An expanding Middle East war that puts the Red Sea and Suez tanker route at risk is a major risk to us because it could hit the global price of oil.
Since the attacks by the United States and United Kingdom on Houthi bases in the last days, oil prices have started to spike.
This runs counter to the 2023 price record. The Chief Market Strategist for B. Riley Wealth Mr Art Hogan explained the growing importance of OPEC as a stabilising influence. “OPEC+ has done an effective job in 2023 of coordinating lower output levels, in an environment of decelerating demand. Additionally Brazil looks set to join the alliance in January 2024.”
Brazil’s entry is likely to put downward pressure on oil price globally since it is not committing to match output with demand, and oil production in the US together with very soft economic growth in China will also be downward-price factors.
However it is pretty apparent that the United States effort towards containment of the Middle East conflict in Israel and beyond is failing. It is now much more likely that this is about to kick off, and with it oil prices are at upward risk.
We have very little protection against rising oil prices.
More than in other OECD countries, New Zealand’s use of transport fuel is weighted towards diesel and jet fuel, which play a minor role in private transport but a major role in tourism and agriculture which are our economic engines. Our economy is already weak and this is exactly what we don’t need.
We should definitely worry that an expanding war in the Middle East will affect oil prices. Analysts like Goldman Sachs have been flagging this increasing risk for a while now.
During the 1973 Arab states invasion of Israel, Arab members of OPEC imposed an embargo against the United States in retaliation for the U.S. decision to re-supply the Israeli military and to gain leverage in the post-war peace negotiations. It may be 40 years ago, but this current confluence we don’t need again. Then the Iran revolution occurred in 1979. As the previous Minister of Energy Sir Bill Birch stated, “In 1979, New Zealand suddenly lost half its oil supply. The Government could not stand idly by and do nothing.”
You can check out the full public sector response in John Boshier’s 2023 book Power Surge. This results from his recollections as an insider and his own extensive research. Read it if you want to understand the turning points in our energy story, and explore what motivated the key people.
The pressure on New Zealand at that time was so strong that it instigated a massive national programme towards greater energy self-reliance.
But then ideological radicalism and complacency set in. Deregulation of the oil industry in 1988 removed price controls, government involvement in refining, licensing of wholesalers and retailers, and restrictions on imports of refined products. With the dismantling of Marsden Point as a refinery we now fully rely on imports for all petroleum products from road tarmac to butane.
As the Ukraine war did, so the Middle East chaos should again remind us of our vulnerability.
Don’t worry we are a long way from carless days or another oil crisis.
Forty years later from the OPEC embargo, New Zealand doesn’t have an energy strategy. But the previous government did generate a terms of reference for one to be developed.
There are two bits of good news. The U.S. has such strong domestic supply that it can’t be successfully embargoed by OPEC as it was. Secondly the countries upon which we are most reliant – China, the United States and Australia – are not experiencing recession and are sending bounteous volumes of tourists our way. They can pay for the jet fuel.
The bad news is that the United States simply isn’t using its influence to calm the region down. Since 2015, in Yemen, Saudi Arabia has produced the world’s worst humanitarian crisis and caused 377,000 deaths according to U.N. estimates. That’s who the U.S. wants a big diplomatic deal with. And it is continuing to fail to use its influence over Israel to come to any diplomatic solution over its huge attacks on Gaza after the terrorist incursions in October 2023, and rewarding it with unlimited weapons.
This sustained failure with the two worst offenders in the Middle East is not likely to improve, whether Biden or Trump are running U.S. foreign policy.
This is going to get worse.
But New Zealand has zero effect on any of that. So it must prepare.
New Zealand is at high risk of oil price spikes that can cause massive economic damage.
Our government needs to commit to continuing the transformation away from oil dependence towards electricity and decarbonisation across the whole of New Zealand. It needs an energy strategy. It needs to accelerate electric car fleet replacement. It needs to shut down the Huntly coal power station. It needs to work to rid us of petroleum reliance which is our core addiction.
And it needs to act fast. As we all do.
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