MP's magic bullet has history of misfiring

Energy and Resources Minister Gerry Brownlee announced this month that New Zealand looked like it had oil and gas fields that could produce $30 billion a year in export receipts and $10 billion a year in taxes and royalties for the government by 2025.

That would make the oil and gas industry, which is already our third-biggest export earner, more than three times bigger than the dairy industry is now.

If this revenue eventuated, it would appear to be the magic bullet for our economy, wiping out our current account deficit, our national debts and improving real per capita earnings.

Brownlee spoke in detail about how government would work with oil companies to "mobilise" this massive resource for the benefit of New Zealand. He made the assumption that New Zealand should go for (black) gold and develop this resource.

Surely it's a no-brainer?

You'd get a different answer if you spoke to anyone from the Netherlands, Venezuela, Angola, Congo or Nigeria.

These countries suffered conditions known as the "Resource Curse", the "Paradox of Plenty" or the "Dutch Disease" when they found oil or other resources and started exploiting them.

The Dutch gas boom of the early 1960s is one particularly relevant example.

The Netherlands discovered gas in the North Sea in the late 1950s and embarked on quick development with Esso and Shell.

Unfortunately, the development sucked labour and other resources out of its manufacturing sector and drove up its currency, hammering its exporters.

The "oil curse" is not limited to driving up currencies and making other exports uncompetitive.

A study in 2000 by the Centre for Economic Policy Research found that GNP per capita fell 1.3 per cent on average in Opec countries between 1965 and 1998, while GNP per capita in other low- to middle-income countries rose 2.2 per cent.

Amazingly, countries with massive oil wealth actually did much worse than "poor" countries.

Only four countries out of the 65 categorised as resource-rich performed better than non-resource rich countries.

Nigeria's per capita income is actually lower now than it was in 1966.

Currency volatility linked to swings in oil and mineral prices was partly responsible. Also, these countries often became corrupt. This in turn destroyed foreign investment in other industries.

The risk of such corruption in New Zealand is low, but the risks of currency appreciation wiping out the rest of our export sector is very real.

There's also a risk that New Zealanders, newly complacent about their oil wealth, choose not to make the tough decisions about the structure of the tax system, our government and our economy.

There are various approaches to this problem. Norway set up a state pension fund that reinvests the oil wealth so that when the oil runs out, there is something to live off.

Why can't we decide now to invest any oil and gas royalties in the New Zealand Superannuation Fund? If, as Brownlee suggests, New Zealand will be earning $10 billion a year in royalties from this resource by 2025, then it may go some way to pay for all the baby boomers retiring then.

Meanwhile, we still need to make the structural changes to encourage production in the future rather than consumption now.