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THINK BIG AND WHY IT STILL MATTERS

We’ve seen oil shocks and inflation before, and they led to radical changes in our economy. A new book examines what worked and what didn’t.

Stephen Stewart reports.

War. Soaring fuel prices. Fears about future oil supplies. Inflation . . . No, it’s not about today – New Zealand has been through all this before, when inflation was twice as high as now, mortgage rates were over 20% and the economy was experiencing its worst recession in decades.

The crisis of the 1970s and 80s was the biggest we’d faced since World War II, says Bill Birch, the energy minister at the time. ‘‘In 1979, New Zealand suddenly lost half its oil supply. The Government could not idly stand by and do nothing.’’

Its response was staggering investment in major energy projects, which came to be known as Think Big. As part of a wider growth strategy, more than $8 billion was invested (about $26b today). One of the projects was world-leading, and all aimed to increase use of New Zealand’s energy resources and earn foreign currency.

But just a few years later, Labour’s 1984 election victory ushered in the radical era of what became known as Rogernomics. It changed the nation and our systems of government into what we still have today. The energy projects would be discredited and, in many cases, sold – at giveaway prices.

The 12 years of Think Big and Rogernomics were transformative, and the biggest impact was in the energy sector. But the changes they wrought permeate every aspect of society.

A book about those heady times has just been written by a former top public servant from the 1980s. John Boshier’s Power Surge results from his recollections as an insider and extensive research. His aim is to understand the turning points, and explore what motivated the key people.

Think Big had its beginnings in the international oil shocks of the 1970s. Oil prices increased 400% from 1973, and New Zealand was particularly hard-hit.

The public urged Robert Muldoon’s National government to act. Fuel imports were costing three times more than six years earlier, and power blackouts had hit cities. To cut fuel use, ‘‘car-less days’’ were introduced. Meanwhile, New Zealand was in recession.

Muldoon then unveiled an attractive new policy: the country would become as self-sufficient as possible in transport fuels, using the new Maui natural gas field.

The biggest decision was to wind back the planned use of natural gas in power stations and allocate it instead to make petrochemicals such as methanol and ammonia-urea for farming.

Thousands of vehicles were converted to run on compressed natural gas (CNG) and liquefied petroleum gas (LPG).

The growth strategy aimed to pull New Zealand out of recession, creating jobs and boosting exports, but had limited success. So the emphasis moved to bigger projects based on energy resources, which were hoped to produce a quicker result.

In his 1981 election manifesto, Muldoon said ‘‘growth means independence and independence means we don’t get pushed around by other countries’ problems. We’ve got to think big and we are going to train the extra skilled workers needed to put these projects in place. Restructuring is the only way out.’’

He termed inflation the No 1 enemy, and his controversial wage-price freeze tried to control it, hitting ordinary people and businesses alike.

To protect motorists from any more overseas oil shocks, the world’s first ‘‘synfuel’’ plant was built in Taranaki, to make a third of NZ’s petrol from natural gas. The Marsden Pt oil refinery was expanded to make diesel. These projects cost about $4b. Marsden Pt closed its refining operations in March, at the same time as the Ukraine crisis. The world oil market has become volatile and confused, just like the 1970s.

Think Big also resulted in the massive expansions of New Zealand Steel and the Tiwai Pt aluminium smelter to boost exports.

For more than 50 years the smelter has employed thousands of people and has been a mainstay of the Southland economy.

Auckland’s NZ Steel expansion was the most controversial, because it relied on substantial state support and tariff protection. Industrial disputes delayed completion by two years and effectively doubled the cost.

Another fraught project was the Clyde high dam. Its cost soared because of the discovery of an earthquake fault and slow-moving landslides. Though hugely controversial at the time, its renewable electricity is now viewed as highly valuable in a carbon-constrained world.

Other Think Big schemes saw the creation of a new North Island gas pipeline network and a methanol plant in Taranaki using Maui gas for export. About 400km of the North Island Main Trunk railway were electrified; the biggest single project in its history.

