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The rising cost of living and the return of inflation is hitting Kiwis hard. In a new Herald series, Inflation Nation, we explore the reasons and impacts of the price shock - and possible solutions. We also share some great life hacks on how you can save money and live more affordably.
This week, Prime Minister Jacinda Ardern acknowledged what she called a "global energy crisis" and at the same time announced a considerable, though temporary, cut to the Government's tax take on petrol and diesel. The impetus was the steadily rising price of fuel, exacerbated by Russia's invasion of Ukraine.
The Government has been careful to note that while fuel prices are shockingly high, the delivery of supplies is unaffected. What it hasn't said, is how New Zealand is placed to manage if serious disruptions do emerge.
While some observers think there's little likelihood of 1970s-style supply disruptions, with possible shortages of petrol and diesel, and consequent government rationing, many believe that danger has grown considerably this year.
The moment is a precarious one for New Zealand, thanks to several factors. The country's only oil refinery took delivery of its last crude shipment last week, and the shutdown of its refining units is now under way. From April 1 it will operate as an import terminal for refined products only - petrol, diesel and jet fuel.
At the same time, New Zealand's domestic oil production is in long-term decline.
Government figures for last year show an average production of 23,500 barrels per day, about 12 per cent lower than 2020, and the lowest average daily production in 15 years.
As well, the 90-day buffer of petroleum supplies that New Zealand keeps on hand against the possibility of a supply shock is unlikely to be fully usable in dire circumstances.
Is it a crisis yet?
New Zealand Energy Minister Megan Woods says that "while the global energy shock being felt in New Zealand is unprecedented, our access to the physical supply of petrol and diesel is secure". That view is backed up, she notes, by fuel companies operating in this country: "[they] tell me that they are not anticipating any associated disruption to fuel supplies in New Zealand in the short term".
But today's situation has many broad precedents.
The benchmark price of West Texas Intermediate crude spiked to nearly US$124 a barrel this month, though it has since fallen to just below US$100.
That recent spike is outstripped by a number of historical highs. The nominal price was considerably higher in 2008 (US$147 a barrel). In 1980, the inflation-adjusted price came close to US$140 a barrel (US$35 a barrel in nominal terms).
And the inflation-adjusted price was also higher than current highs as recently as 2011, 2012 and 2013, when the bite of sanctions against Iran, conflict in Iraq, and other events in the Middle East and North Africa hampered supply and increased the price premium that typically accounts for geopolitical risk.
In the intervening years the world, including New Zealand, became accustomed to relatively cheap and secure oil.
![Energy Minister Megan Woods. Photo / Mark Mitchell](https://www.nzherald.co.nz/resizer/v2/FXVLF3HW6AAPBAOFXCXCVY4V2Q.jpg?auth=a116e035c371655bb69fb59a50ea18b35f8aa047e4ae039e943514c41f845f43&width=16&height=12&quality=70&smart=true)
But under-investment in exploration — the consequence of low prices, the climate change policies of governments that threw up barriers to fossil fuel development, and the environmental concerns of investors — mean supply was already struggling to keep pace with demand last year, as the world emerged from a Covid-induced economic slump.
Now, supplies are being taxed further still by the repercussions of war in Ukraine, under attack by the world's number two oil exporter (after Saudi Arabia).
So far, it is Western countries' economic sanctions against Russia, rather than the war itself, that have driven the oil price higher.
But despite headlines, which trumpet that Russia is now the most sanctioned country in history, those measures contain glaring holes; stricter energy sanctions are a possible next step for the US and its allies.
"The West needs to keep developing escalatory options for sanctions to keep pace with Putin's increasing violence," Brian O'Toole and Daniel Fried of Washington think tank the Atlantic Council observed last week. "There is still room for more targeting before these sanctions reach a level comparable to those against Iran or North Korea."
Low probability, high risk
Even as countries including the US, Britain and Australia have announced bans on Russian oil imports - the British and Australian measures are not effective immediately - most of the world, including the EU, which is heavily dependent on Russian oil and gas, has not.
Even measures to use the Swift bank transfers system to throttle the Russian economy contain "carve outs" to allow energy payments to continue.
