Tuesday, May 02, 2006

Cameron Pitches: Projects hinge on price of oil

A little over a year ago, when oil was US$56 ($88) a barrel, I wrote an article which concluded that New Zealand needed to diversify away from fossil fuels in order to survive and prosper.

One year on, and with oil now over US$75 per barrel, there has been no policy response at all from central Government.

Transport projects that would reduce our dependency on imported fossil fuels, such as electrification of the rail network, are being passed over in favour of completing "missing" links of the motorway network.

With the price of oil forecast to go much higher than the 25 per cent increase we have had in the past year, many fossil fuel-dependent projects simply will not be viable.

Fuel prices will continue to rise as they have done for over five years now. This is because demand continues to grow globally, while supply remains flat or even starts to decline.

Recent studies show that nine out of the top ten international oil companies have flat or declining production rates as a result of their oil fields maturing.

Why do fossil fuel-dependent transport projects continue to be funded in New Zealand? Mainly because the benefit cost ratio (BCR) framework used by Government agencies completely ignores the future price of fuel.

An example is the road pricing study being championed by the Ministry of Transport. I attended a briefing for this recently and I asked officials what the expected price of petrol will be in 2016, which is the purported time frame of the project.

After a bemused silence, the answer was that the price was irrelevant for the purpose of comparing different charging options, and so was benchmarked at today's prices.

Future fuel prices are also similarly ignored for billions of dollars worth of projects, such as the Manukau Harbour crossing and the State Highway 20 projects being promoted by Transit.

Under the BCR evaluation framework, therefore, fossil fuel dependent projects will still appear to be viable even if no one can afford the future price of petrol.

It shouldn't be like this. In 2003 the Government enacted the Land Transport Management Act. The aim of this act is to provide an "integrated, safe, responsive and sustainable land transport system".

The act established a funding process so approved organisations such as Transit, local and regional councils and the Auckland Regional Transport Authority (ARTA) could seek funds for transport projects from Land Transport New Zealand. Projects from different sources were supposed to be evaluated and prioritised according to the aims of the act.

Clearly the implementation of the Land Transport Management Act is failing. It is hard to see how the sustainability of transport projects can be evaluated if the price of oil is not considered. Also projects which are environmentally beneficial or reduce carbon dioxide emissions don't receive any greater weighting than ones that don't.

Further adding to the confusion is a recent Government directive that Treasury will now take over the funding of rail capital projects.

The Government went as far as supplying the Auckland Regional Council with a list of Auckland rail projects that Treasury is willing to fund.

These include established projects such as double tracking the western line, but don't include any plans for electrification or expansion of the rail network such as the Onehunga branch line.

ARTA, the agency tasked with planning Auckland's passenger transport, has wisely determined that Auckland needs electrification as the price of oil rockets through the US$70 a barrel mark, but it is unable to convince Treasury of this.

Our Government has funded alternative transport more so than any other in recent history. But now we are facing a new challenge. We must accept the reality of rising oil prices, start making intelligent decisions and fund the most appropriate transport projects.

It remains to be seen when the Government will finally start doing this. Perhaps, when petrol reaches $2 a litre, it may realise that the congestion charging initiative will be redundant.

Perhaps, when petrol reaches $3 a litre, it may suspend all uncommitted roading projects, and begin investment in an alternative fuels infrastructure instead.

We can only hope that whenever the Government does decide to act, that it will not be too late to catch up with the rest of the world.

* Cameron Pitches is a software consultant and the Convener of the Campaign for Better Transport.

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