Not since the era of Julius Vogel in the 1870s had so much infrastructure been created. Tens of thousands of construction workers were employed for more than five years.

In the longer run, exports worth billions were created, resulting in new industries, growth and jobs. It was claimed the 1980 growth strategy could produce up to 410,000 jobs, but as events unfolded, the result was much fewer.

Regulation of many industries was pervasive, while employment relations were centralised through large trade unions. Strikes and disputes were frequent, and Muldoon became notorious for his heavy-handed interventions and control.

Stirrings for a radically new role for government began with leading economists in the Planning Council, Treasury and Reserve Bank, together with the Labour Party in Opposition. Labour’s finance spokesman, Roger Douglas, was very public in saying there had to be ‘‘a better way’’. Treasury’s watershed 1984 Briefing to the Incoming Government changed everything.

It said radical reform across the board was needed, and the role of government in most sectors of the economy should be changed.

It was unequivocal in its criticisms of previous policies and said the economy was one of the most lacklustre in the developed world. It scathingly blamed ‘‘unwarranted state monopolies’’ for holding prices below the cost of supply to constrain inflation.

The drive for increased energy self-sufficiency was rejected.

After its victory in the 1984 election, Labour embarked on a strategy of revolution, not evolution. The tsunami of change came to be called Rogernomics. It relied on liberating the economy from political intervention, and producing efficiencies through market forces and competition.

It put consumer choices at the centre of economic life. Inflation would be the responsibility of an independent Reserve Bank controlling the money supply.

The most immediately obvious reform was the transformation of nine government departments into state-owned enterprises (SOEs) in April 1987. The energy sector faced dramatic change. Bulk electricity prices went up 25% and coal 35%. In 1988 petroleum imports and prices were deregulated. World oil prices then fell and motorists benefited.

The Marsden Pt refinery, previously protected from competition, now had to compete against imports. It reduced its costs, and survived until earlier this year when mega refineries in Asia threatened its profitability.

Competition was introduced to the electricity sector in a similar way. Restrictions on building new power stations were removed, and the century-old ‘‘obligation to supply’’ electricity jettisoned. Sometimes essential household health machines were disconnected after bills went unpaid.

Previous power boards and municipal electricity departments (MEDs) were replaced by competing companies retailing electricity at local level.

Years later, the shares in some power boards were given away to tens of thousands of their consumers, who then sold them.

Proliferating windfarms are a visible outcome of the new electricity market.

After Labour won a second term in 1987, the privatisation of SOEs began. They were to operate in a market with ‘‘lighthanded’’ regulation. The public, including loyal Labour Party members, were shocked.

First in line was Air New Zealand, followed by the state oil and gas company Petrocorp, both of which had already floated a minority of their shares. The disastrous sale of NZ Steel to Equiticorp coincided with the sharemarket crash in October 1987.

Ministers moved quickly in December 1987 to sell Petrocorp. Fletcher Challenge gained 70% of the company’s equity in ‘‘the best 30 seconds’’ in its history. The deal privatised the monopoly highpressure gas network that supplied North Island cities, together with the methanol and ammonia-urea plants.

Meanwhile, Taranaki’s synthetic petrol plant was losing money for the Crown because the world price of oil had fallen below break-even. Without calling tenders, the government virtually gave away the plant to Fletcher Challenge in a July 1990 fire sale shortly before the election.

The Maui natural gas field was sold to Fletcher Challenge as well. Finance ministers believed they had to get the synthetic petrol venture off the state’s books quickly; price did not matter.

Fletcher got the deal of the century, but later had to sell to Canadian-owned Methanex. It soon stopped petrol production and converted the plant to make more profitable methanol for export. The combined output of the Waitara and neighbouring Motunui plants produces earnings of over $1b a year.

These ventures, the gas network and Maui are part of Think Big’s enduring value to the national economy, and have made Taranaki New Zealand’s wealthiest province.

