As I got off the bus this evening I noticed that BP had raised their price for 91 octane petrol to 221.9 c a litre. From memory this is the highest price, in nominal terms, we’ve ever seen for petrol in New Zealand. While the most recent price spike seems to be more the result of political instability in the Middle East – and one might assume a price reduction if/when the instability falls away – it does seem as though higher prices than we’ve been used to in the past are here to stay.
On this note, there was a very interesting article by Bernard Hickey in the NZ Herald a couple of days ago – asking how prepared we are for much higher petrol prices in the future. While I don’t share Mr Hickey’s opinions on all matters, he’s a very thoughtful commentator.
The economic and political pain around the rise this year in petrol prices to around $2.20 a litre is intense, but many can’t imagine the prospect of it going much higher or haven’t thought too much about what a permanently higher petrol price means for them and the wider economy.
The assumption is the rise is temporary in the same way that high oil prices in 1975, 1979 and 2008 were temporary.
But what if this time is different and the price of oil and petrol is about to shift permanently higher?
Interestingly, I would put the 2008 price spike as the “odd one out”, compared to the price spikes in 1975, 1979 and now in 2011. The price shocks in the 1970s were caused by supply disruptions, while the current price rise is probably also caused – to some extent – by disruption to supplies in Libya and general unease about the possibility of further supply disruptions in the Middle East. The 2008 spike, on the other hand, seemed to be caused by rising demand and the inability for supplies to meet that demand – even though there were relatively few supply constraints.
However, in general it seems that today a relatively small disruption to oil supplies can result in a pretty big increase in oil prices. That’s something somewhat new – as it would seem there simply isn’t the supply capacity anywhere else to ‘pick up the slack’. Hickey continues, looking at the cause of this more recent phenomenon:
It’s worth looking at the trends in oil production, oil demand and in currencies to get a sense of where prices might head.
Some analysts believe the near record high oil prices are simply a result of financial market speculation and by a rush by many investors to hold ‘hard’ inflation proof assets rather than the US dollar, which is being printed at an alarming rate and at alarming interest rate of 0 per cent by the US Federal Reserve.
But in recent months the debate around peak oil has migrated from the greener fringes into the centre of economic and financial debate.
This week renowned hedge fund manager Jeremy Grantham issued a detailed paper predicting the world was at one of its “giant inflection points in human history” with an epic shift higher likely in commodity prices, led by oil as rising demand from China and India hit peak oil supply.
He is not the only one. HSBC, one of the world’s biggest banks, predicted oil would run out in 50 years, even if demand was flat at current levels.
I pointed out a week or so ago that the International Monetary Fund appears increasingly concerned about the larger-scale economic impacts of growing oil scarcity and its inevitable outcome: higher petrol prices.
As well as it seeming increasingly difficult for the oil producing nations to increase the amount of oil they pump (often necessary to offset oil fields like the North Sea that are well past their peak production), one of the major reasons for the long-term price increases seems to be the increasing demand for oil in developing nations like China and India. Hickey’s article picks up on this matter:
The trouble for the world and petrol consumers everywhere is that oil demand is not flat. It’s growing, largely because of China’s explosive and intensive demand for oil. India is not far behind.
Both nations are rapidly motorising their economies and are entering a phase of industrialisation where energy and oil usage becomes most intense.
As well as expanding their fleets of cars and trucks, they are building new motorways, buildings and other infrastructure that uses a lot of steel and concrete.
Both require large amounts of energy. Some of it will come from coal, but the end result is strong demand for oil.
For example, China is now the world’s largest car market. It is expected to add another 220 million cars to its fleet by 2020.
That would add 8 million barrels a day of demand at a time when the International Monetary Fund forecasts oil supply rising just 1 million barrels a day.
If one looks at the amount of oil pumped out of the ground over the past few years, we simply haven’t seen much of an increase.
Therefore it’s difficult to see how the increased demand from developing nations, plus our seeming inability to pump more oil out of the ground, will result in anything other than a significant increase in prices. This is picked up in Hickey’s article:
Some economists are forecasting an oil price well over US$200 a barrel within 5 years.
