Fuel Shortage: Underprepared?

VIEWS FROM OUTSIDE THE APIARY: IAN FLETCHER

With the Iran-US war still resulting in closure of the Strait of Hormuz, former GCSB head Ian Fletcher surveys the playing field from New Zealand's vantage point.

By Ian Fletcher

The Iran war (like all wars) has been unpredictable. The actual bombing stopped just after Easter (in fact more or less as predicted). This reflected US ammunition shortages, again as we expected. I have always thought, too, that any ceasefire would be ragged and that there would be months of disruption. Finally, I still think that any peace deal that includes sanctions relief for Iran is a big win for New Zealand. Iran would be a big untapped market for exactly the stuff we grow best.

Ian Fletcher: "It's (the fuel shortage) going to get worse".

But there’s the stuff that hasn’t been foreseen: firstly, the very poor management of the conflict by the US. The Iranians were able to shut the Gulf first, and on their terms, and so show the world what a wonderful weapon of mass disruption they had exposed. The later American (‘Me too’) blockade was too late to establish psychological dominance – US commentators had been calling for such a move for a month prior to US action, and so there was no surprise. And not having any idea of what sort of a peace deal they really wanted has meant confusion on both sides.

But the Iranians have learned that the Hormuz card is a real joker in the pack. They don’t have to re-open the waterway if they don’t get what they want. The psychological advantage now lies with Iran.

Like every country east of Hormuz, New Zealand is in the economic crossfire. Three really important conclusions about the situation, and then some lessons:

First, it’s going to get worse. For us, it’s all about diesel, and (to some extent) jet fuel and fuel oil for ships. Prices have been held down (yes, down) by slow release of stocks around the world. Traders are now warning those stocks will be gone by the end of May, and prices will then rise sharply. We pay for the fuel we need at rates much higher than the crude oil price – the refiner’s margin, shipping costs, and exchange rate depreciation (likely) all jack up pump prices here. I’m told we might well see $5/litre diesel. You should plan accordingly.

While actually running out of diesel completely in New Zealand is unlikely, Ian Fletcher says prices of around $5 a litre in the near future are not far-fetched.

Secondly, sustained high fuel prices will tank much of the economy. Tourism (anything involving travel, actually), and fuel-intensive industry (forestry, food supplies) will be really hard hit. It won’t take long for the higher prices to start to distort some sectors permanently – many companies will not survive, and the economy will be more fragile in future. Many of our Asian trading partners will be hit hard too, so a regional recession is likely. Some particular sectors will do well – I wish I owned an electric car franchise right now.

Finally, there are some second-order effects we haven’t really understood yet. Nitrogen fertilisers will be more expensive, and may be just unavailable. For beekeepers, that will lift the relative value of clover pollination. Like all pollination, beekeepers receive a poor return for the value created. I’ve urged before that beekeepers form pollination collectives and negotiate higher prices. This might be an opportunity.

Separately, it’s clear that a lack of helium (a by-product of oil and gas production I hadn’t appreciated) will seriously crimp production of computer chips. We don’t yet know how much, but stored reserves will run out soon, and it’s an essential input. That will directly slow the global engine of the US economy’s investment boom.

Are there other risks? The big one is that Asian countries decide to ban exports of refined fuel, and we are unable to replace the supply. So, we actually run out of fuel at any price. As I wrote last month, this would be a threat to our way of life at a fundamental level. The agreement with Singapore being signed this weekend is intended to provide some guarantee against this. But if our trading partners are themselves pushed over the limit, there are no guarantees. I think this is low risk, but it would be catastrophic.

What is to be done? Firstly, I fear the government has a response based on hope. They hope they won’t need to make difficult rationing decisions. That may be true, but they have yet to be really clear with the country that prices will go higher for longer. Many groups and regions will be hard hit, and everyone needs time to prepare. Secondly, although we might all agree that physical shortage (no fuel at any price) is very unlikely, we all deserve reassurance that there is a plan, and to know how it would work. At present I’m reliably told there is no meaningful plan. This is culpable negligence.

For each of us individually? Rising prices, and static or falling real incomes face most of us who live rurally or provincially, and many others too. This is a moment to seriously reduce exposure to oil and gas, and manage our other costs carefully. We are all about to discover we are not as affluent as we thought. For many of us, this is also the moment to consider a move across the Tasman. The economic gap between New Zealand and Australia is about to widen sharply.

The election later this year will be fought against this background. The temptation to offer simple, magical solutions to the electorate will be seductive for many parties. Far be it for me to tell anyone who to vote for (I haven’t decided myself, and I rarely vote for the same lot twice). But honesty about the challenges and humility as to the solutions will be the measures I expect to apply.

For those of us running small businesses using diesel-powered vehicles, this is a moment to vote carefully, and to ask searching questions as we do. Plato is said to have observed that “failure to go into politics is to condemn oneself to be governed by one's inferiors”. It will be a pity to see him proved right once again.

Ian Fletcher is a former head of New Zealand’s security agency, the GCSB, chief executive of the UK Patents Office, free trade negotiator with the European Commission and biosecurity CE for the Queensland government. These days he is a commercial flower grower in the Wairarapa and consultant to the apiculture industry with NZ Beekeeping Inc.