Oil and the New Zealand Economy
Laurie Meadows
Current situation
The economy is the size it is due to relatively cheap
liquid transport fuels. New Zealand (like many
countries, including USA) has used up the greater part
of its free flowing, high volume oil field reserves,
but we still manage to supply about 50% of our own
needs (2013).
That won't last. The current oil fields are dropping
in production, and Maui, the mega gas field that
produced liquids as a by-product, is a fading giant.
America has added about 9 million barrels a day of
'new' oil to its domestic supply, so it doesn't have
to buy so much from overseas. This fact, coupled with
a general global deflationary environment and slide in
oil use in the Eurozone has led to a temporary
oversupply of oil, causing prices to drop to extremely
low levels (US$47 in January 2015). Ironically, this
price is so low that oil fields with high drilling and
production cost - the 'new' shale oil fields in USA -
become uneconomic (some US shale fields are uneconomic
below about 70 USD, many are OK until oil prices go
lower than about 50 USD). At USD 47 it costs more to
bring the oil out of the shale fields than the value
of the oil that is produced. Some of these fields will
be closed off until oil prices rise again.
And oil prices will rise again, but the timing and
magnitude of the rise is related to both the economic
'state of the nations' of the world and to the pace of
natural nett depletion of the major geological oil
reservoirs.
We will find more oil, but not enough
But new Zealand is attractive enough to big and small
oil companies that they continue to search for, and
find, oil. It is unlikely that there are any major
fields in New Zealand, but a continual (for now) flow
of small fields that play out relatively quickly will
do. However, the price of oil will have to rise again
before it is worth doing.
We depend on other oil-producing countries having a
surplus to export
Our dependence on other countries export oil is
increasing. Unfortunately, major oil exporting
countries have reached the limits of their productive
capacity, and at the same time their domestic demand
is increasing with uncontrolled domestic population
growth.
We compete with every other country in the world to
buy surplus oil
At some point, volumes available for export will be
lower than global demand, and at that point oil prices
might increase significantly. But we are not at that
point yet. The
'pool' of oil available to import from overseas will
slowly shrink, but this is masked by slackening demand
and increased USA shale oil production (shale
production has meant USA only has to nett import 6
million barrels of oil a day). The effect of import
limitations won't be obvious until USA shale
production falls in 3 or 4 years time (the relatively
'high volume' shale oil resource has a very limited
life) and global economic activity starts to
grow markedly again (we shouldn't assume it will).
Price effects of Higher Oil Prices
Rising oil prices preceded 9 of the 10
recessions in the 35 years after world war 2. Higher
oil prices didn't necessarily cause the
recessions, but they very likely contributed to them.
The general economic assessment is that higher oil
prices lead to 'inflation' (in the sense of price
increases, mainly due to the direct cost of transport
fuel increasing), which then triggers the Reserve Bank
Governor to act to keep 'inflation' within the target
band of between 2% and 3%. Just about the only 'lever'
the Reserve Bank has to 'pull' is to increase interest
rates. Higher interests rates both increases mortgage
rates on home loans, and increases the cost of
business borrowing. Higher mortgage repayments by you
and me means less spending, and therefore lower
business profits. Businesses cut back on expenses by
dropping staff numbers. Unemployment rises as a
consequence.
Additionally, 'inflation' is seen by money market
traders as reducing the value of the New Zealand
dollar. It then takes more NZ dollars to buy the same
amount of oil. So even if the price of oil remains
steady, it costs us even more to import.
The process slows down and eventually stops, because
the weaker New Zealand dollar makes our exports
cheaper to buy, and the buyers have to pay us in New
Zealand dollars, which in turn creates a demand for
NZD, making the NZD more valuable. Then we get 'more
oil for the dollar' than before.
However, since 1990 rising oil prices appeared, at
first, to have had less recessionary effect.
