NZ after the Oil Shock by Chris Olsen 1/12/2008

Thu, 02/04/2009 - 2:01pm

According to the New York Times in March of this year the World has just been through the biggest oil price shock of all time. This occurred earlier this year when oil reached $103.76/barrel, the inflation adjusted price of oil during the shock of the mid 1970s. As we all know the cost of oil continued to rise above this level to about $142/barrel. Today, as I write this column, oil has returned to around $60/barrel.

So looking back 30 or so years how did New Zealand respond to the 1970s shock and is there anything we can learn from it?

From what I remember 30 years ago the Government's first reaction was the mandatory introduction of carless days. You could only use your car on alternate days, the day determined by whether your number plate was even or odd. I lived in Auckland in those days and found carless days a real nuisance. However, they got me to car pool.

Moving ahead 30 years a similar result has occurred for me over the past six months. I ended up providing a car pool for family members. This time however the price of petrol drove the outcome, not Government regulation. I also found that because many motorists used alternative travel modes to work it only took me 15 minutes to drive to work instead of the 25 minutes. Needless to say, since the price of petrol has again dropped it’s taking 25 minutes again to get to work.

If that was the effect 30 years ago on Jo Citizen what was the effect on Government at that time and how did it react.

Well, 30 years ago the Muldoon Government decided to Think Big. It decided that New Zealand was too dependant on overseas oil and that we would become self sufficient in fuel. It then spent the equivalent of what was probably $1 billion in current dollars to develop amongst other things a synthetic petrol plant, converting gas into petrol.

The problem was that it didn't work properly and turned out to be a huge white elephant because the price of oil dropped. New Zealand had spent all this money on Think Big projects which delivered very little utility. My personal opinion is that there were two negative outcomes from this. Firstly, future Government’s became very risk adverse to capitalexpenditure. The second is that it took New Zealand many, many years to pay for Think Big and because we gained so little out of it our standard of living dropped significantly. So what can we learn from this?

I believe that New Zealand must move cautiously in response to the recent and any future oil price shocks, we must also move cautiously with respect to climate change and carbon trading.

Just like the 1970s we can jump to solutions and throw money at them. Given the current economic climate this is something that New Zealand simply cannot afford to do. Yet there appears to be some examples starting to pop up.

For example, everyone that has studied the numbers knows that rail is very expensive in moving freight and people and can be relatively inefficient. On the other hand it can be useful in some situations. Wouldn't it be sad for New Zealand if we poured the little money we have into these inefficient projects. Let me suggest that if we did that we could once gain spend the next 10 years paying things off with little utility arising from them and therefore fall further behind the rest of the World in terms of our living standards.