Thomas Coughlan: Russia, Ukraine war’s impact on New Zealand: petrol, energy, subsidies, politics


Russia’s invasion of Ukraine changes little for New Zealand, but exacerbates political tensions that already existed.

The world is currently grappling with the future of fossil fuel energy supply, after energy-rich America decided to ban Russian oil imports, while energy-poor Europe grapples with whether it can afford to implement a similar move.

Governments will be wary of pushing Russia into the arms of China, the world’s largest energy importer, which will relish the opportunity to diversify away from Middle-Eastern oil.

Likewise, The Economist warned this week against prolonged and regular use of extreme sanctions by the democratic world (mainly the United States and Europe) against autocracies like Russia. If their use becomes too regular, there’s every chance autocracies will simply detach themselves from the shared global economy and build their own payment and energy systems, weakening the democratic world’s ability to sanction them.

On the face of it, this means little to New Zealanders. Nothing we do will stop a gun being fired, or a bomb dropped, but how New Zealand chooses to express its values, maintain trading relationships, and provide rising living standards for the people who live here will become more difficult.

Despite importing no oil from Russia, New Zealand is vulnerable to price shocks on international markets. Oil prices are rising here and it’s likely they’ll continue to do so for some time.

New Zealand has an ongoing vulnerability to fluctuating global fossil fuel prices, or inflation in general.

This challenge plays into New Zealand’s attempts to wean itself off fossil fuel use. Unlike Europe, New Zealand has the advantage of having most of its electricity generated by renewable sources – about 85 per cent. The fossil fuel that does the rest of the heavy lifting, coal, is also currently enjoying a price spike thanks to the Russian invasion despite the fact New Zealand does not import coal from Russia.

This high rate of renewable generation won’t be good enough as New Zealand moves towards the zero carbon future. The Government needs to both replace the limited amount of electricity still generated by fossil fuels, while ensuring that additional demand from things like electric car uptake comes from renewable sources too. The future of transport emissions merges with the future of our electricity system as more and more vehicles go electric.

New Zealand’s electricity demand is estimated to more than double by 2050, according to a 2018 report by grid operator Transpower. Renewable generation will also have to rise to meet that demand.

None of that is new – it hasn’t been new for years, but the conflict in Russia and Ukraine will place added weight behind those who would seek to build up domestic renewable electricity generation, against those who argue it’s not worth the cost. Domestic renewable electricity generation coupled with widespread use of EVs and electrified public transport would insulate many from future price shocks.

So far, arguments in favour of complete decarbonising electricity have fallen down on the issue of cost. The Interim Climate Committee found that decarbonising the last 1-2 per cent of electricity generation would be prohibitively expensive, largely because it means building a whole lot of redundant electricity generation to sit idle until it’s needed to meet a spike in demand.

The Russian conflict slightly shifts this argument by demonstrating New Zealand’s ongoing vulnerability to fossil fuel price spikes. Likewise the merits of the extraordinarily expensive pumped hydro scheme at Lake Onslow may be debated in terms of how much it could insulate New Zealand from increasingly costly global energy markets.

If it sounds like a regurgitation of Think Big, that’s because it is. The debate will be framed by whether the cost of ongoing vulnerability to international inflation driven energy prices is more or less costly than the inflationary risk of the public debt inevitably required to push forward with decarbonisation.

Another existing trend likely to be exacerbated by the Russian invasion is New Zealand’s continued difficulty in situating itself between its democratic friends and autocratic trading partners. The invasion has unified the United States, Canada, Europe, and Australia – New Zealand’s sluggish response was noted.

In the case of Russia, New Zealand faces no immediate diplomatic challenge. Russia is not a major trading partner, so siding with the democratic world against it has no major downside risk. Much like during the Cold War, New Zealand can take an independent, principled stance against Russia, without jeopardising trading relationships.

But it’s not clear for how long this strategy will be tenable should Russia shift itself into the orbit of China, or should China itself continue down the path towards violent autocracy by conducting further atrocities in Xinjiang, or invading Taiwan. Such a dilemma would force New Zealand to choose between principle and trade, a totally different proposition to sanctioning Russia in this case.

One of the reasons the Government is lukewarm on autonomous sanctions is that it’s reluctant to be dragged into a sanctions war on behalf of other countries. The dysfunctional United Nations process for sanctioning countries acts as a shield in this case. Either sanctions are agreed on almost universally, or New Zealand cannot implement them. There’s no mechanism for New Zealand to be called on by the United States or anyone else to sanction countries when it might not be in our trading interests to do so.

One thing that is unique about this crisis is that it shifts the focus of the world back to Europe and the North Atlantic in a time when the eyes of all great powers were shifting focus towards our region. Since the Obama presidency, the United States has been increasingly focused on the Indo-Pacific. Europe belatedly joined suit, with France making it a feature of its European Union presidency.

Russia’s invasion is a reminder that while America and Europe may want to establish a presence in this region, Russia’s volatility means they cannot afford to shift focus from threats to their own. Europe and America don’t have the resource to secure their own continents while adequately policing the Indo-Pacific.

Germany’s decision to lift defence spending from about 1.5 per cent of GDP to 2 per cent of GDP is in part an acknowledgement of this. There is a serious security challenge in Europe, and even Europe’s most pacifist countries are waking up to it.

New Zealand faces a similar challenge. Who is to look after our security if America and the European Union are occupied with their own continents? New Zealand spends half as much on defence as a percentage of GPD as we did in 1980. Does Europe’s instability and the Indo-Pacific’s increasing challenges require our Government to increase defence resource? Possibly.

Whatever the outcome, New Zealand faces an disturbing future of expensive and uncertain energy supply, and a lonely and uncertain geopolitics.

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