War Clouds on the Horizon?
VIEWS FROM OUTSIDE THE APIARY: IAN FLETCHER
By Ian Fletcher
The Government has started, tentatively, to take steps to prepare for the possibility of war in our wider region. (I’ve used the word ‘war’ here because ‘conflict’ is mealy-mouthed and avoids the awkward truth that this is about actual shooting war, not anything short of that.)
On 9 November, the Government announced that fuel companies will be required to hold onshore stocks of approximately 28, 24 and 21 days’ worth of petrol, jet fuel and diesel respectively. And the Government is getting into the game too, announcing that it will also procure additional onshore storage of diesel stocks of at least 70 million litres of diesel, providing approximately seven days’ cover.
All this was announced as part of a wider package of measures aimed at helping consumers by managing price pressure: the biofuels obligation was delayed, and some reserve powers to set prices will be created for the Commerce Commission. These other measures are aimed at the prices you and I pay for fuel. The stockholding requirement will raise oil company costs (and so retail prices), a bit.
Holding strategic stocks onshore is a big change for New Zealand. As recently as April, announcing a release of oil stocks as part of an International Energy Agency (IEA) programme to damp rising prices, the Government explained “New Zealand’s membership of the IEA requires it to hold stocks equivalent to at least 90 days of net oil and imports. New Zealand buys emergency reserve stocks that are held offshore as part of this obligation and help to manage potential disruptions in the oil market”. I’ve added the emphasis here. Some of the oil was held in Spain, and some in the UK. The existing 90 day arrangement dates from the late 1970s.
Offshore, since the 1970s. Now onshore. Why the change? Holding stocks offshore is economically efficient, but assumes that it will always be possible to get fuel to New Zealand at some price. It’s a minimum way to meet IEA obligations. Holding stocks onshore is more expensive, and only makes sense if there might be a physical disruption, so tankers can’t or won’t get here. Economic downturn or pandemic-type disruption isn’t enough – we saw during Covid the Government’s willingness to pay extra for airfreight to keep essential supplies coming in. The only change in the environment that explains the new requirement is possible war. And the only war in the region that looks plausible over the coming years is China invading Taiwan. North Korea can threaten South Korea, Japan and soon the US itself, but has no capacity to disrupt shipping more widely. So this is all a consequence of a change in the Government’s assessment of war risk.
Why, and will it work? Does it mean the closure of the Marsden Point refinery was a mistake? The Government’s own thinking (helpfully released by MBIE) gives an insight.
Firstly, Australia is doing the same. This is mentioned several times in the papers, and that’s important. Australia may well have made clear to New Zealand that free riding on Australia’s reserves is not on. I don’t know that, but I think it’s a reasonable deduction.
Secondly, Marsden Point. The Government develops the bizarre argument that Marsden Point was a single point of failure and so closing it and importing refined products from a range of sources somehow improves security of supply.
This is nonsense. If markets and shipping are working well, there’s no security of supply issue, and getting the best economic deal makes sense. But ‘security of supply’ means having options when markets and shipping aren’t working. If that happens, being unable to process crude oil reduces options. In that situation, price won’t matter, but physical availability will.
This is the biggest gap in the Government’s thinking. The world is full of oil producers (and lots of refiners) who will want to sell to us, especially if the price is high (the phrase ‘war profiteering’ applies here). But shipping is the issue. If there’s war around Taiwan, ship owners will look to see what their risks are before sailing anywhere near, and a lot of the world’s shipping (and a lot coming our way) goes through Asian waters that may be contested in wartime.
Which leads to insurance. If ships are at risk, insurers won’t cover them, and they won’t sail. If they won’t sail, we’re stuck. Our biggest risk isn’t physical blockade by the Chinese navy (unlikely), it’s economic blockade by the shipping underwriters at Lloyds of London (very likely in a shooting war). The shipping insurance market is really powerful: to nobble the Russians’ oil sales, next week the EU and UK are introducing a partial ban on shipping insurance for tankers carrying cheap Russian crude oil. As that moment approaches, the Financial Times reported industry folk saying “… the coming days mark a moment of deep peril for the oil market…”. Insurance really matters.
Could the Government do better? Yes. Stockholding onshore will help (it’ll buy time, if things get sticky). Being prepared to lease and then to self-insure tankers would be a big, bold step. But maybe the only really effective one. It would only require preparation, not action while insurance markets are working. Doing it with Australia might help too (a lot of New Zealand’s crude oil exports are trans-Tasman, so keeping that supply chain open helps both sides). I think there is a real war risk around Taiwan, but we don’t need to catastrophise. Just being open about risks and having credible plans would be a great start (just like the early days of Covid). Welcome to the new world.
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 expert 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 and chairperson of the Mānuka Honey Appellation Society.