5. Measures to Respond to an Emergency Oil Supply Disruption
5.1 As discussed in the previous section, the Ministry of Economic Development proposes that the Senior Officials Coordination Team (in consultation with the Industry/Government Management Team) will take the lead role in determining which measures are appropriate to respond in a given situation.
5.2 This section sets out the Ministry's proposed general approach of how prescriptive the strategy will be, briefly describes potential measures, and discusses some of the implementation issues and pros and cons of those measures.
5.3 The Ministry's view is that the strategy should not provide strict rules prescribing the measures that have to be implemented in response to specific situations. Rather, the strategy should provide information on the range of measures available to respond to an emergency oil supply disruption so that the decision on which measures to implement could be made quickly in light of the information available at the time of the oil supply disruption. In general, however, measures which augment market mechanisms are favoured and government intervention would be commensurate with the scale of disruption.
5.4 Note that the potential emergency response measures are not mutually exclusive and may be implemented in conjunction with each other where appropriate.
5.5 In principle, there are two broad categories of measures available for the government to respond to an oil supply disruption: measures to improve supply and measures to restrain demand. The diagram below illustrates the range of potential measures.
Summary of Potential Emergency Response Measures
Measures to Improve Supply
Drawdown of Stocks
Stocks from New Zealand's petroleum reserve offered to the market to prevent stocks "running out".
Surge Production
New Zealand's domestic production increased to prevent stocks "running out".
May require regulation or Ministerial direction under the International Energy Agreement Act or the Petroleum Demand Restraint Act.
Specification Relaxation
Petroleum Products Specification Regulations relaxed to improve the supply of petroleum products.
Requires amendment to Petroleum Products Specification Regulations by Order in Council.
Measures to Restrain Demand
Voluntary Demand Restraint
Appeals made to public, via a public information campaign targeting voluntary savings, to reduce demand.
Legislative powers not required.
Mandatory Demand Restraint
Government compulsion used to restrain demand, to prevent hoarding, or to distribute a limited amount of fuel.
Requires regulation under the International Energy Agreement Act or the Petroleum Demand Restraint Act.
Fuel Switching
Oil substituted in favour of alternative fuels where possible to prevent stocks "running out".
May require regulation under the International Energy Agreement Act or the Petroleum Demand Restraint Act.
Measures to Improve Supply
Drawdown of Stocks
5.6 In an oil supply disruption, New Zealand could respond by releasing stocks from New Zealand's petroleum reserve (from the start of 2007).
Background: New Zealand's Oil Stocks
As a member of the IEA, New Zealand is required to hold petroleum stocks that meet at least 90 days of the country's net import requirements. Until 2006 New Zealand has relied on indigenous oil production and normal commercial stocks to meet the IEA requirement. However, declining indigenous production and increasing demand has left New Zealand short of the 90 day requirement.
The government has decided that New Zealand will meet its obligation to the IEA by tendering for companies to hold stock on behalf of the Crown. Tenders are expected to be held in late 2006. The reserve stocks will be in addition to normal commercial stocks and will be controlled separately. Criteria for the release of reserve stocks will ensure that the stocks may only be released to meet New Zealand's obligations to the IEA or because there is a reduction or threatened reduction of petroleum supplies in New Zealand. The reserve supplies will not be available where the primary purpose is for price management or for assisting any particular supplier
Surge Production
5.7 In an oil supply disruption, New Zealand could respond by increasing domestic oil production. Options to increase production would be investigated at the time of an oil supply disruption. Consideration should be given to effect that surge production can have on reducing New Zealand's recoverable reserves.
Relaxation of Fuel Specifications
5.8 In an oil supply disruption, New Zealand could respond by relaxing specific parameters within the Petroleum Products Specifications Regulations where this would improve the supply of petroleum. The relaxation of specifications has the potential to improve the availability of petroleum supplies in two main ways: through increasing the output at the New Zealand refinery; and through increasing the likelihood of petroleum from offshore being acceptable for sale in New Zealand.