Even the US Energy Information Agency has forecast a rise to US$200 a barrel within 20 years.
Even if the New Zealand dollar was to rise to parity with the US dollar, a rise in the oil price to US$200 a barrel would push the petrol price towards $4 a litre, particularly once the deferred tax increases are included in 2012 and 2013.
A week or so ago I filled up my car with petrol, bought a couple of bottles of milk and a loaf of bread – the total came to over $100. The thought of doing the same thing in a few years time and having the total coming to around $200 is pretty scary.
How prepared are we for the impacts such a price spike might have? Did the issue even cross the mind of those preparing the 2012 Government Policy Statement for transport? I think not.
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I feel better for having gotten to several meetings by bike today. However I do live quite close to the city centre and most of my meetings are in there or in the fringe suburbs so I’m reasonbly lucky that way.
It seems extremely unlikely we’ll ever go back to the very cheap oil prices we saw just 5 or 10 years ago, unless China and India go to war and destroy each other, so you’d think the government would be considering what to do.
Unfortunately I couldn’t think of a worse way to prepare ourselves for the price rises than the National Party’s proposal to put nearly every dollar of transport funding into the Roads of National Significance. And cut public transport investment by 75% to pay for it. Wasn’t Darwin meant to deal with these sorts of people?
Q: How prepared is NZ society and economy?
A: Not prepared. At all.
Really, the National and Labour bozos will carry on steering their South Pacific Titanic into the Peak Oil iceberg while the band plays on. the fact that Peak Oil has been regarded, in “serious” media, financial and political circles, as a “conspiracy theory” is VERY revealing about the psychology of our society’s “leaders”. And the car-dependent mortgage belt. And the cow cockies. my question is, what percentage of median household expenditure will be used on petrol before the penny drops? is there any recent data on this?
Don’t worry…electric cars are the future…right?
It could be compared with the warnings that started sounding by some commentators about the sub prime lending market in the USA around 2 years before Lehman Brothers & the collapse of the finance industry. Many people ignored the warnings.
We have warnings occuring with PT in Auckland which could largely be attributed to higher petrol prices that the government should be hearing; increasing patronage, crowding, buses being brought back from retirement and a mayor elected on promises of The Inner City Rail Loop, Rail to the Airport, Rail to the North Shore. The price of petrol will likely rise far more rapidly that the time it might take to replace a significant portion of our vehicle fleet with newer hybrids or electrics. This will certainly lead to PT demand & empty motorways. There is no sign of the rise in petrol prices abating, the IMF is predicting oil will hit $150 this year. Instability will continue around the oil producing nations of the middle east & africa, tensions continue in Lybia, Syria, Iraq, Afganastan, etc. Demand for imports continues from USA, Japan, China, South Korea, India, Germany, Netherlands, France, Italy, Singapore, etc.
On the up side, electrification and the ordering of new trains is in progress, and politically this is past the point of being deferrable. We have coachbuilders in Christchurch that could supply more buses. Hillside may yet be involved with the new trains.
The tenders for the $2b Waterview Connection have yet to be let and for most of the other RONS, the bulk of construction is scheduled to start in 2012/13. Petrol prices may rise rapidly enough to bring this spending into question.
“The tenders for the $2b Waterview Connection have yet to be let and for most of the other RONS, the bulk of construction is scheduled to start in 2012/13. Petrol prices may rise rapidly enough to bring this spending into question.”
Unfortunately, I’m not sure what it would require for Waterview to be postponed – $300-400 barrels? – National won’t back down on that road any time soon.
Building Waterview, along with the work planned for the Northwestern, and the nearly complete SH16, push any need for a third ROAD harbour crossing back by decades…. even under the twisted logic of the petrol drinkers….And everything will have changed by the time the thing is underway let alone open. As we have most of the WRR I’m not against its completion I only wish it was going to be really smart and actually ‘multi-modal’… ie a busway on the Northwestern. But the next big spend in AK must be the CBDRL by any analysis….. without it there is no way get the full value out of the expensive new trains and work on the current network. To not build it is to half waste that investment.
