In addition to petroleum oil reserves, New Zealand has a vast resource of lignite coal, which can be converted into petroleum products. Solid Energy and several other companies are proposing lignite to liquids plants or underground coal gasification projects to create oil products. However, the IEA estimates lignite to liquids production costs are US$60-$110 per barrel, so high oil prices are needed to make lignite to liquids viable.

If New Zealand can increase its oil production, it could be a major economic boon in the long-run. The Ministry of Economic Development projects oil exports to reach $30 billion per annum by 2025. However, becoming self-sufficient would require a massive increase in New Zealand’s oil production and refining capacity, and, as with any region, New Zealand would not be able to sustain high production rates as reserves were depleted.

No large-scale coal to liquids projects or commercial production wells of, as yet undiscovered, conventional oil reserves are planned to come online within the next five years.

In the medium term, New Zealand will remain heavily dependent on imported oil. Domestic production at any level cannot insulate New Zealand from global short-falls or price rises. New Zealand pays the world price for oil, whether that oil is produced domestically or not because oil producers will not sell their product in New Zealand if they can get a higher price overseas.

New Zealand would be affected by oil supply crunches both directly and indirectly via the effect on trading partners.

Direct effects include higher transport costs and an increased balance of payments deficit due to the increased cost of importing oil. Transport costs constitute a significant expense for exporters, especially exporters of bulk goods like timber, meat, and dairy.

Indirect effects would be felt through lower consumer demand in the markets for New Zealand’s export goods, leading to lower prices.

The LEaP report cited above details the economic consequences of oil shocks on the $9 billion a year international tourism industry, which it states is “highly dependent on affordable oil”:

* “Tourism Businesses: face an increase in their operating costs due to higher oil prices and reduced demand in response to oil shocks and price increases.

* Destinations and communities: face reduced visitation resulting in compromised regional development.

* Tourists: reduced experience due to higher proportion of holiday budget being spent on transportation.

* Government: reduced income from tourism as a result of reduced arrivals and reduced expenditure by tourists.”

As a country that is reliant on oil imports and heavily dependent on cheap oil for its major sources of income, New Zealand is highly exposed to oil shocks. Domestic oil production is insufficient to meet New Zealand’s oil needs. Equally, increasing domestic oil production would not protect New Zealand from either the direct or indirect effects of price spikes caused by global supply crunches.

Cross posted from Peak Energy.