5.9 Options to relax fuel specifications would be investigated at the time of an oil supply disruption. The industry/government management team would identify what regulations, if any, may potentially be restricting the production or supply of products in New Zealand. Once potential regulations have been identified, the industry/government management team would ascertain the likely effects (both positive, in terms of increased supply, and adverse, in terms of environmental, health, safety, and operational effects) of relaxing the relevant regulations and provide advice to the Minister on whether the relaxation of those parameters is appropriate.
Measures to Restrain Demand
5.10 New Zealand may implement measures to restrain demand in response to an oil supply disruption. Note that the demand restraint measures considered here are in addition to the reduction in fuel use that may occur in an emergency due to likely higher oil prices.
5.11 The Ministry favours an approach that first introduces measures that encourage voluntary restraint, moving to mandatory requirements only if the severity of the situation requires it. The main exception to this rule is that an immediate requirement for minimum sales could be introduced if there was a risk of panic buying causing a supply disruption to escalate into physical shortages.
Voluntary Demand Restraint
5.12 In the voluntary phase of a restraint programme appeals would be made to the public, via a public information campaign targeting voluntary savings, to reduce demand. The Energy Efficiency and Conservation Authority would take the lead in overseeing the communications campaign to encourage voluntary restraint.
5.13 Section 6 contains information, from a study of New Zealand's available demand restraint measures,4 on voluntary demand restraint measures that could be encouraged by the information campaign.
Mandatory Demand Restraint
5.14 If it was necessary to move into a mandatory phase of demand restraint, government compulsion could be used to restrain fuel demand. Legislative power to restrain demand is available under the Petroleum Demand Restraint Act (1981) and the International Energy Agreement Act (1976).
5.15 If the decision were made to implement any mandatory measures, government would also need to consider security and enforcement implications.
5.16 As noted above, the government could introduce a fixed sales requirement if there was a risk of hoarding behaviour. Under this measure, all individual fuel sales would be restricted to a specified fixed quantity (by sales or volume). The purpose of a fixed sales requirement is to prevent a supply disruption from escalating into physical shortages by ensuring against frequent topping-up of fuel tanks. Section 7 contains further information on a fixed sales requirement.
5.17 The government could also introduce regulations to reduce the open road speed limit, for example to 80 km/h or 90 km/h, in response to an oil supply disruption. It is estimated that vehicles are approximately 11 percent more fuel efficient at 90 km/h than at 100 km/h.5 The costs of temporarily reducing the open road speed limit would be significant, and this may rule out speed limit reductions as an option. Section 8 contains further information on a speed limit reduction.
5.18 In extreme circumstances, the government could introduce petrol rationing in response to an oil supply disruption. The purpose of a rationing scheme would be to prevent petroleum products from running out and/or to distribute a limited supply of fuel. Rationing would only be considered if there was a real threat of widespread physical shortages and a fixed sales requirement was considered insufficient to manage this threat. Section 9 contains further information on rationing.
5.19 Car-less days (a policy banning the use of a vehicle on a specific day of the week) could be introduced to ration petrol consumption. However, the Ministry does not favour car-less days as a method of rationing. Previous experience with car-less days in New Zealand had limited success. Furthermore, the Ministry considers that other measures are likely to be more successful and cost-effective.
Fuel Switching
5.20 Fuel switching refers to the capability to switch from oil to an alternative fuel within a short time frame. Examples of fuel switching include switching a dual fired power station to run on its non-oil fuel (not currently an option in New Zealand), and replacing conventional fuels, such as petrol and diesel, with biofuels. Options for fuel switching would be investigated at the time of an oil supply disruption.
Areas for Feedback
This section makes a proposal for the general approach of how prescriptive the strategy could be, briefly describes potential measures, and discusses some of the implementation issues and pros and cons of those measures. The Ministry of Economic Development welcomes feedback on:
- the proposed approach for the emergency response strategy to outline measures but not provide strict rules prescribing the measures that would have to be implemented in response to specific situations;
- implementation issues associated with the various measures; and
- costs and benefits of the various measures, including how might they impact upon your business.
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