Selling natural resources to foreign companies has been controversial. Boshier speculates that an alternative method of sale could have proved more popular, such as that adopted for Telecom in 1990 (for $4.25b). A similar model was used for the partial sales of electricity generators Mighty River Power, Meridian and Genesis in 2013.

The John Key government’s plans to sell the generators provoked the largest petition in New Zealand’s history. To overcome the objections, a mixed-ownership model was used: the state retained 51% and individual investors could buy the rest. The sales proved popular and the government enjoys better earnings now than when it owned them outright.

If the 1980s were tumultuous, the future is probably more so. Some of the Think Big projects emit carbon dioxide and face big costs when they have to pay for emission permits. Most are exposed to international trade, so could be heavily penalised if their competitors do not face the same costs.

The Tiwai Pt smelter’s future is uncertain. Fluctuating profits have caused owner Rio Tinto to say it will close in 2024, though its metal is among the purest in the world and the smelter uses renewable hydro-electricity.

It may yet get a reprieve, however; aluminium prices recently reached an all-time high, and its profitability is improving. But the smelter emits about 700,000 tonnes of CO2 a year.

If it does close, smelting would shift to Asia, where electricity is mainly produced from coal, which produces far more CO2 . But Tiwai Pt’s closure would also release Manapouri electricity for other industry, such as a massive data centre or green hydrogen.

If the power is sent to the North Island, new transmission lines would be needed. Transpower is reluctant to commit to this major investment until the smelter’s future is clarified.

Climate change policies will also have big implications for NZ Steel. The easily recyclable metal will be in big demand to reduce carbon emissions in transport and construction. But the Glenbrook plant emits 1.8m tonnes of CO2 a year, which are hard to reduce. NZ Steel says it will rely heavily on carbon offsets, such as forestry, as it seeks to remain open until 2050.

Marsden Pt refinery’s closure in March raised concerns about our vulnerability to overseas oil shocks. (Ironically, the refinery was expanded during Think Big because of this very concern.)

The Government has tackled this by buying international options for future supplies of petrol, diesel and jet fuel. This, and a roughly equal amount held by oil companies, gives a combined total of 90 days’ supply for emergencies.

The Taranaki methanol plants will incur rising gas prices beyond 2029. The industry will face financial risks because of this and the need to pay for – or offset – carbon dioxide emissions.

If the plants are forced to close, production would be transferred to Asia, posing another moral dilemma for New Zealand’s tradeexposed sector. Green hydrogen fuel for trucks is becoming a realistic proposition, and First Gas plans to add it to its natural gas pipeline network.

Climate change is now the overwhelming concern. As transport and process heating is electrified, a vastly increased contribution is needed from solar and wind energy.

Because more than 60% of our electricity generation at present comes from dams, dry years pose a particular problem. In the past this has been overcome by burning gas or coal at Huntly power station, but these carbon emissions are now becoming increasingly unacceptable.

The Government is investigating a gargantuan scheme of ‘‘pumped storage’’ 600 metres above Roxburgh on the Clutha River. Designing this $4b scheme as a commercial proposition will pose significant challenges, rivalling any Think Big project. The energy minister will give an update next month; a Cabinet decision is due in December.

The Ukraine war has heightened awareness of New Zealand’s vulnerable energy supply. Interruptions to the flow of oil and gas from Russia have raised prices worldwide. Echoing the 1970s, our fuel supply is again threatened by politics and war on the other side of the world.

But now the imperatives of climate change pose more difficulties and challenges than they did then.

The 1980s have much to teach us about managing capital cost, funding major projects, designing fallback options, avoiding big bangs, and resisting a crisis mentality.

Stephen Stewart edited Power Surge, and contributed to the writing.

Weekend

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2022-05-28T07:00:00.0000000Z

2022-05-28T07:00:00.0000000Z

https://fairfaxmedia.pressreader.com/article/281844352259060

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