Saudi Arabia’s Abqaiq oil processing facility – on fire last week.

‘When War Comes’ was the headline to an editorial published in the 7-13 September 2019 edition of the New Zealand Listener. The Abqaiq and Khurais oil processing facilities were attacked and set on fire on 14 September. Readers will agree that it would be impossible to be more prescient than this.

Earlier, Yemeni Houthi armed forces spokesman Brigadier General Yahya Sare’e claimed responsibility for the attacks. He said that they were a legitimate response to US-backed Saudi attacks on Yemen. US Secretary of State Pompeo has said that there is no evidence that the attacks came from Yemen. ‘Amid all the calls for de-escalation, Iran has launched an unprecedented attack on the world’s energy supply’.

Under the heading: ‘All out war’: The dire consequences of Iran’s Saudi ‘air strike attack, todays NZ Herald paints a different picture with evidence from the Saudi Defence Ministry that the attack emanated from Iran. So, another sign of escalating tension in a region which is key to New Zealand’s economic well being and our interests are at risk. See; https://www.nzherald.co.nz/world/news/article.cfm?c_id=2&objectid=12269625

Oil industry experts say that the attacks have affected around 50% of Saudi oil exports or 5% of global oil supplies. It is not clear how quickly the damage can be repaired.

For New Zealand, the attacks remind us that we are at the end of a very long supply line for imported oil. They also remind us how dependent the New Zealand economy is on shipping. More than 90% of our trade by value and 99% by volume is transported by sea. Any disruption to this trade, whether at source, as in Saudi Arabia over the weekend, or at sea, would have serious consequences for us.

Energy supply lines at risk – 1 of 4 oil tankers attacked in the Arabian Gulf in June 19

Yet, it also has to be asked, why have petrol prices in New Zealand spiked within a mere three days of the refinery attacks? What is it about the way in which our oil markets operate that drive such an instant response when we should be buffered both by distance and the existence of ample stocks of prepaid oil already in the system?

New Zealand oil stocks and the IEA

New Zealand has obligations to the International Energy Agency (IEA) to hold oil stocks equivalent to 90 days supply (net oil imports). In practice, we meet that obligation through a combination of oil stocks held domestically plus ‘ticket contracts’ tendered for on the international oil market. Governments holding stocks for us under ticket arrangements at the present time include the UK, Japan, Denmark, Spain and the Netherlands. Obviously, it would take some weeks to draw down on these stocks but the question remains: if the oil held in our domestic stocks has already been paid for under an old contract price, what is it that justifies petrol companies responding within days to increases in the international benchmark price?

It appears that there is no good answer from either government or the industry to this very obvious question. The answer is that ‘this is just the way the market works.’ Which is not even the beginnings of an attempt at an explanation. To the ordinary person, this just looks like opportunistic behaviour.

What the AA has said

The AA has a very useful piece on its website that explains how fuel prices at the pump are made up. Government taxes (fuel excise tax, the ETS and GST) comprise 47% of the price paid. The cost of the refined petrol is 29%, shipping costs 2%, and the margin for the importer (the fuel companies) is 22%. See the link at https://www.aa.co.nz/cars/owning-a-car/fuel-prices-and-types/how-petrol-prices-are-calculated/.

What these figures mean is that if the benchmark price changes by 10%, then the cost to motorists should change by only 29% of that again, or a little under a third. In practice, matters are a little more complicated than that because currency fluctuations can intervene. That said, the AA advises that the general rule of thumb still holds good, which is that for every US dollar change in the Dubai benchmark, which is where most of our imported oil comes from, motorists can expect to see about a 1 NZ cent price change at the pump.

This was borne out yesterday (17 September) by BP, which announced a 6 cents per litre price rise, effective immediately, in response to an upwards spike in the benchmark price of around 6 US dollars.

What we say

We are vulnerable to attacks such as those over the weekend. We are at the end of the whip. The effects appear to be magnified the further we are away from the source of the trouble. Maj Gen Sir Howard Kippenberger, Commander of the New Zealand Division in WWII, used to say that the approaches to New Zealand begin in the Middle East. In some ways, 70 years on, that may still be true.

Certainly, the attacks on the Abqaiq and Khurais oil processing facilities and the immediate spike in petrol prices at the petrol pump seem to underline General Kippenberger’s belief. They also underscore the importance of our sea borne trade routes and our ability to protect those routes. And they remind us of the importance of finding ways to defuse tensions in the Middle East and accommodate the legitimate aspirations of all regional actors, Iran, Yemen, Saudi Arabia and the Gulf States included.

That said, there can be no excuse for the attacks on oil refineries when the UN and other international bodies have ample dispute resolution mechanisms available with which to address grievances. The sanctions imposed by the United States on Iran following the US withdrawal from the Joint Comprehensive Plan of Action (JCPOA: the Iran nuclear deal) may well be exacerbating the problem and driving the behaviour of Iran and its allies in ways that could lead to a very serious miscalculation. But there are reasons for these sanctions in Washington’s eyes, and Iran and the United States need to address those reasons urgently.

A New York Times Editorial just published contains a sober assessment of US President Trump’s limited options. It can be read online at  https://www.nytimes.com/2019/09/16/opinion/iran-attack-saudi.html

Guidance for New Zealanders doing business in Iran is contained on the MFAT website at https://www.mfat.govt.nz/en/countries-and-regions/middle-east/iran/doing-business-with-iran/.

In the meantime we are reminded daily at the petrol pump of the consequences of a failure to find enduring solutions to the problems of the Middle East, including most particularly between the US and Iran.

What the Listener Editorial said

The Listener Editorial (September 7th) raises some very timely points. It asks if New Zealand is in danger of ignoring, or at least underestimating, the risk that New Zealand will be caught up in war again. It argues that the rise of a new generation of politicians, many of whom are veterans of protests against the Vietnam War, brought a sea change in attitudes. The result was a shift away from offensive capability to a defence policy focused on politically less contentious capabilities.

We think that this factor is now dying out. To have been politically active during the last phases of the Vietnam War would mainly apply to the generation of 60 year old New Zealanders and older. Age may not weary them, but this generation is passing from the political scene. Younger New Zealanders, seeing Trump sabre rattling over Iran, China asserting itself militarily in the South China Sea, and North Korea posturing over nuclear missiles, are more likely, we think, to see New Zealand’s defence requirements in a different and more sombre light than the Vietnam generation.

The Listener queries whether we still live in what Helen Clark memorably described as ‘an incredibly benign strategic environment’. As the Listener argues, while developments over Iran, the South China Sea and North Korea may not directly imperil New Zealand, our economy depends on trade and the maintenance of open sea lanes, which could be threatened in the event of war. ‘We cannot pretend to be immune from risk’.

The Listener is to be congratulated for raising these questions. It notes that under Defence Minister Ron Mark, the Government has ‘taken long-overdue strides towards upgrading its defence inventory’. This is true. But much remains to be done still to equip New Zealand to promote and protect its maritime and oceanic interests in the strategic environment of the 30s, 40s and 50s.

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