Part 3 - Oil emergency response measures
8. Introduction
8.1 This part sets out the oil emergency response measures that are available to respond to an oil supply disruption. It is important to note that the measures would not be activated where the primary purpose is price management or to assist any particular supplier.
8.2 The government's view is that the primary responsibility lies with industry to respond; however, if on the basis of industry and interdepartmental consultation, a need for government intervention is required this would be commensurate with the scale of the disruption.
8.3 The Strategy does not provide strict rules prescribing the measures that will be implemented in response to specific situations. Rather, it outlines the range of measures that will be available to respond to an oil supply disruption.
8.4 The potential response measures are not mutually exclusive and may be implemented in conjunction with each other where appropriate.
8.5 The Strategy provides a high level overview of the measures that will be further developed by MED as part of an ongoing work programme. It is the intent that the measures will be developed to the point where they can be used in a sufficiently timely manner, while still flexible enough to be useful in varying situations.
8.6 Some possible design features, including a cost benefit analysis of these measures, are set out in the Covec and Hale & Twomey report prepared for MED in June 2005 entitled Oil Demand Restraint Options for New Zealand.10
8.7 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. Figure 4 below illustrates the range of potential measures, which will be further developed to provide guidance on their implementation, including drafting regulations where necessary.
Figure 4: Summary of potential oil emergency response measures
Measures to improve supply
|
| Drawdown of Stocks |
Surge Production |
Specification Relaxation |
Stocks from New Zealand's petroleum reserve offered to the market. |
New Zealand's domestic production increased. |
Petroleum Products Specification Regulations 2002 relaxed to improve the supply of petroleum products. |
Measures to restrain demand
|
Voluntary Demand Restraint |
Mandatory Demand Restraint |
Fuel Switching |
Appeals made to public, via a public information campaign targeting voluntary savings, to reduce demand. |
Government compulsion used to restrain demand, to prevent hoarding, or to distribute a limited amount of petroleum. |
Petroleum substituted with alternative fuels where possible. |
9. Measures to improve supply
Drawdown of stocks
9.1 As discussed in paragraphs 1.11 to 1.13, oil stocks held within New Zealand are owned by the oil industry, and, in order to fulfil New Zealand's IEA 90 day obligation, the government holds contracts for reserve stocks off-shore.
9.2 In the event of a non-IEA declared oil emergency the government could work with oil companies, through NESO, to monitor the drawing down of commercial stocks within New Zealand. While the government could use legislative powers to compel oil companies to draw on their stocks, it is expected that oil companies would do this without government compulsion.
9.3 In the event of an IEA declared emergency, in addition to a commercial stock drawdown, the government may be required to release its reserve stock onto the international market as part of a concerted IEA response to improve global supply.
Relaxation of fuel specifications
9.4 In an oil supply disruption, New Zealand could respond by relaxing specific parameters within the Engine Fuel Specification Regulations 2008. The relaxation of specifications has the potential to improve the availability of oil supplies by increasing the likelihood of oil from offshore being acceptable for sale in New Zealand, or to provide greater scope to alter the composition of refined product produced from the New Zealand refinery.
9.5 Options to relax fuel specifications would be investigated at the time of an oil supply disruption. MED in consultation with industry and relevant government departments would identify what specification, if any, may be restricting the supply of products to New Zealand. Once specifications have been identified, MED, in consultation with industry and relevant government departments, in particular the Ministry of Health, the Ministry for the Environment and the Ministry of Transport, 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 of Energy on whether the relaxation of those parameters is appropriate.
Surge production
9.6 In an oil supply disruption, there could be some scope for increasing domestic oil production, reserving production and in extreme circumstances increasing the supply of domestically produced oil to the New Zealand refinery.
9.7 Options to "surge production" would be investigated at the time of an oil supply disruption in consultation with the oil production industry. Full consideration would be given to the physical, financial and contractual implications of this measure. A voluntary market response would be preferred.
10. Measures to restrain demand
10.1 The government could implement measures to restrain demand in response to an oil supply disruption. Note that the some reduction in demand is likely to occur in a fuel supply disruption due to high fuel prices.
10.2 It is intended that measures that encourage voluntary restraint are introduced initially, moving to mandatory requirements only if the severity of the situation required it. The main exception to this is that an immediate requirement for quantity rationing scheme could be considered if there was a risk of panic buying causing a supply disruption to escalate into severe physical shortages.
Voluntary demand restraint
Information campaign
10.3 In an oil supply disruption, the government could respond by introducing an information campaign targeting voluntary savings to reduce demand.
10.4 The Energy Efficiency and Conservation Authority (EECA) would most likely be the government agency responsible for delivering the communications campaign to encourage the public to undertake a number of measures to restrain demand, including changes to driving behaviour, fuel substitution and shifting modes. More specifically the campaign is likely to focus on proven common themes such as reducing speeding on the open road, carpooling, telecommuting, ensuring correct tyre pressure, compressed/flexible work week, dropping unnecessary trips, and encouragement to walk, cycle, use public transport and more fuel efficient cars. EECA has already undertaken some planning on this campaign.11
10.5 In the event of an oil supply disruption it is likely that the price of oil would be relatively high and consumers would be seeking ways of reducing their oil consumption regardless of government action.
Fuel switching
10.6 Theoretically, an additional measure to restrain demand voluntarily is fuel switching. 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 source (not currently an option in New Zealand), and partially replacing conventional fuels, such as petrol and diesel, with biofuels.
