Options to improve New Zealand’s diesel resilience

These range from placing the responsibility on fuel importers to the Crown being fully responsible, with varying flow on cost impacts to consumers. The options are for the government to:

1. Do nothing.
2. Increase the stockholding obligation for diesel from 21 days’ cover to 28 days’ cover through regulations. 
3. Government procurement of 70 million litres of diesel stock and access to storage (equal to 7 days’ cover), either through the Petroleum or Engine Fuels Monitoring Levy, general taxation or a combination.
4. Increase the stockholding obligation for diesel as in Option 2 but the government supports additional storage. 

In addition to these options, we also considered sharing the responsibility of increasing our diesel reserves between fuel importers and government. For example, fuel importers hold 24 days’ worth of stocks and government procures the remaining four days. We discarded this option as it would impose high costs to both the government and to fuel importers, potentially compounding price increases at the pump. Previous engagements with terminal operators indicate that the reserve diesel storage costs would be much higher on a per-litre basis, should the government rent less storage space than option 3. Given these disadvantages, it would make more sense to provide financial support (Option 4) to reduce the cost and administrative burden on fuel importers and achieve the intended effect of alleviating price increases at the pump.

We have not identified a preferred option. We welcome feedback on each option, including the potential impact on consumers and on competition in the fuel industry.

Key limitations on analysis

In May 2024, Cabinet decided to do no further work investigating the detailed commercial arrangements for government procurement of 70 million litres of reserve diesel stock. Instead, Cabinet decided to explore other options to increase New Zealand’s diesel reserves from 21 to 28 days’ cover.  This consultation is focused solely on increasing our diesel reserves from 21 to 28 days’ cover.

A major constraint on our ability to assess the potential impacts of the options examined in this document is that we are not privy to commercially sensitive information or detailed breakdowns of fuel companies’ operational costs, how they optimise their stock management practices, and the underlying evidence base for their assessment of the implications of holding more stocks than the normal commercial stockholding level.

There is also uncertainty about how much the Levy rate might need to increase if the preferred option relied on Levy funding (Options 3 and 4). The price of diesel is highly volatile and at any given time may be higher or lower than the import price that we have used for our estimates. The surplus in the Levy may also be lower than forecast if the cost of IEA oil tickets increases.

New Zealand's participation in the International Energy Programme

We lack information on the benefits of our proposals. MBIE periodically commissions studies into our fuel security, including considering particular disruption scenarios. The most recent was in 2020  with a new fuel security study to be completed early next year. While we have a good understanding of the risks, we are not able to quantify the benefits of having essential services continue to operate during a severe and sustained supply disruption.

Multi-criteria analysis

We have used following 5 criteria to compare the options to the status quo:

1. Overall objective – would this option increase diesel reserves in New Zealand to an average of 28 days’ cover?

2. Impacts on competition – would this option negatively impact competition in the fuel sector?

3. Cost impact – what are the cost impacts to consumers and taxpayers?

4. Administrative efficiency – are compliance costs to industry and the government minimised?

5. Timing – how soon would the option result in an average of 28 days’ cover (ie diesel in tanks)?

There is a trade-off between cost impact and timing. Placing the obligation on fuel importers would likely mean diesel is in tanks quicker than a government-led approach. However, fuel importers have commercial drivers and would pass on all costs to consumers, whereas a government-led approach would alleviate flow on costs. This is explored in more depth below.

There is also some overlap between the criteria. The cost impacts could also be greater if competition between fuel importers was reduced or the compliance burden was high. While there is overlap, we consider these criteria to be sufficiently important so have kept them separate.

Below is a high-level summary of our provisional view of how each of the options weigh up against the status quo, using the below key. The sections below set out more detail about how each option has been assessed against the criteria. The document asks a series of questions that we will use to refine our analysis.

Key

++ Much better than the status quo

+ Better than the status quo

0 About the same as the status quo

- Worse than the status quo

-- Much worse than the status quo

Options detail

Conclusions

• Options 2 and 3 stand out as the leading options for further consideration, but they have their advantages and disadvantages.
• Option 2 is faster but potentially will have a higher cost at the pump.
• Option 3 is slower but likely to have a lower cost impact. We seek your views on your preferred option.

< Objective | Option 1 >