19 Apr 2018

Oil exploration ban: Plumbing the depths

4:11 pm on 19 April 2018

By Brian Easton*

Opinion - Banning offshore oil exploration is a moral act, bBut it has economic implications.

The public rhetoric too often claims that New Zealand can do something significant to restrain global warming. In fact, we are far too small to have much direct impact at all.

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Photo: 123rf.com

There are two things we can do.

First, practically, we need to prepare for its consequences, not least by taking measure to prepare for rising sea levels are going to rise and storm surges.

Second, we can take a moral stance. It has two elements. The first is to individually reduce one's emissions, the second is to nationally set an example for the world by taking measures to reduce our piffling emissions in the hope that others - emitting much more - will follow us.

The government announcement last week that it will not grant any new deep-sea oil and gas exploration permits is driven by moral arguments. Were the rest of the world to follow our example there would be, eventually, less hydrocarbons for world consumption, their price would go up and renewable energy would become more prevalent.

However, unless we hit a Saudi-sized field, anything that the new discoveries are likely to produce will not have much effect on aggregate carbon emissions or global warming.

The moral arguments make economic evaluations of the ban complicated.

Imagine banning baby farming (assuming it was practiced). There would be outrage from existing baby farmers and those planning to enter the industry, and an outcry from those who supply services to the industry.

They might get a consultant to show the ban would reduce GDP (if the report said otherwise they would not publish it). But the reasons for the ban would be moral ones, not about material output. On that, the consultant would be silent.

The same applies to a morally-motivated ban on new exploration permits.

Prime Minister Jacinda Ardern, flanked by Energy and Resources Minister Megan Woods, Regional Development Minister Shane Jones, and Climate Change Minister James Shaw, answers questions about the government's stance on oil and gas exploration.

Government ministers answer questions after announcing a ban on offshore oil exploration. Photo: RNZ / Chris Bramwell

Even so, economists might be curious as to its impact on GDP. I should not be surprised if the ban reduced material output. But before the gloom - many people make material sacrifices in the interests of their morality - a few twists need to be mentioned.

First, GDP includes payments to overseas entities such as the drilling operators and migrant workers.

Second, any economic benefits from the drilling are likely to accrue only to particular regions (where, not unexpectedly, any outcry is largest), although there may be some net gains from taxes minus spending costs to the exchequer. However, there is not generally much in it for most New Zealanders, especially those outside the regions servicing the exploration.

There is a further complication. The consultant's calculation will depend on the exploration phase. The extraction phase - if hydrocarbons are found, for they need not be - hardly appears because it is so uncertain and so far into the future that it is heavily discounted.

The funding will largely come from outside New Zealand, which may be a good thing insofar as some outlays are captured by New Zealanders. In the immediate term, one is almost valuing foreigners playing at a casino although the odds of a decent return may be somewhat lower.

I am not sure whether this is a good or bad thing. The cynic might hope that the wells all prove empty (or uncommercial), although that would do nothing for the international moral example the anti-drillers are trying to set.

I imagine the protests against the ban will soon die down. Even so, it seems likely that a future government will reverse the decision.

The hydrocarbons - if they exist - will still be there. Their price will be higher as the world runs short of alternative sources but still needs hydrocarbons because renewable fuels cannot replace everything.

Those with a longer time horizon than that measured by the quick buck may do well to wait.

* Brian Easton is a Wellington-based economist who researches and teaches at Auckland University and does consultation. He has written previously for the Listener and has authored or edited more than 30 books.

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