10.7 Currently the potential for fuel switching in New Zealand is minimal, so it remains a voluntary measure. If, for example, biofuel products and flexi-fuel vehicles become more widespread, its usefulness may increase and there could be scope in the future to introduce some type of fuel switching as a mandatory measure. Options for fuel switching would be investigated at the time of an oil supply disruption.
Mandatory demand restraint
10.8 If it were necessary to move into a mandatory phase of demand restraint, government compulsion could be used to restrain oil demand. As discussed in part 1, legislative powers to restrain demand are available under the Petroleum Demand Restraint Act 1981 and the International Energy Agreement Act 1976.12
10.9 If the decision were made to implement any mandatory measures, these would most likely be in the form of rationing – either by quantity, or in extreme circumstances, by allocation. Although unlikely, the government could also respond by reducing the speed limit on the open road.
Speed limit reduction
10.10 In the event of an oil supply disruption, the government could respond by reducing the speed limit on the open road to reduce demand for oil. The rationale for reducing the open road speed limit is that vehicles are more fuel efficient at speeds lower than 100km/h (by about 11 percent for 90km/h). Because this measure involves relatively high administration costs compared to the expected benefits, it is likely that the government would only encourage a reduction of speed on the open road via the voluntary information campaign. The government would, however, consider this as a mandatory measure, if the situation warranted it.
Quantity rationing
10.11 In the event of an oil supply disruption, the government could respond by restricting the quantity of oil that can be purchased at any one time. This section outlines the broad framework for a quantity rationing scheme and will be further developed.
Description
10.12 Quantity rationing restricts all individual sales of oil to a specific or restricted amount. This restriction can be measured by either; quantity (e.g. 25 litres) or price (e.g. $25) and could be restricted in the form of a maximum amount (e.g. no more than $25 or 25 litres) or a specific amount (e.g. exactly $25 or 25 litres).
10.13 Depending on the size and type of the oil supply disruption, the government could set the quantity or price as well as the type of restriction. As the situation changes, the government could adjust these restrictions.
Purpose
10.14 The purpose of quantity rationing is to reduce the demand for oil and discourage hoarding behaviour. This would help to prevent a supply disruption from escalating into physical shortages. It may also ensure a more equitable fuel supply to consumers.
10.15 A quantity rationing scheme would almost certainly be introduced as an interim measure if the government planned to implement an allocation rationing scheme. An allocation rationing scheme would need to be advertised in advance and would take time to roll-out, necessitating the immediate introduction of a quantity rationing scheme to prevent customers from hoarding petrol.
Further implementation details
10.16 A quantity rationing scheme would need to be implemented very rapidly with little or no advanced warning to the public because advance notice would create incentives for customers to fill-up quickly and hoard oil before the scheme entered into force.
10.17 A rationing scheme would likely include a complete ban on sales of oil in containers. This would prevent customers filling up containers and then using that fuel to top up their vehicle tanks. It would also help to minimise hazards arising from oil being stored in unsuitable containers.
10.18 To ensure that essential social services could continue to function, it might be necessary to implement a priority users' mechanism as part of the quantity rationing scheme. This is likely to be in the form of exemptions.
Allocation rationing
10.19 In extreme circumstances the government could introduce an allocation rationing scheme in response to a prolonged oil supply disruption. An allocation rationing scheme restricts both the amount of fuel that can be purchased, and the frequency of purchase. The information here provides the broad framework for an allocation rationing scheme, which will be further developed.
Description
10.20 An allocation rationing scheme would restrict both the amount and frequency of oil purchases. This type of rationing scheme would probably require the government to allocate coupons to oil users. Each coupon would enable the recipient to purchase a specified amount of fuel over a specified period of time, such as 25 litres of oil per week.
10.21 Generally, allocation rationing has a much greater ability to reduce oil demand than quantity rationing. Benefits would be limited by the time taken to implement the scheme and the costs involved in its implementation.
Purpose
10.22 The purpose of an allocation rationing scheme would be to prevent oil products from running out and/or to distribute a limited supply of oil. Allocation rationing would only be considered if; there was a real threat of widespread and prolonged physical shortages; other measures, including price increases, were socially or economically untenable; and quantity rationing was considered insufficient to manage this threat.
Further implementation details
10.23 For allocation rationing, the government would need to restrict the frequency with which individuals purchased oil probably through a fuel coupon scheme. Possible tools to identify users include the electoral roll, the motor vehicle registration list, or the postal addresses of each household.
10.24 A decision would have to be made on whether homogenous coupons or person-specific coupons would be used. Person-specific coupons would reduce the risk of theft whereas homogenous coupons would be cheaper and allow trading.
10.25 Tradable coupons would allow those who value oil highly the ability to purchase coupons from those who place a higher value on money. This would ensure a more efficient use of oil and minimise the economic and social impacts of an allocation rationing scheme.
10.26 To ensure that essential social services are able to continue, it is likely that a priority users' mechanism would accompany the allocation rationing scheme. This is likely to be in the form of extra coupons, exemptions or both.
Comment
10.27 As stated above, rationing would only be considered where there is a real threat of widespread and sustained physical shortages and all other approaches are considered insufficient to manage this threat.
10.28 There would be significant administrative costs associated with setting up and running an allocation rationing scheme. For example, administrative costs could include coupon printing, distribution publicity and information provision, as well as costs of increased petrol station security. There may also be an economic cost to consumers who would otherwise choose to consume more oil than their allocation. This cost would be much higher if the rations could not be traded.
10.29 The development of an allocation rationing scheme is a significant undertaking. MED will continue work on this measure in the ongoing work programme.
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