The paper warns potentially expensive improvements could be much harder to afford in the maelstrom of supply crunches and price spikes as the world grapples with peak oil.
Author Associate Prof Bob Lloyd, of the University of Otago's physics department, said research suggested declining oil stocks would come with a succession of recessions.
Unemployment and the cost of materials could rise to put new pressures on ratepayers and make it even more expensive to improve infrastructure, Dr Lloyd said.
"We expect these shocks to come, and we must now decide where our vulnerabilities are and take care of them while we can.
The end of cheap oil won't just be about the end of cheap travel; it will be part of a shock to the world economy that will have a much greater impact."
Dr Lloyd's paper is part of a suite of work the council commissioned to help it consider the potential consequences of peak oil.
The main report is still being written.
It pre-dated the release of parliamentary researcher Clint Smith's paper The Next Oil Shock which last week warned an oil-supply crunch could start in 2012.
A cycle of supply crunches would lead to price shocks, each shock leading to recession as consumers cut back to pay for petrol and oil-influenced consumables.
Key earners including tourism, and meat, dairy and timber exports, were among the most vulnerable, Mr Smith's report said.
Dr Lloyd said food supplies, especially imports, might also be vulnerable in a world where the cost of production was linked to international oil prices.
The council needed to promote local gardens to ensure Dunedin could feed itself if food imports became too expensive or difficult to secure.
This was especially important if successive recessions led to unemployment, Dr Lloyd said.
An author of the main report to the council, University of Otago Associate Prof Dr Susan Krumdieck, said Dunedin had time to plan its response to peak oil.
Fuel supplies were likely to slowly dwindle to be about the same as in the 1960s by 2050.
The decline would be measured in decades, not months.
Recessions affected the least productive parts of the economy, so further investment in the productive sectors might help the city prepare for the future, she said.
Referring to Dr Lloyd's concerns about the water system, she said oil shocks and recession could see communities managing local infrastructure through organisations such as water boards.
"What has happened since the 1940s and 1950s is the amalgamation effect, where single entities have taken on responsibility for infrastructure that covers a wide geographic area.
"This has been possible because of the use of cheap oil, but as it becomes more expensive, then it might make sense for local communities themselves to take control of local resources," Dr Krumdieck said.
Localisation would also mean local schools and local libraries could be revived as people moved to live closer to amenities.
Surveys in August suggested a "significant" commuter population might struggle to afford travelling 15km to 20km into the city each day.
The council had to improve mass transport.
The surveys suggested there was a "great deal" of dissatisfaction with public transport.
