Brittle Thinking

This post is a follow on from Stu’s, here, on the transport minister’s extraordinary answers to questions in parliament concerning the wisdom of his extremely unbalanced transport spending programme.

You will recall that Mr Brownlee thinks that petrol price is irrelevant to decisions about transport investment. Or at least I think that’s what he means by:

“it’s clearly evident then that the pump price is an extremely irrational input into the consideration of strategic transport policy.”

And that somehow supermarket discount vouchers are the proof of this… or something? The use of the word irrational here is apt as it is increasingly becoming the right word to describe almost every utterance by Mr B on transport matters. Regardless, let’s try to look at what he seems to be saying.

Basically the idea is that the only rational transport policy is one that builds roads whatever the price of the fuel needed to be able to use those roads. He is not saying that he thinks petrol is going to get cheaper, or even stop getting more expensive, but rather that it doesn’t matter how expensive it gets- we will still always need more roads than we have now. And why, because people will always drive more and more no matter what it costs; there can never be enough roads. And as this government always repeats, our exports need more and more roads to be able to get to port on trucks. So much so that these special new roads, despite duplicating existing ones and existing rail lines are certain to greatly add to our nation’s wealth; they are of National Significance. No matter like fuel cost can apparently have any bearing on this. It is all rather faith-based after that, because the mechanism for these great outcomes are hard to identify beyond a few incremental efficiencies; like slightly lower fuel costs, exactly the work that would be undone by higher fuel price.

As petrol has been rising pretty much all this century we can probably test this price-doesn’t-matter theory of Mr Brownlee’s with some facts. Here is the average pump price adjusted for inflation from our friends at the MED [a little out of date – we’re well in the $2.20s/l now].

As has been observed we are not quite in the price territory at the pump that we were in the mid 1980s when we adjust for inflation, so we have yet to see unprecedented prices but we do seem to be heading that way. It is also interesting to note that that earlier peaks were initially because of a rise in crude price but persisted in NZ because of a crash in the NZD after the crude prices declined, as the chart below shows. The mid 80s was a time of the big retreat in price after the end of the OPEC embargo and the beginning of the long period of stable western supply from the North Sea, Mexico, and Alaskan fields, all now well in decline.

[The figures below are for continental US deliveries not the Tapis or Dubai crude that our supplies typically are- which are usually higher]

It is also obvious from the chart above that we are now in crude price territory that when it last happened was called a ‘shock’ [the red peak]. That price event, a clear discontinuity, was caused by a cartel of major producers, OPEC, withholding their supply. This time the ever rising price is caused by an inability of all the world’s producers going flat-out to meet demand. And this is despite unheard of sums of money being used to squeeze every last drop from difficult and inaccessible sites with ever trickier and more risky technology. The production from these new and expensive unconventional, ultra deepwater, and shale plays only means that the decline in older conventional fields is just being kept up with- for now. Supply/Demand on a knife edge: Price goes up. Economics 101.

Who knows what lies ahead but this is already a longer lasting and more serious discontinuity from the long term average than the OPEC shock. So at the very least there is a good risk of the crude price continuing to rise simply because of the increasing demand from the big developing nations; China, India, Brazil etc. and a continued inability to increase the rate of production simply because the accessible stuff is no longer to be found. Compounded by the fact that the marginal barrel is now so expensive to extract.

Going back to the first chart and we can see that the curve of the price rise this century at the pump in NZ is not nearly as steep as the crude price rise. This is principally because the NZD dollar has appreciated against the USD throughout this period [and because the taxation part of the price has not risen as fast]. So we have been shielded from much of the rise by our unusually high dollar.

OK so here’s a second level of risk; perhaps the crude price will stop rising, well even that won’t stop the prices at the pumps going up if the NZD settles down to its historical average of around 60 USc. Or even both could happen at once! Oil up and NZD down… $3-4 a litre anyone?

Chart below from ANZ RESEARCH here [thanks to Kent]

So the point here is that the RoNS by entrenching an already unbalanced [another way of saying inelastic] infrastructure is in fact a dangerously risky policy and the complete reverse of what Ken Shirley describes as ‘sensible’. It increases the nation’s exposure to both crude price risk and exchange rate risk. Its a radical and low odds gamble with our tax money [No Ken it is not yours]. 12 billion is not a trivial sum to gamble with.

