealand Official Yearbook, 2000, p.440.
(6.) Ministry of Economic Development, New Zealand Energy Data File, Jul 2001, p.8. See also fn 1.
(7.) Macintyre, op.cit.; New Zealand Official Yearbook, 2000, p. 527.
(8.) New Zealand Official Yearbook, 2000, p.525.
(9.) BP Statistical Review of World Energy, Jun 2001, pp.7,18.
(10.) Ibid., p.4
(11.) Ministry of Economic Development, op.cit., p.8.
(12.) Ministry of Energy, Media Statement, 27 Sep 2001.
Richard Kennaway is a member of the University of Canterbury's Department of Political Science.…
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: Need New Zealand Fear a New Oil Shock? Richard Kennaway Discusses the Prospects of a New Oil Crisis and the Implications for New Zealand. Contributors: Kennaway, Richard - Author. Journal title: New Zealand International Review. Volume: 27. Issue: 2 Publication date: March-April 2002. Page number: 25+. © 1999 New Zealand Institute of International Affairs. COPYRIGHT 2002 Gale Group.