Canadians strike oil in NZ

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A Canadian company has struck oil near Stratford in Taranaki as a visiting energy and oil economist warns of bleak economic consequences from skyrocketing fuel prices.

Canadian-listed Tag Oil says sandstones drilled at its onshore Cheal prospect "were likely to be oil-charged".

Two of the four zones intersected were oil-bearing zones never before encountered in wells within the 30.3sq km permit area.

While it did not release details of the size of the discovery, Tag in a reserves upgrade last year said it had assigned net proved and probable reserves remaining of 651,000 barrels of oil, plus associated gas in the Cheal field.

New Zealand uses more than 160,000 barrels of oil a day.

Although onshore discoveries tend to be small, the announcement is welcome news to the exploration sector which has struck out at a string of offshore Taranaki prospects during the past 12 months. The discovery came as a visiting economist warned that escalating oil prices towards US$150 ($203) a barrel could push up pump prices in New Zealand by a further 50c a litre.

Phil Verleger said when oil hit US$147 in 2008 it precipitated the United States recession and the collapse of car companies.

"With this kind of price increase, by year end there could be a stagnant US economy."

Verleger, who has advised presidents on energy policy, said China and Brazil were being badly hit by high oil prices at a time when they were trying to contain inflation.

He said the United States could lead the way in taking price pressure off by releasing part of its mandatory oil reserves.

Nations in the Organisation for Economic Co-operation and Development (OECD) - including New Zealand - and other consumers were required to hold stocks in reserves which now stood at 1.6 billion barrels.

"Releasing strategic stocks is the right thing to do at this time," Verleger said.

Chaos in Libya had choked off supplies of around 1.5 million barrels of oil a day. Although only a small fraction of global output of 88 million barrels, it was light, sweet crude that was used in the production of diesel.

Saudi Arabia could step up production but its heavy crude was not in such high demand.

"It's chocolate icecream when you need vanilla," said Verleger who was brought to New Zealand by Shell service station owner Greenstone Energy.

Governments could also consider relaxing emissions standards covering sulphur in diesel. Higher sulphur levels are produced from lesser-grade crude.

Verleger said the oil industry in the United States had fought against releasing reserve stocks as this would push down prices and profits.

The Obama Administration said at the weekend it was considering tapping its reserve of 727 million barrels which was last used in 2005 after Hurricane Katrina.