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

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).

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.

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