To twisted Government logic, rising petrol prices mean there is even more reason to make the roading network more efficient.
The reason we are no longer at the top of the OECD wealth tables with Sweden and Australia accidently prpepared their economies to withstand the oil shocks by reducing their dependence on imported oil. Australia did it by developing their own oil and gas fields beginning in 1960 and reaching 80% domestic supply by 1985. Sweden did it by building one million highrise apartments next to railway stations and electrifying their commuter railways. In the 1950s and 60s we blew our wealth on the quarter-acre half-gallon pavlova paradise despite the obvious warnings from Suez crisis that it wasn’t really smart to lock the nation into an urban form creates dependence on imported oil. Servicing that type of land use pattern with buses instead of cars reduces oil dependency by such a small amount and at such a huge cost that it makes the Holiday Highway look like a fantastic investment. We need to learn our lesson from Sweden – go electric. Whether we do that with cars, buses or trains should be determined solely by which is cheapest and quickest and at the moment retrofitting existing road vehicles with existing electric motor, battery and wireless energy transfer equipment scores highest on those two key criterea, with the additional advantage that it’s the sort of thing we can do in this country without having to wait for some other country to invent it so that we can import it, which is the situation with “new” electric cars, hybrids, fuel cells and biofuels.
Kind of agree Kevin. The problem with the “technology will save us” argument is that NZ is at the end of a very long queue for technology like electric vehicles etc. The least overall cost to the economy is surely the expansion of public transport in our major cities. This potentially means families will get away with just having to upgrade one car, rather than two, three or four to more fuel efficient means.
The other issue with ‘technology wil save us’ is that we will soon run into problems with peak rare metals if the whole world tries to go electric at the same time.
Also will take along time to retool all the car plants to make electric vehicles, thus making them very expensive while this process is happening.
Then there is the issue of grid upgrades and transmission capacity.
So therefore travel will still be more expensive with electric vehicles, at least in the medium term.
Doesn’t matter if oil is more expensive, or electric is more expensive, still will affect our economy and lifestyles substantially.
So the only benefit of electric vehicles would be air quality.
I’m no expert on this though, maybe someone with better knowledge could correct/confirm my thoughts?
But also electricity really only works efficiently when reticulated to its enduser, storage in heavy mobile batteries is terribly inefficient and expensive. We have the electricity to use, mostly generated renewably and relatively cheaply. So it is pretty much criminal that we are not urgently using the Land Transport Fund to enable as much movement as is possible onto electric trains and trolley buses. We are still going to need hydrocarbons for agriculture, aviation and road distribution. Of course we should also be expanding and privileging rail and shipping freight where ever possible for the same reasons.
These are of course the COMPLETE OPPOSITE of the current government’s policy, which is not based on any reasonable understanding of the world, resource availability, and economics, but on ideology and fantasy. Government by whim and prejudice.
We are squandering a financial resource, the Land Transport Fund, that will be coming under increasing pressure in the near future, as prices at the pump will produce enormous pressure on governments to lower taxes to compensate for increasing resource cost.
Actually we have a major electricity crisis looming. We don’t actually have enough power generation to meet even a fraction of our transport energy needs. Not to mention major transmission issues. No one wants a powerline/powerplant in their back yard. Wind farms are hard to place because they scare the horses, hydro hurts the fish etc. Our share of renewable energy has been declining for years as we turn to coal and natural gas. Now people are suggesting electric cars to add to that demand? Madness.
Expensive oil = expensive electric cars, so it is no long term solution. Fuel cells are just batteries and are a waste of energy. My next car will be electric, but that is not an answer to our problems. We need to change our lifestyles to that of living in apartments next to mass transport. That is the only good option we have for the long term. That or free energy from cold fusion… I wont hold my breath on either. We instead will have to suffer through a massive crisis which will probably destroy our way of life entirely as society collapses under the strain of expensive oil.
A radical suggestion I read about option would be to cover our country in industrial hemp and extract oil/ethanol to become self sufficent for our fuel needs. We would reduce our imports and keep the money in the local economy, with the potential to export biodiesel/ethanol much like Brazil. All the while being carbon neutral for the most part. Unfortunately this will probably never happen either.
