Oil depletion means an election win is a poisoned chalice

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The National Party won the 2023 New Zealand general election but they are actually in for a shock; a win is a poisoned chalice. That means it appears to be a reward but in reality is harmful. No matter what a government does, petrol and diesel prices will rise. And this will mean inflation persists.

That is because neither Labour nor National appears to be aware of the resource depletion issue. Or that growing oil is so critical for their treasured economic growth. So when oil is depleted the economy can’t grow.

On October 5th, before the latest Middle East war, energy expert Nate Hagens interviewed petroleum geologist Art Berman.

It is important to note that both of them keep a close eye on the oil market and any events related to it. Berman emphasizes that we are currently facing a situation of limited supply of oil.

In the last 12-13 months, OPEC along with a few other nations have implemented a systematic reduction of almost 4 million barrels of crude oil and other related products from the market, which represents a significant amount.

He said demand had recovered from pre-Covid levels but supply hadn’t. They had reduced oil supply by about 4% saying they are scaling back production. According to Berman, the BRICS countries – Saudi Arabia, Russia, Iran, United Arab Republic, and Brazil – now account for 50% of the global oil market. 42% of oil exports are from Russia or Saudi Arabia.

They are saving their oil for themselves

Why is this? As exporting countries become developed countries, they are not going to have nearly as much oil to export because they use so much internally. He said the price of oil (The price of West Texas oil has varied between $67 a barrel and $93 in the last year) is too volatile for long-term investors.

“Most of the growth in oil production in the last 13 years has been in the United States tar sands. The rest are in net flat.” Two-thirds of the remaining oil reserves are in the Middle East triangle.

“We’re not getting off oil any time soon. The perception in the investment community is that oil doesn’t have a long future.”

Oil depletion everywhere

Worst of all, Berman says, “Decline is the only thing that I see out there. One of BP’s cases that they forecast has oil production declining 20-25% over the next 20 years.”

He goes on to explain that we are just not going to have the supply. It doesn’t mean it’s not there. It’s just that it is not available to us because of some combination of geology, lack of investment etc.

So what if oil supply is declining? The new government has promised economic growth, hasn’t it and surely that is not related? Well there, my friend, is the problem. Various commentators have put the link between oil and economic growth at .97.

And this means that higher oil prices kill oil demand and economic activity. At some point people get to the point where they say they will leave the car in the garage today. They cut back and there is a ripple effect. Oil is the master energy resource.

That Art Berman interview took place before Hamas invaded Israel and 2 million people in the Gaza Strip have to move. A huge war is starting.

And now we have both high oil prices and high-interest rates. There are no more Alaskas or Siberias to be found. The big fields to be tapped are the ones deep in the ocean and you only search for those if oil prices are high.

And what conclusions did Art Berman and Nate Hagens come to? “The answer is to cut back on energy consumption. Nobody likes to hear it. Lower energy consumption is inevitable they say. Berman says when he talks to audiences he pisses people off. “They hate hearing what I have to say.” 

Hagens has interviewed Art Berman more than once. Cut down. Bring our standard of living back to where it was in the sixties, seventies or eighties. Degrowth is the answer to oil depletion, it is coming whether we like it or not. You can’t argue with geology.

Why is oil depletion a poisoned chalice for National?

National says it was elected on a cost of living issue. People were concerned about rising prices of food and other goods and voted for change.

A New World diesel powered truck delivers to a supermarket
Diesel fuelled trucks deliver 93% of our goods according to the NZTA

So let’s look back a year. An AA spokesperson told Stuff in August 2022 that we use diesel for the transportation of all our goods. It is an important fuel for the logistics chain. Diesel powers tractors, harvesters, trucks, delivery vehicles. “Any time there is a higher cost on transportation, that will be reflected in a higher inflationary pressure on goods.”

A year later Infometrics chief economist and director Gareth Kiernan told Stuff (12 Oct 2023) that the biggest risk to food prices continuing to stabilise was the upward pressure on transport costs from higher diesel prices. He said, “The surge in diesel prices since July has been unexpected and is likely to flow through to higher costs for all goods and services with a transport component.

But aren’t delivery trucks going electric? Well, very slowly and it’s expensive. A Waka Kotahi NZTA report in 2021 said that 99.6% of trucks entering the fleet were diesel fuelled.

What about rail transport and coastal shipping? No, they are small too. A 2017-8 report said that 93% of goods in New Zealand were delivered by diesel-powered trucks and subsequent reports appear to have repeated this statistic. Despite this, strangely Gareth Kienan of Infometrics, says (The Post, Oct 16,2023) diesel prices weighting in the CPI “doesn’t really have a significant effect”. 

Putin’s war on Ukraine and then Gaza/Israel war breaks out

Russia is one of the world’s largest suppliers of diesel and a major exporter of crude oil.

In February 2022 Putin invaded Ukraine and by September Russia had temporarily banned exports of petrol and diesel to all countries other than four Russia-aligned countries. They needed the fuel for themselves and their war.

It also affected their oil exports. Prior to the war, they exported an estimated 2.8 million barrels a day of oil products. That figure has since fallen to around 1 million barrels a day.

“Current forecasts suggest oil prices will bounce around between $US80 and $US100 a barrel in the coming months. After Russia’s invasion of Ukraine last year, oil prices shot up nearly 30 per cent to a record high of $US128 a barrel within two weeks.”

CNBC Oct 9, 2023

Then it dropped again.

The Gaza-Israel war may escalate to include oil-exporting countries like Iran and we expect that there will be less oil and diesel being exported. When Hamas attacked Israel the price of oil jumped 3%.

Conclusion

Those who voted National in the hope that they would tame the cost of living are in for a nasty shock. Politicians who are energy blind, always ignoring oil depletion and oil price fluctuation issues, are going to disappoint. And soon.