Lessons from Past ‘Energy Crises’

1. Lessons from Past ‘Energy Crises’ Presentation by Brent Layton ‘Breaking Dependence on Fossil Fuels by 2020’ Institute of Policy Studies Energy Roundtable Series 4 August 2006

2. Introduction • The lessons from ‘Think Big’ • ‘What energy crisis?’

3. ‘Lessons from Think Big’: Background • Electricity demand forecasts in mid-1970s had growth at 7% per annum continuing • Majority on Committee to Review Power Requirements supported this view - NZED, MoW, Power Supply Authorities • Based on extrapolation of history • Failed to materialise from mid-1970s • 1977 Treasury, Statistics and Ministry for Energy Resources develop a lower forecast • 1978 Power Planning Committee recommended two large gas-fired stations in Auckland be deleted from the plan • Maui development already underway at cost of $650m

4. ‘Lessons from Think Big’: Creation of LFTB • Ministry of Energy was in process of being formed and Treasury with DTI developed inter-departmental committee to look at using the gas which was about to arrive but had no ‘home’ to produce liquid fuels • Liquid Fuels Trust Board established in the 1978 Budget • Sir Colin Maiden (Chair) • Dr Basil Walker (Technical Director) • Sir William Birch (new Minister of Energy late 1978) • Late 1978, OPEC increased crude price by 14.5% - second ‘oil shock’ • Revolution broke out in Iran in late 1978 (Shah left 16 Jan 1979) • OPEC raised price again in July 1979 – third ‘oil shock’ and NZ hit BoP crisis

5. ‘Lessons from Think Big’: LFTB Recommendations • LFTB made recommendations in August 1979 • A synthetic fuels project – either Fischer Tropsch or Mobil ZSM-5 (The appropriately named Lurgi, Badger and Parsons to assist) • Methanol plant to produce 2500 tonnes/day for export medium term but later potentially for blending into motor spirits • Gas liquids be reserved for extraction of LPG and to be basis for possible plastics industry • No recommendation on methanol blending • No recommendation to pursue LNG, although apparently highest value use • Reluctance to export so much of the gas fields contents and • Environmental risk

6. ‘Lessons from Think Big’: The Projects • Core Projects • Mobil synthetic gasoline plant at Motonui • Complementary expansion of oil refinery in Whangarei • Stand-alone methanol plant for export • Other Energy Intensive Projects early 1980s • NZ Steel expansion • Electrification of the NI main trunk • Bluff third pot line

7. ‘Lessons from Think Big’: The Lessons • Don’t believe ‘engineers’ forecasts of demand and supply, especially when they have a vested interest in building assets hanging off them • Don’t assume price movements in response to political events are going to be sustained – revolutions take a finite time • Autarky is a dumb idea if you are interested in economic welfare • There are always people willing to spend other peoples money to experiment with new ideas and technology, even if the scheme is hopeless economically • Politicians and bureaucrats should not be trusted to make investment decisions; they will probably get stitched up

8. ‘What Energy Crisis?’ • Energy prices are likely to rise rapidly as oil becomes scarce and other more expensive source of energy are brought on stream - John Fair 1979(Former Managing Director of B.P.) • At current rates of growth world demand for oil will overtake expected available supplies by the mid-1980’s, perhaps sooner - Christopher Laidlaw 1978 (International Energy Agency) • New Zealand will face real restrictions on energy use in the future despite any alternative energy plans New Zealand might implement - Mike Venter 1979 (Auckland University, School of Architecture)

12. Lessons from Past ‘Energy Crises’ • Prices do affect demand – may even lead to a drop in demand • Prices do affect supply – exploration effort - discovery • Doomsayers are not hard to find. There are always people who seek reasons why they should control things politically • Discovery/consumption charts are misleading as the recoverable energy in every field changes with knowledge of the field, drilling/extraction technology and price • Proved reserves are estimated quantities that analysis of geologic and engineering data demonstrates with reasonable certainty are recoverable under existing economic and operating conditions

13. Lessons from Past ‘Energy Crises’ (2) • Updated proved reserves/production ratios are more reliable indicators of physical supply relative to demand • Proved reserves have more than kept pace with consumption for gas and oil • Proved reserves/production ratios for coal are very high • I have used BP’s data from their Statistical Review of World EnergyJune 2006 • Current high prices largely reflect political factors, including OPEC, and not the market warning of impending doom and lack of low cost supply. The current price is well above the current marginal cost of production. • If you don’t believe me, I suggest you demonstrate your faith in your analysis by mortgaging the house and buying long-dated oil futures. If the ‘Peak Oilers’ are only half right you’ll be on to a bonanza