Ari you are panicking a little about the electricity supply. It is true that the bogus ‘free-market’ we have has not proven to be any good at developing forward security of supply [and why would it? what looks like sensible reserve to a nation looks like wasteful over-capacity to a profit focussed corporation], But there is in fact a lot of action with wind and geothermal right now and the drawdown of Akland’s rail is not going to be difficult. The real problem of wind generation in NZ is not the technical issue of intermitency, as it is a perfect fit with our huge hydro resources, but that wind generation by being always ‘on’ actually depresses the market price, and therefor makes capital investment less certain. This is tricky to understand but I think this is right. It is not a difficult investment because of the power generated in propotion to cost but rather that ‘too much’ wind power actively brings down spot prices as it can’t be stored. Except, as in NZ, it allows water to be kept in lakes. This is why you see the power companies trying to get a balance of wind and hydro.
we don’t all have to be able to walk to a train station, but spreading that network so more of us can, as well as extending its reach with connecting buses, is an urgent priority.
Also Ari, my view, and I’ve been following this for years, is that as the crunch happens [ie now] various plays will happen and are happening, the first is a considerable change in the consumption rate of oil in the US. The most wasteful users of oil products, partly this is recession but also substitution [eg wood pellet boilers are replacing oil boilers for space heating in North America big time now]. Where demand is flexible it will flex, especially in the US. This is what is so stupid about our transport policy, we aren’t pick the low fruit. With electricity the lowest fruit is still conservation, at least there is an insulation programme here, but there also needs to be an aggressive solar water programme too. This is proven technology, rolling panels out to every low income home in NZ would make for employment and save us from building at least one big power station. To some extent I believe the future in generation to be micro and local, so I do think human ingenuity will come into play [not as much as some overly optimistic people, as the laws of physics ain’t changing] a lot of small changes can make for a big change. But then you would need a government that understood that there is a problem, not one in willful denial.
Currently I’m a little sceptical of the sudden decline theory, I think we will quite quickly discover reasons not to drive so much as the price signals get louder and louder, all of the OECD will find ways to use less, harder perhaps for the Japanese who are already really efficient and now have less nuclear generation, and may never have more…. A simple change of thinking by many kiwis will of course deal with the relatively small congestion problem here without us building one more road.
“[and why would it? what looks like sensible reserve to a nation looks like wasteful over-capacity to a profit focussed corporation]” Recent changes to the electricity market have reduced this effect. Firstly the (previously $3000/MWh) cap on spot prices has been removed. This means that in a situation where supply runs tight it is possible to charge extremely high prices. A certain SOE did this during some Transpower maintenance and charged 200x normal. It is very profitable to be on the net seller side of this situation and very costly to be on the net buyer side. This will encourage all spot price consumers (i.e. to ensure they keep there own reserves either through hedge contracts or own generation assets). Secondly very heavy fees are imposed on electricity generators if they call for a savings campaign. This encourages retailers to have enough reserve capacity (either there own or brought through hedge contracts). I know at least one company that is building a power station that will see very little running time but will reduce finical losses in a time of constricted supply. The benefit of these actions is increased security of supply, the cost is likely increases in the cost of power to cover the costs imposed by the reserve assets.
“A radical suggestion I read about option would be to cover our country in industrial hemp and extract oil/ethanol to become self sufficent for our fuel needs” – we had to run the calcs on bio fuels in first year engineering. Basically we would require pretty much we would require around 3x the amount of land that is currently being used in forestry to be planted in feedstock. I concluded that this was very unlikely to be viable with current technology. I think biofules will only be a small part of our energy mix
Scott yes you’re right, and what a nightmare for us all, the stupid games they play in trying to force a market model onto a strategic resource, as witnessed by Genesis’ windfall profits due to planed maintenance. Sorry, but call me a communist [if you’re a simpleton]. Electricity supply in NZ is one area that I believe the state should have strategy, a plan, and control… it just isn’t like competing brands of yogurt….
