Denis Tegg: Country oblivious to next oil shock

Opinion

The spike in oil prices to US$147 a barrel last winter helped trigger the global recession.

And soon after a global economic recovery, the inevitable return to triple-digit oil prices will lead the world right back into recession. So argues Jeff Rubin, who was until recently the chief economist at CIBC World Capital Markets, the investment-banking arm of the Canadian Imperial Bank of Commerce.

Rubin says we need look no further than recent history for the evidence. Four of the last five global recessions were due to oil shocks. And the latest oil spike saw prices rise three times as steeply as previously.

Germany, New Zealand and Japan were already in recession well before the sub-prime mortgage crisis broke.

Rubin is controversial, but has a penchant for being right on oil matters. He predicted oil's rise to US$50, US$100, and most recently US$150. He is no lightweight, having been the top-ranked economist in Canadian financial markets for more than a decade.

His opinions and insights have appeared on the front page of the New York Times, Wall Street Journal, Financial Times and Economist, to name a few.

So is Rubin's proposition really that radical? Or does our Government and media have a blind spot when it comes to energy depletion, and its potent effect on the global and local economy?

Currently the oil price is around US$70 a barrel - in the midst of the deepest post-war recession on record.

Just four years ago today's "depressed" price would have been a record high.

Where do we think oil will be trading when economic recovery and oil demand returns? The price may be volatile but the trend will be ever upwards. Have we learnt the lesson that global Gross Domestic Product is inextricably linked to cheap and abundant oil? As prices rise, global GDP falls.

Robert Hirsch is an energy consultant to the US Department of Energy. His studies of the link between past oil shocks and global GDP suggests there is roughly a one to one ratio - ie, for every 1 per cent decline in global oil production, there is a commensurate 1 per cent fall in global GDP.

New Zealand governments have always treated the oil projections of the OECD's International Energy Agency as gospel. The agency's chief economist Fatih Birol has issued a stern warning that there is now a real risk of a crunch in the oil supply after next year when demand picks up because not enough is being done to build up new supplies. .

Even at US$70 a barrel, Birol is concerned about its impact on inflation and interest rates. And he warns that many governments appear to be oblivious to the fact that oil is running out far faster than predicted.

How come our Government has not responded to this advice from its most trusted adviser? If Jeff Rubin and the IEA are correct, we are moving into a relentless cycle of economic shocks triggered by oil restraint and ever-increasing oil prices.

What are the implications for New Zealand of a return to triple-digit oil prices?

Rubin's central argument is that expensive oil will force a reversal of globalisation. Long-distance trade will become increasingly expensive and impractical, and protectionism will become rife as nations ramp up domestic production.

New Zealand is more vulnerable than most to US$100-plus-a-barrel oil prices, and consequent higher transport costs. And of course, triple-digit oil prices are a death zone for airlines. Where does that leave our other major foreign exchange earner - tourism, which largely relies on air travellers from the other side of the planet?

Internally we are almost totally reliant on oil for transport, we are a net importer of oil, and have no military muscle to secure supply.

You would think our Government would have a strategy for this looming crisis, but where is it? In March Australia completed a National Energy Security Assessment. The US Congress is considering a bill to establish a taskforce on oil depletion and to set defined targets for reductions in oil consumption.

New Zealand has begun to tentatively prepare for climate change. We have comprehensive risk management plans for highly unlikely events like terrorism attacks, tsunamis, or bio-security breaches. Which is what government is for.

So how come our Government neglects to make comprehensive plans for the highly likely threat of oil depletion and upwardly spiralling oil prices?

Do we quickly implement wide-ranging liquid fuel conservation measures, and divert spending on new roads to public transport? Or do we continue the current myopic "business as usual - cheap oil forever" scenario?

Will it take oil prices reaching US$150 or US$200 a barrel level before the Government acts? I wish it were not so, but I fear the ostrich-like denial will continue through several more price shocks and recessions.

Sadly this will be too late.

* Denis Tegg is a lawyer at Thames.