Further thoughts on the oil price situation and NZ

A somewhat depressing article from the Wall Street Journal on oil supply.

Now this is not because of ‘peak oil’ so much as ‘peak ability to supply’ through lack of investment in production capability, restrictions on areas for exploration and political issues of various kinds.

The world’s premier energy monitor is preparing a sharp downward revision of its oil-supply forecast, a shift that reflects deepening pessimism over whether oil companies can keep abreast of booming demand.

The Paris-based International Energy Agency is in the middle of its first attempt to comprehensively assess the condition of the world’s top 400 oil fields. Its findings won’t be released until November, but the bottom line is already clear: Future crude supplies could be far tighter than previously though

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Elsewhere the article notes:-

“This is very important, because the IEA is treated as the world’s only serious independent guardian of energy data and forecasts,” says Edward Morse, chief energy economist at Lehman Brothers. Examining the state of the world’s big oil fields could prod their owners into unaccustomed transparency, he says.

Some critics of the IEA, while praising its new study, say a revision in the agency’s long-term forecasting is long overdue. The agency has failed to anticipate many of the big energy developments in recent years, such as the surge in Chinese demand in 2004 and this year’s skyrocketing prices. “The IEA is always conflicted by political pressures,” says Chris Skrebowski, a London-based oil analyst who keeps his own database on big petroleum projects and is pessimistic about supply. “In this case I think they want to make as incontrovertible as possible the fact that we are facing a real crunch.”

And:-

The IEA study will try to answer one question that bedevils those trying to forecast future prices and the supply-demand balance: How rapidly are the world’s top fields declining? The rates at which their production dwindles over time are a much-debated barometer of the health of the world’s oil patch.

The article concludes:-

Some analysts, however, contend that scarcity isn’t the issue — only access to reserves and investment in tapping them. “We know there is plenty of oil and gas resource in the world,” says Pete Stark, vice president for industry relations at IHS. He says the difficulties of supply aren’t buried in oil fields, but are “above ground.”

Mr. Morse at Lehman Brothers notes that there are plenty of questions about supply yet to be answered. “However confident the IEA may be about the data it has, they know nothing about the resources we’ve yet to discover in the deep waters or in the arctic,” he says.

This article is at variance with the source for another recent post by Adam on the same issue. It illustrates the significant variation between analysts, commentators etc as to causes of the recent rise in oil prices.

Some commentators and politicians blame speculators, others think lack of investment in production and politics are to blame.

If the more gloomy forecasts are correct that oil prices are likely to stay high for a considerable period and indeed increase, then what will that do to the state of the NZ economy?

An immediate conclusion is that it will tend to be negative as it will affect:-

• tourism, higher travel costs
• imports through higher transport and production costs
• domestic and export production, through all inputs being affected directly or indirectly by higher oil costs
• New Zealand’s international competitive position
• inflation and thus consumer demand and expectations, plus interest rates
• political sentiment – though what government can do to mitigate in the short term or medium term may be problematic

There is thus a need for a medium to long term strategy to combat the impact of this issue and to re-position the economy to cope.

Adam is concerned because he does not think thought is being given by either of the two main parties as to what the effect of a longer term hike in oil prices actually means for the NZ economy. he thinks there has been too much focus on climate change and the ETS and not enough on how to reshape the economy to deal with the pressures that a long term oil price hike might bring.

Even if the current situation abates, this is an issue that needs to be addressed and planned for.