“It can only get worse from here.” – that’s the Automobile Association’s numbers man on petrol prices. It’s quite a revelation because, until now, the AA has been firmly part of the dinosaur establishment that has been insisting petrol prices will ‘soon’ fall to ‘normal’. In fact petrol prices have been rising at 8% a year since 1999, 3 times inflation in the rest of the economy, and there’s no sign that the price rises – driven by peaking supply – will stop.
There’s a rule of thumb, developed by looking at all the recessions of the Oil Age, that when oil costs exceed 4.5%-5% of the economy, you get a recession. In economic terms, the cost of burning oil exceeds the value gained on the marginal units of consumption – so, you stop doing those units of consumption, and the economy shrinks until the price falls under the danger zone. A look at our oil imports shows we’re currently spending 4% of GDP on oil imports vs 1.2% in 1999.
On the current trends of GDP growth and oil price growth, before 2020 it’ll permanently cost over 5% of GDP to import as much oil as we do now. We, and the world, will have to trim a lot of demand – ie have a series of serious recessions and ‘failed recoveries’ (sound familiar?) to get that down. But the cycle will just continue of oil price rises to recession-inducing levels, followed by recessions that temporarily relieve the pressure by destroying demand.
Mark Stockdale also gets the logical response to this – stop building sprawl: “In the past, people have thought nothing to live an hour away from work. Is that really practical?” Someone tell National, because they plan to put all of Auckland’s additional population in the middle of nowhere in sprawling suburbs where their families’ budgets will be extraordinarily sensitive to rising petrol prices.
We urgently need to reduce our nation’s dependence on oil (I nearly wrote ‘imported oil’ but, in fact, we’re always going to import all the oil we use for transport because the refinery is set up for sour, heavy crudes, not the light ones found here, and, besides we would pay the international price on domestic oil anyway). Imports have been flat for about 7 years. The party that can come up with policies to reduce oil consumption by a serious amount will be putting money into the NZ economy rather than seeing it flow offshore, will be insulating us against future price shocks, and will be helping save the climate.