New Zealand Parliament Report: The next oil shock?

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==> http://www.parliament.nz/en-NZ/ParlSupport/ResearchPapers/4/6/a/00PLEco10041-The-next-oil-shock.htm

Parliamentary support
Research papers

The next oil shock?

... Conclusion

The global economy is heavily dependent on affordable oil.

It may seem counter-intuitive that, when oil reserves and production capacity are higher than ever, the future of the oil market appears bleak. The problem is that production capacity is not expected to keep up with demand. That fact leads to severe economic consequences.

To replace the declining production from existing oil wells and increase production, oil companies are forced to extract oil in more difficult and expensive conditions (deep-water, oil sands, lignite to liquids) from smaller, less favourable reserves. The marginal (price-setting) barrel of oil costs around US$75-$85 a barrel to produce. This will continue to rise with higher demand and exhaustion of reserves.

Although there remain large reserves of oil which can be extracted, the world's daily capacity to extract oil cannot keep increasing indefinitely. A point will be reached where it is not economically and physically feasible to replace the declining production from existing wells and add new production fast enough for total production capacity to increase. Projections from the IEA and other groups have this occurring, at least temporarily, as soon as 2012.

The difference between the global capacity to produce oil and global demand is the supply buffer. When the supply buffer is large, oil prices will be low. When the supply buffer shrinks - due to demand rising faster than production capacity or production capacity falling - prices will rise as markets add in the risk that supply will not be available to meet demand at any given point in time.

When a supply crunch forces oil prices beyond a certain point, the cost of oil forces consumers and businesses to cut other spending, inducing a recession. The recession destroys demand for oil, allowing prices to drop. Major international organisations are warning of another supply crunch as soon as 2012.

The world may be entering an era defined by relatively short periods of economic growth terminating in oil price spikes and recession.

New Zealand is not immune to the consequences of this situation. In fact, its dependency on bulk exports and tourism makes New Zealand very vulnerable to oil shocks.

Some useful references for the report:

1. Peaking of World Oil Production, DOE www.netl.doe.gov/publications/others/pdf/oil_peaking_netl.pdf (2005)   [back]
  2. Statistical Review of World Energy 2010. BP http://www.bp.com/productlanding.do?categoryId=6929&contentId=7044622 (2010)   [back]
  3. New Zealand petroleum reserves options paper, Hon Gerry Brownlee http://www.med.govt.nz/upload/74652/NZ_Petroleum_Reserves.pdf (2010)   [back]
  4. Using IMF world GDP data http://www.imf.org/external/pubs/ft/weo/2010/01/weodata/index.aspx and BP world oil consumption data http://www.bp.com/subsection.do?categoryId=9023761&contentId=7044545, from 1980 to 2008 a correlation of 0.7 is found. Numerous other studies point to the relationship between oil use and GDP growth.   [back]
  5. James D. Hamilton 'Nonlinearities and the Macroeconomic Effects of Oil Prices' http://dss.ucsd.edu/~jhamilto/oil_nonlinear_macro_dyn.pdf (2010)   [back]
  6. Meeting the World's demand for Liquid Fuels, April 7 2009, EIA http://www.eia.doe.gov/conference/2009/session3/Sweetnam.pdf (2009)   [back]
  7. Meeting the World's demand for Liquid Fuels, April 7 2009, EIA http://www.eia.doe.gov/conference/2009/session3/Sweetnam.pdf (2009)   [back]
  8. Definitions, OPEC http://www.opec.org/library/Annual%20Statistical%20Bulletin/interactive/2004/FileZ/definition.htm   [back]
  9. Statistical Review of World Energy 2010. BP http://www.bp.com/productlanding.do?categoryId=6929&contentId=7044622 (2010)   [back]
 10. World Energy Projections 2009, EIA, http://www.eia.doe.gov/oiaf/ieo/excel/figure_14data.xls (2009)   [back]
 11. World Energy Model 2008, IEA http://www.iea.org/weo/docs/weo2008/WEM_Methodology_08.pdf (2008)   [back]
 12. Statistical Review of World Energy 2010. BPhttp://www.bp.com/productlanding.do?categoryId=6929&contentId=7044622 (2010)   [back]
 13. OPEC – The Oil Cartel, BBC http://news.bbc.co.uk/2/hi/689609.stm (2003)   [back]
 14. When OPEC changed its quota system in the late 1980s, linking members' production quotas to their reserves, most members suddenly doubled or tripled their official reserves. Despite large annual production, most OPEC members report the same proven reserves each year – see Statistical Review of World Energy 2010. BP http://www.bp.com/productlanding.do?categoryId=6929&contentId=7044622 (2010). For examples of oil analysts doubting OPEC reserve figures see Matt Simmons 'Twilight in the Desert' (2005) and Nick A. Owen, Oliver R. Inderwildi, David A. King 'The status of conventional world oil reserves—Hype or cause for concern?'. Energy Policy 38 (2010) and 'Key oil figures were distorted by US pressure, says whistleblower' The Guardian http://www.guardian.co.uk/environment/2009/nov/09/peak-oil-international-energy-agency (2009)   [back]
 15. The Oil Crunch A wake-up call for the UK economy, UK Industry Taskforce on Peak Oil & Energy Security http://peakoiltaskforce.net/wp-content/uploads/2010/02/final-report-uk-itpoes_report_the-oil-crunch_feb20101.pdf (2010)   [back]
 16. Warning: Oil supplies are running out fast The Independent http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10588388 (2009)   [back]
 17. The Joint Operating Environment 2010, United States Joint Forces Command http://www.peakoil.net/files/JOE2010.pdf (2010)   [back]
 18. US Energy Information Agency figures http://www.eia.doe.gov/dnav/pet/pet_crd_wellcost_s1_a.htm (2010)   [back]
 19. Statistical Review of World Energy 2010. BP http://www.bp.com/productlanding.do?categoryId=6929&contentId=7044622 (2010)   [back]
 20. Index of Democracy 2008, the Economist, http://graphics.eiu.com/PDF/Democracy%20Index%202008.pdf (2009)   [back]
 21. Corruption Perceptions Index 2009, Transparency International http://www.transparency.org/policy_research/surveys_indices/cpi/2009/cpi_2009_table (2010)   [back]
 22. Pipeline Damage Assessment From Hurricanes Katrina and Rita in the Gulf of Mexico, Minerals Management Service http://www.boemre.gov/tarprojects/581/44814183_MMS_Katrina_Rita_PL_Final%20Report%20Rev1.pdf (2007)   [back]
 23. The Oil Crunch A wake-up call for the UK economy, The UK Industry Taskforce on Peak Oil & Energy Security http://peakoiltaskforce.net/wp-content/uploads/2010/02/final-report-uk-itpoes_report_the-oil-crunch_feb20101.pdf (2010)   [back]
 24. US Energy Information Agency figures http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=E_ERTW0_XWF0_NUS_MF&f=M (2010)   [back]
 25. Oilwatch Monthly – August 2010 http://www.theoildrum.com/files/2010_August_Oilwatch_Monthly.pdf (2010)   [back]
 26. International Crude Oil and Liquid Fuels Supply, Consumption, and Inventories, EIA http://www.eia.doe.gov/emeu/steo/pub/cf_tables/steotables.cfm?tableNumber=6 (2010)   [back]
 27. Statistical Review of World Energy 2010. BP http://www.bp.com/productlanding.do?categoryId=6929&contentId=7044622 (2010)   [back]
 28. ibid   [back]
 29. ibid   [back]
 30. The Joint Operating Environment 2010, United States Joint Forces Commandhttp://www.peakoil.net/files/JOE2010.pdf (2010)   [back]
 31. The Oil Crunch A wake-up call for the UK economy, The UK Industry Taskforce on Peak Oil & Energy Security http://peakoiltaskforce.net/wp-content/uploads/2010/02/final-report-uk-itpoes_report_the-oil-crunch_feb20101.pdf (2010)   [back]
 32. Sustainable Energy Security, White paper, Lloyd's of London http://www.chathamhouse.org.uk/files/16720_0610_froggatt_lahn.pdf (2010)   [back]
 33. Military Study Warns of a Potentially Drastic Oil Crisis, Der Spiegel http://www.spiegel.de/international/germany/0,1518,715138-2,00.html (2010)   [back]
 34. 2008 World Energy Outlook, Executive Summary, IEA http://www.worldenergyoutlook.org/docs/weo2008/WEO2008_es_english.pdf (2008)   [back]
 35. Why energy demand will rebound, McKinsey Global Institute, http://www.nextville.it/deposito/File/altro%20rinnovabili/McKinsey_Energy_prices.pdf (2009)   [back]
 36. Peaking of World Oil Production, DoE http://www.netl.doe.gov/publications/others/pdf/oil_peaking_netl.pdf (2005)   [back]
 37. World Oils oil price database, http://www.worldoils.com/oilprice.php (2010)   [back]
 38. Washington considers a decline of world oil production as of 2011, Le Monde http://petrole.blog.lemonde.fr/2010/03/25/washington-considers-a-decline-of-world-oil-production-as-of-2011/ (2010)   [back]
 39. David Strahan 'The Last Oil Shock' (2010)   [back]
 40. Peaking of World Oil Production, DoE http://www.netl.doe.gov/publications/others/pdf/oil_peaking_netl.pdf (2005)   [back]
 41. Falling Oil Supply Risks a Price Rise, Wall Street Journal, http://online.wsj.com/article/SB123808291973348921.html (2009)   [back]
 42. For a more detailed discussion, see Deutsche Bank's recent report The Peak Oil Market, Deutsche Bank http://www.odac-info.org/sites/default/files/The%20Peak%20Oil%20Market.pdf (2010)   [back]
 43. Ministry of Economic Development figures http://www.med.govt.nz/upload/37172/A-oil-tables-1.xls (2010)   [back]
 44. Statistical Review of World Energy 2010. BP http://www.bp.com/productlanding.do?categoryId=6929&contentId=7044622 (2010)   [back]
 45. Crown Minerals figures http://www.crownminerals.govt.nz/cms/petroleum/facts-and-figures (2010)   [back]
 46. Potential undiscovered oil and gas resources of New Zealand, GNS http://www.med.govt.nz/upload/70843/Potential-Undiscovered-Oil-GNS-Science.pdf (2009)   [back]
 47. Impacts of Oil Prices on New Zealand Tourism, LEaP http://hdl.handle.net/10182/1379 (2009)   [back]
 48. Press release: Solid Energy plans Underground Coal Gasification pilot plant in Waikato, Solid Energy http://www.coalnz.com/index.cfm/1,468,1045,0,html/Solid-Energy-plans-Underground-Coal-Gasification-pilot-plant-in-Waikato (2010)   [back]
 49. Meeting the World's demand for Liquid Fuels, April 7 2009, EIA http://www.eia.doe.gov/conference/2009/session3/Sweetnam.pdf (2009)   [back]
 50. Our future as oil sheikhs of Pacific, New Zealand Herald http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10633915 (2010)   [back]
 51. Impacts of Oil Prices on New Zealand Tourism, LEaP http://hdl.handle.net/10182/1379 (2009)   [back]

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Kiwis are not silly, they starting to electrify their suburban rail networks ...

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