Or does this not matter at all? No-one’s bothered by higher fuel prices; we don’t need any alternative to filling her up? We won’t change our habits; driving is too damn useful and enjoyable.

Ok so price at the pump has risen from the all time low in 1999 even if not as much as it has before or what might be ahead. Let’s now look to see if there have been any changes in driving through this period, you know; elasticity.

Here is a chart from the MoT. They aren’t so free with their info as MED, at least in terms of datasets easily available to download on their website, so this doesn’t cover as much time as I would like but still there is a lot to see.

*VKT=Vehicle Kilometres Travelled.

First we can see that for all this government’s framing of transport decisions as being about what the road freight lobby wants by far the greatest users of our roads are passenger cars. So especially when it comes to congestion it is all about light passenger vehicles. Secondly we can see that there is a clear levelling off of VKT in this sector despite the population growth throughout this period. Some elasticity then. It seems we hit a kind of a wall around 2005 and have been wobbling around on a kind of VKT plateau for the next six years. Important to note that this change precedes the global downturn significantly. In 2005 the price at the pump was only around $1.50 on our chart above and of course it’s now over 25-50% higher than that. I have no idea if there’s a magic price where we are likely be ‘encouraged’ to bend in an even more visible way but it may well be that we haven’t reached it yet.

It looks like light commercial vehicles have increased their travel a bit over the period, as have motorcycles. Of course we know that in Auckland over this period PT use has grown consistently. A rise in PT and more use of lighter vehicles is a rational response to rising fuel costs and something I expect to continue. And, as described here this offers some exciting opportunities for improving our cities and our lives, as well as our efficiency.

Is this not elasticity? 3m to 11m in around 8 years. Even the plateau shows elasticity as the growth hits a limit it slows, and the limit here is the capacity of the network, critically limited by a lack of rolling stock and bottleneck and deadend at Britomart. Elasticity enabled by improvements to service and amenity. All PT use in Auckland is increasing of course; 50m to 70m in the last six years, in direct contradistinction to all the driving stats which are flat at best.

But there is way in which what Brownlee says is true and that is we have built a system that simply does not allow much elasticity in transport mode choice, because for most people there are few options if any, that are as complete, as well funded, and therefore viable as driving. So therefore we are mostly all forced to cut almost every other item of spending before we stop buying petrol at any price. At what point does that become impossible? At different times for different households and businesses I guess. Essentially though I am arguing here that there is an inelasticity of opportunity not simply a cheerfulness about paying any price at all for petrol, ‘cos we just love our cars so much!’ as the minister implies.

But this only goes to highlight the great risk of a policy that further reinforces this inflexibility; what is another word for the inelastic? Brittle.

We have an extremely brittle infrastructure set that is highly vulnerable to exactly the sort of price escalations we are seeing. And what is more likely to snap is outside of transport statistics; peoples lives and livelihoods are what will snap. For example families not being able to pay for other essentials including food because they have to buy petrol to work. As they say in the US: ‘No transit; no job’.

So by all means build huge highways to lift the profitability of big trucking and to smooth the way for Omaha bach owners, but expect to keep having to pick up the tab at the other end of society, in social welfare, unemployment, housing costs, and all the other deficits of increased poverty and inequality. As is usually the case when user pays is applied to public spending it is regressive; it reinforces advantage and increases exclusion.

So in summary:

1. people do seem to be trying to bend away from dependence on the increasing costs of driving where they can, but most have little option.

2. we may not have yet reached the breaking price point but it won’t be pretty if we do, and I’m sure it is already contributing to real hardship now.

3. having identified an inelasticity wouldn’t a wise government seek to increase options rather than be so determined to reinforce this vulnerability in our nation’s infrastructure and therefore the brittleness of society’s fabric?

Or to put it in terms that the government might understand, with its strange conflation of its work with that of running a business: The RoNS are a classic management mistake: a bold investment in last century’s successful line, which is now mature and certainly needs maintaining and some improving but is no longer growing, and missing the opportunity to invest in the new growth products ‘moving forward‘.

We can only build for the future.

Adendum: Comparison with the US: http://www.advisorperspectives.com/dshort/updates/DOT-Miles-Driven.php

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