Peter Dunne set to give away the (oil) farm

There was interesting news in the Dom a few days ago, with an announcement that a Canadian company has discovered more than 12 billion – yes, that’s billion – barrels of light sweet crude on the east coast. As it turns out, the find is not as significant as might be thought, as it’s a shale oil formation. Those who pay attention to The Oil Drum and industry commentators will know that these are typically “tight” formations where oil does not flow easily, if at all:

According to Wellington oil exploration consultant Mac Beggs fractured source rock has proved quite successful in North America over the last few years, adding quite substantial reserves.

The rock lacked the permeability for oil to flow, and had only become viable because of extraction technology breakthroughs.

In other words, this is not a conventional oil reservoir like the Tui oilfield off the Taranaki coast, and extraction will be both more difficult and more expensive than a regular field. Having said that, when oil prices inevitably rise (as they’ll do in the next few years), this will put New Zealand in a very good position when it comes to domestic resources.

Only it won’t – or at least, not if Peter Dunne has anything to do with it.

Our Mr Dunne is currently Minister of Revenue, and one of his areas of “responsibility” is overseeing the minerals regime administered by the Ministry of Economic Development. As Minister, he therefore approved the current sweetheart deal enjoyed by Australian Worldwide Exploration (AWE), the 85% owners of Tui. This involved levying only NZ$10 per barrel on the 50 million barrels of high-quality oil that is due to be produced from the field. As far as I can tell, this is the lowest levy in the OECD, at a time when many countries are either nationalising their oilfields or demanding a significantly higher royalty for their indigenous resources.

There’s an argument that says such a deal might not be that flash because it was struck before oil prices began their bull run in 2007. That might even be a reasonable argument.

However inquiring minds might care to take a look at UnitedFuture’s energy policy. It states:

It is UnitedFuture policy to:

• oppose levying the oil industry to build additional oil storage capacity – this is a strategic government policy and as such should be paid for by the government (it is really a “defence of the realm” issue)

oppose a standard royalty rate on new offshore oil discoveries being fixed in advance. We believe that the general policy should be a zero royalty rate with the government reserving the right to apply a royalty, on a case-by-case basis specific to rate of any medium to large oil field discovered.

Hmm. So there is every chance that if all that oil does turn out to be recoverable, good old friend-of-the-oil -companies Peter Dunne will effectively give it away.

And it appears there’s already a precedent for this – the current Tui oil field (50 million barrels of high-quality light sweet crude) is governed by a production sharing agreement that (apparently) only costs Australian Worldwide Exploration a measly NZ$10 per barrel. Which has to be one of the lowest royalty rates in the world.

Responsibility for signing this deal lay with – you guessed it – the Minister of Revenue.

Only One Idea

The National Party’s economic policies have a disturbing amount of deja vu to them – as I/S notes, they seem to largely revolve around tax cuts, gutting the RMA and attacking the public sector.

What’s interesting is that these policies are almost identical to the ones Don Brash was pushing back in 2005 … which are almost the same as the ones from 2002 … yet the world has changed beyond recognition in that time. You’d think that moving from the halcyon days of 2005 – main problem: too much growth – to the recession-filled 2008 – main problem: not enough growth – would result in some kind of change of direction or re-weighting of economic instruments. Not if you’re the National Party, apparently. It reflects an almost touching faith in an outmoded economic dogma.

But as the Nobel-winning Joseph Stiglitz notes in a very thoughtful article in Vanity Fair this week, the thinking that got us into this problem – specifically tax cuts and deregulation – is unlikely to get us out of it. And the traditional austerity approaches to economic management are likely to make things worse, not better:

This is not the time to turn to the old- time fiscal religion. Confidence in the economy won’t be restored as long as growth is low, and growth will be low if investment is anemic, consumption weak, and public spending on the wane. Under these circumstances, to mindlessly cut taxes or reduce government expenditures would be folly.

Which is exactly what National seems to be planning, unfortunately – and if history is any guide, it seems beyond doubt that these policies will make the recession longer and deeper than would otherwise be the case.

National needs to get rid of its ideological baggage, and start thinking about the economy in a way that deals with reality rather than in terms of dogma. As it stands, John Key and Bill English are starting to look out of touch with our economic reality – based on the evidence, space aliens could invade Earth and enslave us all, and the National Party would still be suggesting tax cuts and RMA reform as the solution.

Remembering Muldoon

I’m old enough to recall Rob Muldoon striding across the 1970’s New Zealand political landscape like an enraged garden gnome, and this week was starkly reminded of how little has changed since he was around.

National is dead keen on more tax cuts, despite the precarious state of the economy, and it seems there are only a few ways that this can be achieved. The alternatives seem to be cutting government spending, increasing other government (i.e. non-income tax) revenue, asset sales, or borrowing.

It’s likely that John Key will attempt a mix of all four, whilst fudging the figures to make it all look affordable. And in truth, any incoming government will have to grapple with striking a balance between a set of relatively unpalatable alternatives.

But the one that scares me the most is the potential for borrowing – largely because I vividly remember the economic hangover that resulted from Muldoon engaging in exactly that approach.

For those who weren’t around at the time, Muldoon reacted to the economic shocks stemming from the 1970’s oil crisis by trying to insulate the New Zealand economy from world events. (OK, that’s an oversimplification, but will serve our purposes here.) One of his long-standing policies was to run large external deficits, which over the 9 years of his reign resulted in a massive external debt and a resulting currency crisis. It arguably took a decade or more – and a benign international economic environment – for the country to recover.

Whether you agree with the actions that Roger Douglas took once he assumed power in 1984, there’s no getting away from the fact that New Zealand was damn near broke, due to Muldoon’s complete mis-reading of the global economic situation. In practically every major economic decision over those long nine years, Muldoon zigged when he should zagged, and persistently made the wrong calls. Arguably he did so because he had the best interests of New Zealanders at heart, but his track record as an economic manager is truly shocking.

And the parallels with John Key are obvious. He’s promising what probably can’t be delivered, and clearly intends to borrow to make good on promises he should never have made. The only redeeming feature I can see is that the current seizures in the international credit markets may make it impossible to fund the kind of overseas debt he’s contemplating.

As the saying goes, history doesn’t repeat, but it sure does rhyme.