To date, the loosely described Western countries have been reluctant to take steps against Russia that would have punishing consequences at home. A comprehensive embargo on Russian energy would likely ravage European economies such as Germany, and would be so disruptive to global energy markets that already roaring inflation would be sent much higher.
So far, energy bans on Russia have been "largely symbolic", according to energy economist Roberto Aguilera of Australia's Curtin University.
"The US and the UK are not big importers of oil. Most Russian oil finds its home in Europe, so that continent would be very conscious of restricting supply given that it would be very harmful to consumers through higher prices."
It is this scenario of a more comprehensive embargo — as yet off the table — that could bring serious world oil supply disruptions.
New Zealand's defence
New Zealand's first line of defence against the interruption of fuel supplies is its agreement, through membership of the International Energy Agency (IEA), to keep 90 days' worth of cover for domestic petroleum use.
But despite this three-month requirement, the country holds just 20 days' worth of supplies of the critical liquid fuels: petrol, diesel and jet fuel. The Government is weighing a requirement to raise that and keep a 28-day supply of diesel onshore, and 24 days' worth of petrol and jet fuel.
The balance of cover is made up in two ways. Further "onshore" cover is made up of supplies that are less urgently needed in an emergency, especially for a country with no refinery. They include crude oil produced from domestic fields but not yet exported, fuel oil, bitumen and LPG. Also included are crude and petroleum products afloat in vessels in New Zealand waters.
Another 30 days or so of the obligation is met by what the Ministry of Business, Innovation and Employment (MBIE) calls "oil stock tickets" held overseas, mostly in Europe.
These are options contracts that can be - and some recently were - exercised if the IEA calls on member countries to make a coordinated release of supplies into the world market to alleviate a significant disruption. Recent action appeared to be aimed more at simply lowering prices.
MBIE says the "tickets" also allow for the oil to be bought by the New Zealand Government at the market price, whereupon it would be shipped to New Zealand. But that's where some observers say the plan breaks down.
First, the possibility that the contracts would not result in the timely supply of oil to New Zealand, especially in an emergency, is considerable.
MBIE confirms that the contracts contain a force majeure clause. Such clauses typically nullify a contract in the case of catastrophic events such as war and natural disasters.
While MBIE says the clause "does not include an oil crisis, threatened oil crisis or any similar event and the contracts are designed to be activated during an oil crisis", it is not clear where their limits lie.
John Coyne, head of the Northern Australia Strategic Policy Centre, says he suspects such contracts, which are also used by the Australian Government, would be of little use in a real emergency, when war, tanker availability, supply chain logistics and other unforeseen circumstances might all frustrate getting the oil to where it is wanted.
"NZ doesn't meet its 90-day requirement onshore, that's risk number one. And number two is that it hasn't secured any additional crude oil or liquid fuel reserves either domestically or internationally. While the fuel levy is being reduced to reduce prices, there's not a lot of wiggle room there in terms of being able to secure additional supplies. So there is a vulnerability there and the country does risk a real crisis," Coyne says.
Marsden Pt
Australia, and especially New Zealand, Coyne notes, are at the end of just about every global supply chain: "If we do get serious disruption, it's reasonable to think that the countries at the farthest reach of supply chains would be hit hardest."
Australia and New Zealand are similar in that both are heavily reliant on imported oil. But in recent years Australia established subsidies to preserve its two remaining oil refineries, to retain some security of energy supply. The New Zealand Government considered, and rejected, similar action.
Last November Woods brought a paper to Cabinet that weighed the merits of government intervention to prevent the country's only oil refinery, Marsden Pt, from shutting down - a decision that flowed from difficult market conditions including stiff price competition from much larger Asian refineries.
The paper notes that Woods considered subsidising the refinery to keep it operating in the medium term: five to 10 years.
But it ultimately recommended against such intervention: "There does not appear to be a clear case for maintaining refinery operations for fuel resilience reasons, except to address an exceptional 'no fuel imports' scenario. This is an unlikely scenario, but not entirely implausible, therefore I believe the option of maintaining refinery capacity warrants an active decision by Government."
That decision was not to interfere. Publicly traded Refining NZ, owner of the refinery, started the shutdown this week. On April 1 the company's name will change to Channel Infrastructure and it will start operating as an import terminal for refined products on behalf of its oil company customers.