My personal favourite way of dismissing privatisation of electricity is that “There’s no value-add to electrons. You can’t make your electrons better than my electrons. And if we put them all in a tub, good luck telling which electrons are which.”
When you cannot cost-effectively compete on the supply of a product (duplication of electrical supply lines), and the product is absolutely interchangeable no matter who creates it (your hydro electricity is just as much use as my geothermal electricity), a country of 4.5m people cannot justify pretending to have a competitive market in that product.
I actually quite like the artificial market that has been designed for the NZ electricity sector. The recent changes have made a significant impact on the operations of the generators. The governments goal was to increase security of supply has definitely been increased. It is interesting to see how generators hold large reserves in there hydro lakes after the changes. Of course this results with less efficient operations, and hence, generally a higher spot price.
For the electricity market to be really efficient we need real time metering and variable pricing to get a really efficient result. This is a so called smart grid.
At one of my past jobs I saw a cartoon about the ending of the NZ electricity board. It has stuck in my head. One of the politicians of the time was making a presentation and said “The problem with the NZ Electricity board is that while it works in practice, it doesn’t work in theory” That stuck in my head.
Our retail sector is definitely much less efficient than a government board. Look at all the money spent advertising that would not be required by a single government power board, think how much we could save by not needing to provide quality customer service.
Cameron, The problem with public transport that stops it from being a cost effective solution is that it’s energy consumption per passenger/km can be ten times worse than the private car in off-peak suburb-to-suburb trips, about the same for peak suburb-to-suburb and ten times better in peak suburb to cbd trips. In NZ cities where suburb-to-suburb is the dominant trip origin/destination (eg Te Atatu-Wiri or New Brighton-Hornby) switching essential trips to pt wont have much effect on net transport energy efficiency. The only way investing in public transport instead of private trasnport will result in using less imported energy is by making non-essential travel so unattractive that we stop doing it. Fuel price spikes also make non-essential travel unattractive in such a short timeframe that the effect is easily measured so we can be certain it will happen. Now, if it was possible to rapidly undo the land use policies of the last 75 years of town planning and subsidised suburban sprawl then we might get the spatial distribution of dwellings and workplaces that the Swedes found so successful in the 70s and then pt would become the least expensive of the technology will save us approaches.
Has the middle class right to live where we like become so sacred that it is now a heresy to suggest just leaving it up to people to solve high transport energy costs by living close to where they work or go to school just like we did in the 1960s.
I actually agree – I guess the point is at what point do we abandon building new roading capacity and fund alternatives instead?
The most interesting thing for me about fuel prices is what it does to our economy. Transport is a factor in how we move our populace into the future. Economic woes from higher fuel prices cuts to the heart of everything. Patrick states that he is sceptical of the sudden decline theory (of oil presumably). I share some of the scepticism. That’s only part of the picture though, it seems. A more realistic model may be the “corrugated plateau” where we have constrained supply and intermittent demand where one outstripping the other leads to cycles of recession and recovery and then recession. The main point, what is the price level of fuel that an economy can sustain and what is the price level that puts it into recession?
Through 2006-2007 we saw rising fuel prices that peaked (but for a relatively short period of time?) somewhere near $2.20 a litre in NZ. It was the stress of rising fuel prices across a period of time that started the recessionary effect, not the absolute peak price. The factor few predicted was that we also had a hugely unstable casino global economy that fell apart when certain key triggers were hit. Sub prime housing market problems in the US spilt out into the financial economy and the entire global economy, because of the way the world economy was bound together. This time around we do not have the same level of financial leveraging and bubbles, they were burst back in 2008. We do have other problems mind. I sort of get the feeling that we are somewhere in the cycle we were back in 2006-7. That being, fuel prices may not yet threaten the (so called) recovery but are placing a drag on it. If things continue as they are, even with fuel coming back a bit in price, the drag on global economies will cause a split somewhere. May not be as dramatic as the 2008 meltdown but will surely impact us somehow.
