Cuba – Oil – NZ Election

One thing that has interested me for the last few years is the Cuban “Special Period”, following the collapse of the USSR, and how the country coped. One the of effects of the withdrawl of the Soviet Union from Cuban affairs was the withdrawl of oil from the Cuban economy. The Societs supplied the bulk of Cuban oil and oil derived chemicals, fertilisers and pesticides. Amongst other things the “Special period” was a Cuban oil shock. The west faced oil shocks in 1973 and 1979 as Arab nations reacted to various political events through the decade and twice tightened oil exports to the west. Read anything about, or speak to a Cuban who experienced, the Special Period and it doesn’t sound like particularly good times. The curtailment of oil meant problems with transport, (oil dependent) power generation and food production (fertiliser, pesticides, fuel for machinery etc). Oil was central to the Cuban economy and a lack of it mixed with other matters to create quite a potent cocktail of problems.

Anybody who has an interest in tracking the price of oil since about 2007 will be familiar with predictions of future price increases. A number of major international agencies are picking that oil will get more expensive over the next decade. Some predict an oil price crunch sometime around 2014 or 2015 whilst others see prices going up but perhaps in not quite the same dramatic fashion. The basic premise of a rising price is captured by the notion of peak oil. You can look at this two ways. One, that we have extracted roughly half the global supply of oil and the second half is more expensive to tap, or two, that we have tapped most of the cheap and easily accessible supplies of oil and what is left (however much) is more expensive to extract (economic peak oil – slide 11). The main point is not whether we have reached a mid point of global recoverable oil or not, but rather, that we have found the easy and cheap stuff to mine and whats left is more expensive to extract.

As I understand it there areat least three aspects to this. One is the depletion rate of existing massive oil fields. A number of very large oil fields are old and on the decline in their rate of production. These are (were) cheap supplies of oil. The fields necessary to replace this decline are in more challenging locations either geographically (eg deep water, the arctic) or politically (Middel East, parts of Africa).  Two, other sources of  substitute oil (oil shale, tar sand, coal) are more expensive to extract and process and come with environmental costs. The last is a rising demand in oil from (particularly) the developing countires such as China and India. The increased demand must be met by increased supply. Any constraint on this supply must have an affect on pushing up prices. 

Whether we are at or near a peak in global extraction, or whether there is more (and more expensive) supply out “there” somewhere the consensus view is that the price of oil seems destined to increase. There are pundits who argue the case, and point for example to the recent large oil finds in deep water off Brazil as evidence, that the idea of having reached a half way peak in recoverable oil is a false theory. They might be correct, however, I imagine the cost of extracting oil from deep water fields is a little bit (or maybe much) higher than a shallow on shore field. For example the exploration for deep water oil fields in NZ will not occur, says the NZ Government, until world leading safety standards are put in place. These may or may not stop a major oil spill as occurred in the Gulf of Mexico last year, but they will add to the cost of extraction.

So in the face of a probable increase in the price of oil over the next decade I would expect a prudent Government to have a plan to mitigate any affects as much as possible. NZ had a general election yesterday. The Government of the past 3 years was re-elected, more or less, intact. It is therefore possible to judge the prudency of the Government by its last three years in office and its election manifesto.

The NZ Government does in fact have a ‘plan‘ for rising oil prices. The plan essentially revolves around ‘leaving it to the market’ to sort out a solution. Over time Kiwis will react to rising prices and adopt whatever strategies help them through. This might be more fuel efficient cars or might be electric cars. The government is playing its part by building a series of new highways throughout the country that will facilitate, over time, some savings in fuel use. People will be able to drive their more efficient or electric cars on these new highways. Presto, problem solved?

 A very quick analysis of these ‘responses’ throws up some questions. If a price increase is shallow enough increasing fuel efficiency may help offset the rising prices. If a price increase is more sudden an extra few (over time) kms per litre of fuel may not go very far. The faith in electric cars isn’t matched by an great zeal to facilitate their introduction. It seems to be a gradual process, 5% of the national fleet by 2020. The uptake of more fuel efficient and electric cars is normally by fleet replacement. People scrap older cars and replaced them with new and newer motors. Problem is that since the global financial collapse in 2008 and subsequent economic stagnation, Kiwis are not replacing our cars as quickly as we did and the age of our vehicle fleet grew by a year. People may or may not be able to buy more fuel efficient cars, or electric cars, to offset rising oil prices. The price of oil may rise slowly enough to allow some time to mitigate, or we may be caught with our pants down.

In the mean time the Government has put in place plans to spend billions more on new highways and has policies to look at spending some billions more on 4 extra highways. Some of these highways have dubious (or at least contestible) benefit cost ratios (BCRs). There is no great zeal within this Government to expand public transport or help fund things like an inner city Auckland rail loop. Mitigation in the face of higher fuel prices fairly much stops at tarmac rather than expanded public transport. If there is a sudden oil price spike, the mitigation most kiwis will be faced with may me cycling or walking.

Finally, if electric cars are the salvation for NZ drivers from expected oil price rises, surely our domestic power generation infrastructure will be key assets for our future transport needs. Why then does the Government have a policy to sell off 49% of these assets. Oil prices increasing so we can’t afford to drive our petrol car. Power prices increasing so the profits from the power used in our electric cars goes offshore. I mentioned that the Government has a ‘plan’. I didn’t mention anything about it being coherent (which means logically connected or consistent).

Here is what some Cuban roads are like – fairly empty and partially complete. Maybe the fate of our present governments massive roading spend.