Internationally, crude oil was still available from
2012 to mid 2014 at from $USD 80 to around USD $100 a
barrel. But we should note that from 2011 to 2013 oil
prices averaged USD110, and growth in western
economies has been constrained.
Oil prices in mid 2014 started to slide, eventually
hitting around USD 47 a barrel. It seems developed
countries have now entered a period that shifts
between low growth, slow grow, and no growth. The
result is fewer road miles traveled, particularly in
USA.
The counterfactual would suggest low oil prices would
stimulate growth in world economies.And, all else
equal, this tends to be true over the middle and
longer run. But in the immediate term, it isn't true,
because low oil prices are an effect of slowing
demand. However new car numbers (netted out from those
scrapped) have risen rapidly in 2014, particularly in
China. This insensitivity to fuel price may indicate a
growing middle class, particularly in China, or,
worryingly, it may indicate a willingness to take on
new debt by the growing middle class. New debt backed
by inflating house values.
World crude oil
production 1930 to 2012
Graph: created by Plazac,
Wikipedia, reproduction licenced under Creative
Commons Attribution-Share Alike 3.0 Unported license.
Data: US Bureau of Mines and Minerals yearbooks to
1960,OPEC website from 1960, EIA 1980 to 2013
Oil supply overall is more or less static
or rising slightly
Current (feb 2015) production of around 93 million
barrels a day (mbd) takes in cheap Saudi at $25 a
barrel, to expensive Canadian oil sands only
profitable at over $80 a barrel, and everything in
between. Total global production of 'conventional'
crude oil (flowing up from an underground reservoir)
plus liquids often found in natural gas wells
('condensate') is about 77 mbd (early 2015).
Saudi Arabia, the world's largest exporter (6.9
million barrels a day of exports at end 2014, ), is
producing oil at about maximum of 9.2 million barrels
a day (down
from 9.6 mbd in 2005).
As far as limited public data can inform, it might
remain producing at these levels for a relatively long
time.
Russia
is the world's second largest crude oil exporter, at
about 5 million barrels a day of crude; but it also
exports 2 million barrels a day of refined products.
Russia's main oil supply is from heavily re-worked old
fields (at the rate of 5,000 to 6,000 'infill' wells a
year), and these are estimated to slowly decline in
production from 2016 onward. There are very large
areas of complex shale 'plays' in Siberia, but these
will take decades to delineate and fully come on line.
If oil prices remain low they will never come on line.
The rest of the world has slowly declining production
(except USA - shale oil hit 9 mbd in 2014 - but it
won't last, as the EIA says the overall production
decline rate is ~ 6.4% per month). Crude oil (45 and
lower API, excludes heavy oil) production from the
rest of the world will continue to decline at
about 7% a year over the next few years.
The pace of decline markedly increases at some point
over the next decade or so. The speed of decline at
that point depends on global demand, which in turn
depends on how deeply in recession the global
oil-dependent economy is.
The drawdown of the total 'tankload' of exportable
oil exceeds the refill rate
According to American oil commentator and oil
geologist Jeffrey Brown (February 2015) the nett
amount of petroleum liquids being exported by
the 33 biggest oil export countries was steady in an 8
year period from 2005 at 46 million barrels a day, but
exports fell to 43 million barrels a day in 2013. The
3 million barrel a day shortfall was made up by a
reduction in USA oil imports as its Shale oil industry
increased production markedly.
Jeffrey Brown notes that the 'OPEC 12', representing
the major chunk of exporters (except Russia, which
exports roughly 5 million barrels a day), exported
about 70 Giga Barrels (GB) of oil in the period 2006
to 2012. His best estimate of the portion of Saudi oil
reserves that have in the past been exported, and on
reasonable assumptions will be exported in future,
total 260 GB. This means about 27% of the total 'pool'
of exportable oil in Saudi Arabia has gone in a 6 year
period.