![Marsden Point is now closing its refining units. Photo / Michael Cunningham](https://www.nzherald.co.nz/resizer/v2/43UOWYRX2ZJFC7RZX57OTGAISE.jpg?auth=0f47647dfa05da27fdf2a1217971ecdb31b1d0bed13a4730fb97f2c193b62ed6&width=16&height=11&quality=70&smart=true)
The government papers don't spell out precisely how the Marsden Pt refinery would have served New Zealand in a "no fuel imports" scenario. Historically, it has produced the country's refined products mostly from imported rather than domestically produced oil, though small quantities of domestic oil were blended with the imports.
But implicit in the documents, and confirmed to the Herald by a source with some knowledge of the refinery but not authorised to speak publicly, is the possibility that with some adjustment, the facility could have produced refined products from "light, sweet" New Zealand oil, even though it was configured to process a different, "sour" feedstock.
In other words, the refinery might have been a lifeline for the country's transport network - which runs overwhelmingly on petrol, diesel and, to a lesser degree, jet fuel - if the storage tanks ran dry and re-supply was cut off.
Refining NZ, however, disputes this. In an official statement the company says: "New Zealand oil production could only support local refining of less than 5% of NZ diesel demand and less than 2% of total fuel demand and would require constant stopping and restart of the refinery units, which is not feasible from either a safety or economic perspective..."
It said it would take "some years" to plan and implement a reconfiguation to process local crudes.
Woods says the Government is not rethinking its decision of last year, but there may remain a small and diminishing possibility that the infrastructure could still be salvaged.
A Refinery NZ spokesperson explains: "Once we have shut the refinery down, the refinery units will be permanently decommissioned, following which it will not be possible to restart the equipment without major investment.
"Some units [will be] sold and remaining facilities demolished at a future date, which we estimate to be 10+ years."
Possible relief
Despite rising concerns for energy security, there is no consensus that the situation will worsen.
In recent days oil prices have retreated from their high point early this month. That change, combined with the cut to the fuel tax, had the Automobile Association sounding a brighter note — on Wednesday, principal policy adviser Terence Collins said he no longer expected prices at the pump to reach $4 a litre.
Considerable global efforts are also being made to bring on new production.
Tim Marchant, an adjunct professor at the University of Calgary's School of Business in western Canada, and previously an oil executive with a long history in the Middle East and Canada, notes that "there've been a lot of discussions" with countries that the US has previously sanctioned.
"There are discussions now with Venezuela to bring on more of their crude, and with Iran as well. Saudi Arabia has some capacity and there are also the US shale [oil] producers. That production has been very slow to come back, but I think we'll see more of it from here."
![It's looking less likely that petrol will reach $4 a litre, says the AA. Photo / Alex Burton](https://www.nzherald.co.nz/resizer/v2/Z4KO45D7LRZIXH6IXECAFYJTBM.jpg?auth=ddf50159e600c4a59928f88c9509ae8e9bb1dfd1560bf38c46054c3ed2876ae6&width=16&height=11&quality=70&smart=true)
Marchant is not among those who think that true oil shortages — as experienced after the 1973 Yom Kippur War and the Iranian Revolution of 1979 — are likely to develop in today's environment.
"I think the industry is pretty fundamentally different today than it was in the 70s. And today we have an oil market that is much better managed, we have a very savvy group of oil traders, the likes of [global energy and commodities trader] Vitol and we're much better able to move supplies around."
But he does believe that recent events will prompt governments to rethink many of their recent policies around fossil fuel reduction.
"I think a lot of government policy, across a range of countries, has neglected the need for the supply of fossil fuels through the next 20 or 30 years as a transition to alternatives takes place."
Just this week, for example, UK Prime Minister Boris Johnson took the extraordinary step of meeting oil and gas company heads — long out of favour in Britain's economic planning — to discuss stepping up investment in the North Sea.
The European Union is now considering encouraging natural gas and nuclear energy investments. And fuel storage capacity, lately of negligible interest to either the public or politicians, is now a front-page issue.
The Government says New Zealand's energy policies, which include a ban on offshore oil and gas exploration and the recent refinery decision, are not up for reconsideration. But as always, their greatest challenge will be the inexorable march of events.