Oil Market - Supply (Question 3 to Minister of Finance)

What economic and fiscal strategies is he developing to prepare New Zealand for the impact of an "extremely tight" oil market within 5 years where oil production may not be able to keep up with demand, as predicted by the International Energy Agency's Medium-Term Oil Market Report earlier this month?

Hon Dr MICHAEL CULLEN (Minister of Finance) : Low debt and projected surpluses give New Zealanders as much fiscal flexibility to respond to changing circumstances as almost any other developed country has. The development of an emissions trading system, and measures to support energy efficiency, to support biofuels, and to support passenger transport will help directly. Of course, as oil prices rise, individuals also react, by, in fact, adjusting to more efficient vehicles.

Jeanette Fitzsimons: Will he discuss with his colleague the Minister of Energy the need to amend this statement in the draft New Zealand *Energy Strategy: "It is unclear whether conventional oil production will peak in the next decade, or a decade or two later." so that it reflects a greater sense of urgency, given that the Government has always relied on the *International Energy Agency's fool's paradise view that we still have around three decades until peak oil, despite all the other views to the contrary?

Hon Dr MICHAEL CULLEN: I do not propose to do that at this stage, at all. I am old enough to remember the report from the **Club of Rome in, I think, 1975, stating that we would have run out of oil by this point. In fact, proven commercial oil reserves now are still larger than they were 20 years ago.

Gordon Copeland: Can the Minister confirm that a steady increase in oil prices to the point of an extremely tight market in 5 years also provides economic incentives for reductions in oil consumption, such as switching from cars to public transport, and for oil substitution through increased investment in alternative technologies; if so, how does the Government plan to assist that process?

Hon Dr MICHAEL CULLEN: I think the member is right; there are basic market signals coming through, and we are seeing the results of that. When did we last see nearly all motor vehicle manufacturers or importers in New Zealand advertising diesel vehicles as part of their major offering, instead of petrol vehicles, because of diesel vehicles' greater efficiency? What the Government can do in all of that is look at areas like fuel efficiency ratings and standards, and look at doing what it has done, which is to mandate a beginning towards including, to start, minimal *biofuels content within our fuels, but that can increase. The Government itself is reviewing its own vehicle fleet. It is looking to use much more fuel-efficient diesel-powered vehicles and others, and vehicles with low carbon footprints.

Jeanette Fitzsimons: Does he believe that biofuels, useful as they will be when used on some scale, can provide for a continuing 4 percent annual compound growth in demand for transport fuels, given the International Energy Agency's statement in the same document I just quoted that biofuels are already running into competition with food production for suitable land, and that the economics of biofuels are still uncertain and raise doubts as to whether ambitious supply-growth scenarios can be realised?

Hon Dr MICHAEL CULLEN: To pick up on that one important point, it seems to me, the economics of biofuels is like almost anything else: dependent in large part upon the price of the alternative. In that respect, the Green Party should be welcoming high oil prices, even if the rest of us complain when we go to the petrol pump.

Jeanette Fitzsimons: What plan does he have to deal with the impact on the economy of even faster accelerating oil prices, if strategies to correct the exchange rate actually work and we are no longer protected from real oil prices by an overvalued dollar?

Hon Dr MICHAEL CULLEN: The member, of course, points out the conundrum that is faced at the moment; that if the dollar starts to come back to a level that is more favourable towards exporters, there will be an increase in petrol prices and, indeed, in diesel prices. That is one of those variable prices that business in New Zealand has coped with for a very long time. Petrol prices at the pump now are significantly lower in real terms than they were, for example, in the early 1980s. It is not as though we have not been through these kinds of variables before. It is important to remember that other countries are going through the same experience.

Jeanette Fitzsimons: Can the Minister place on record, then, that he expects the current rise in oil prices to be a temporary phenomenon, just as the oil price rises in the 1970s were, and that it does not signal a long-term depletion of oil supply?

Hon Dr MICHAEL CULLEN: I thought it was very clear from what I said that that was not what I was saying, at all — in fact, rather the opposite. I said that I expect that there are long-term pricing signals here that will lead to significant change in behaviour and practices by individuals, by business, and by others.

Jeanette Fitzsimons: I seek leave to table an article quoting *Goldman Sachs Group headed: "$100 oil price may be months away says" —

Madam SPEAKER: Leave is sought to table that document. Is there any objection? There is objection.