If we drop back into fuel based recession (versus the recent government GST hike induced recession) the corrugated plateau starts to look worringly accurate. I could however be totally wrong and driving electric cars to Auckland on the Waikato Expressway may actually be the future for humanity.
George I may have not stated my view on oil supply decline clearly. We have since 2005 been on the ‘bumpy plateau’ of global oil supply and the question is really about how soon and how sharply supply declines off this plateau. What matters is the feedback of higher oil prices into depressing the world economy and whether that leads to reinforcement of decline or, more positively, at great deal of effort put into conservation and substitution, and creative change, especially in OECD economies like ours. Of course we should be preparing our economy of this problem and there is nowhere better to start in NZ than with transport. So I do believe that our economy and our society is being and will be much further transformed by resource supply decline but through ignorance or by the desire to try to maintain ‘Business As Usual’ we are letting that happen to us and not taking intelligent steps to meet it. And this is tragic. Crazy that we still see the use of language like oil ‘shocks’ we should not be shocked ever again by rising oil prices, even the Herald is reporting peak oil now. http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10723973
Because oil is so vital to the world economy it is pretty clear that this feedback mechanism will lead to high volatility in oil price as recession causes demand to suddenly decline and price to drop, then build back up and so on. We are probably going to head off the plateau down an equally bumpy staircase. In this case the price signals are going to be mixed, unfortunately giving idiots like SJ who front organisations desperate to believe it’ll be BAU, moments to claim that it’s going to be ‘normal’ again soon….. Tragic again. We really need to be investing the NLTF, while its’s still there and worth something, in transformation of our transport sector not pissing it away on negative investments like more State Highways. The answer is not electric cars it’s trains, trains, trains… 180 degrees away from SJ’s planet. Tragic again.
Cameron, NZTA (or SJ) seems to be operating on the basis that whats happened over the last dozen years is merely a repeat of what happened in the dozen years after the first OPEC oil shock. Take that approach and you have to expect a repeat of the 1990s traffic growth at some point. Even with retrofitting of the existing most popular models with ecoboost engines or mild-hybrid type technologies that scenario will only come to pass if Treasury’s $89bbl price forecast for 2015 is correct. That forecast is based on futures prices the same as all their previous forecasts have been and they’ve got it right about two or three times since 1998. Adding 50% to Treasury’s forecast actually gets it about right for eight of their last dozen forecasts so I’m expecting a minimum price at $130 in 2015.
By then I will have finished my environmental managment degree and should be able to afford to live close to wherever I end up working. Current response to the price surge was limited by finances to downsizes to an older twice as fuel efficient car.
Kevyn, nice bit of analysis of the road industry’s prediction model, not too sharp are they? Likely on current global trends that for either of those prices to be close, either China and India will have to have stopped growing or the US will have to have pretty much ground to a halt….. neither of which would be pretty for NZ inc. Because if there is four more years of Chindia consumption growth plus the current decline in oil available for export, countries like ours in Importistan are going to be hurting big time as the prices we’ll have to pay are going to be way way higher. However neither is impossible or indeed unlikely, Chindia can’t go on growing forever, and the OECD can’t take real high oil prices, especially as dumb-arse governments like ours are furiously looking the other way singing ‘lalalala’….. sigh.
One interesting thing to consider is why the price of oil has dropped in the past week. A couple of good quotes from today’s article in the NZ Herald: http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10723918
And this:
One interesting thing is the level at which we start to see high oil prices generating demand destruction. US oil demand over the past few years has actually declined, as people are driving less and as the economic recession has led to less industrial activity etc. etc.
Understanding the impact of high petrol prices on economic activity is something that probably needs further analysis I think. One thing that might delay extremely high oil prices is that economies simply can’t stand them, and we inevitably see the easing off of economic activity as soon as oil prices hit a certain level – which obviously then reduces demand and eases prices back down again.
As I said above most likely that we’re headed for a lot of price volatility…. and that will be less helpful for good transit decisions
Find cheapest petrol prices in your NZ city and help to encourage competition to bring prices down
http://wellingtonpetrol.blogspot.com/
http://christchurchpetrol.blogspot.com/
http://aucklandpetrol.blogspot.com/