By about 2020, only 5 years away, the 'OPEC 12' will
have only 50% of their exportable reserves left. They
can maximise returns now by highest bearable price for
lots of customers for a shorter sustainable period, or
maximise long term returns by much cutting production
now, in the hope of not pushing the global economy
into perma-recession, and being able to levy higher
price for much longer, but for fewer customers.
Very few governments act before they have to,
especially where it means sacrifice for the population
now for a benefit later. The OPEC 12 are not likely to
be different. They are likely to 'pump full bore until
the well is dry'.
The only relevant statistic for New Zealand is oil
available for export
The press always focuses on the total amount of oil an
oil exporting country produces and any trends in that
production. The mainstream press never focuses on
trends in the percentage of oil that an oil exporting
country is using internally. While Saudi Arabia, the
world's largest oil exporter, has a growing population
and growing internal oil use, Russia, the worlds
second largest oil exporter, has a stable population,
and (I guess but don't know) internal oil use that is
pretty static.
Non OEC oil production is falling
It is widely conceded that oil production outside OPEC
is falling. Gas production globally is nett
increasing, and some gas wells have liquids associated
with the gas. These liquids are increasingly taking up
the slack in falling global conventional oil
production, just as shale oil production in the USA
has 'covered for' the underlaying decline in
conventional oil production.
In
the case of oil, supply and demand are always equal. Recession
slackens demand for oil. So recession acts as
'negabarrels' as an important factor in obscuring the
geological ceiling in 'barrels per day' oil
production.
The cost of producing oil in the Arctic, deepwater
and in Oil sand and Shale deposits is very high
It is hugely expensive to produce these kinds of oil.
This is not a problem so long as oil prices are high,
and the global economy is strong and likely to remain
strong. No unsubsidized oil company, private or
government owned, will invest big millions of dollars
in oil exploration and production if the costs of the
operation exceed the value of the oil in place. When
oil prices drop, oil development in these difficult
and extreme environment locations becomes a dead loss,
a cost. Given planning and execution of projects in
these environments takes say 5 to 10 years, investors
have to be as sure as can be that oil prices will
average high enough for long enough to cover costs, at
least.
Oil prices dropped in late 2014 early 2015, and about
1 trillion dollars worth of oil projects in such
difficult environments suddenly went on hold or were
cancelled.
New Zealand southern ocean environment is a difficult
environment. Not the worst, but still expensive to
explore and drill test wells in, let alone develop
on-ocean infrastructure for oil production. Don't
expect very much more than re-working existing fields
(unless something 'of great interest' shows up in
seismic surveys).
Politics
The largest current supply of exportable oil comes
from the Middle East, with eyes on Iraq, in
particular, to help bolster falling global
cheaper-to-produce crude oil supplies. The Iraqi's
have faced reality and admitted that their expansion
plans will have to be cut back in the face of the
political mess that is the Middle East. Saudis value
stability, but sit on a powderkeg of religious
extremism and the unmet expectations of a rapidly
growing and rapidly stratifying population. Venezuela
is clearly going to implode. Expertise in oil
production is moving away from the country.
The only bright light is that, in spite of
provocations from the West, Russia remains stable - at
least in Russian terms.
Nett outcome for New Zealand
Our dependance on imported oil will increase
inexorably, but is OK for the next maybe 4 or 5 years
(that's my guess).
Global slowdown and recession will likely hold the
price of oil oscillating at about, or a bit above,
$USD80 a barrel for the next few years.
After that it is a 3 way interplay between increasing
supply of natural gas liquids, the speed of slowing
demand due to recession, and falling absolute
availability of export oil.
Political events are a wild card on top.
Conclusion
In the worst case, fuel for our cars will remain
relatively cheap for the next 4 or 5 years due to
global recession and increasing natural gas liquids.
We won't aggressively move to electrify transport
routes and transport vehicles. Declining nett export
oil availability reaches a low enough point that it
eventually 'show through' in the form of a diminishing
pool of better-off people around the world bidding up
the price of oil.
At that point, we will realise we should have invested
in the 'future reality' years ago.
Feb 08 2015