Tuesday, January 26, 2010

Oil Strategy

New Zealand has now adopted a strategy around oil exploration. This is a good thing, a positive first step in utilising natural resources for wealth growth. However, there is more to the value proposition from oil than just exploration and the export of crude oil. Rich countries make most money out of value adding and leveraging not just the raw commodity but industry around that resource.

While a strategy around exploration and extraction is a good start, the strategy needs to continue to the refinement of the raw resources in to high tech products. Oil is certainly a valuable commodity. Countries that produce oil still tend to be near the upper half of the GDP per capita rankings but, if history can be relied on to repeat, previously valuable commodities fall down the relative value stakes as they become more and more commoditised.

A strategic goal of exporting, in the order of, $60 billion of oil over the 15 or so years is a big economic boost to new Zealand. However, this is nothing like the increase that could be created by moving steadily into refined petroleum products, petrochemicals, plastics & material manufacturing and high-tech products.

Now, this is not easy, but it is a truism that nothing worth having ever is. It is also easy to believe that little New Zealand can't compete in the high tech space. This is possibly true but not trying is tantamount to saying that we wish to, effectively, drop out of the OECD; certainly in terms of GDP (and income) per capita.

New Zealand seems to be able to perform at least 'at its weight' in terms of technical capability. With our historical association with agriculture we seem to hold our own in high tech food processing. We also seem to do quite well in terms of machinery manufacturing, especially when we don't have a wealth of mineral resources to leverage off (compared to Australia, for example). Not having the natural commodities doesn't have to mean that you can't develop technical dominance (a la Japan) but, generally, having the resource creates the opportunity to leverage technical expertise around that resource.

We actually already have creative businesses in the high tech space; they're just quite small at the moment. If New Zealand can now expand its oil and gas strategy to derive technically excellent products from it (which will also have energy policy implications) and connect with an already innovative, but small, local entrepreneurial base then maybe we will see some impressive gains in productivity. This would also provide a far more positive incentive to not spend money on property, although playing around with taxes is probably easier than a transformational strategy.

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