High prices new normal: Here's how petrol could hit $3 a litre

Monday, 15 October 2018

If you think $2.40 for a litre of 91 petrol is a tough price to pay, how about $3.20?

Motorists are smarting about increases in petrol prices, which have risen by about 40 cents a litre in recent weeks. About a quarter of that is due to increases in taxes.

The rest is a combination of the rising price of oil and weakness in the New Zealand dollar.

Economists say higher petrol prices are the new normal - and it's possible they could still rise further.

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Shamubeel Eaqub said oil prices could still rise from US$80 (NZ$123) a barrel to US$100 - a level last seen before the global financial crisis.

'What we would need is relatively good global growth, which we have, and uncertainty in geopolitics. Given what's happening in Saudi Arabia and Iran, we've got a lot of the factors that could cause oil prices to rise.'

He said how sharply that increase would be felt by motorists would depend on the performance of the New Zealand dollar.

If it dropped to US60c from US65c today, that would put the price of petrol at about $2.70 for a litre of 91.

If the currency dropped to US50c, as it did in 2009, the petrol price would rise to $3.20.

Economist Brad Olsen, from Infometrics said his predictions were for global oil prices to fall but he expected the local currency to remain weak.

'Although we expect fuel prices to fall towards the end of the year or start of next year, the risks to fuel prices are broadly for them to head higher. Rising international prices are the main driver of this, alongside an unhelpful New Zealand dollar fall.'

Economist Cameron Bagrie said he expected the dollar to remain weak for now.

'We also know here's going to be a structural shift in the tax component to petrol prices. If we want to get people out of cars and build more transport systems, we're going to be hit at the pump. Petrol prices are going to be elevated for the next three or four years or longer.'

He said he would not rule out an increase in price to $3, although it was not the most likely outcome in the near future.

But ASB chief economist Nick Tuffley said the weakness in the New Zealand dollar had bottomed out and oil prices seemed to be at or near their peak.

'We are at or near the top of the rise in petrol prices for now. But all we need is a sharp drop in the New Zealand dollar or a squeeze higher in oil prices an dit will translate quickly into higher petrol prices.' 

Would we cope with higher prices?

Tuffley said petrol at $3 a litre would cost the average household an extra $18 a week.

'That does start to add up over the course of a year.'

Some people would change their behaviour to reduce that impact, or cut spending elsewhere.

Eaqub said the top 50 per cent of households by income would survive petrol prices at that level because the proportion of their income that was spent on fuel was smaller than those who were less well-off.

People on lower incomes tended to live further from work and could not rely on public transport if they needed to cut their fuel bill. 'If you live in Helensville and work in South Auckland, trying to get there on public transport might take you hours.'

Those households were more likely to have older, less fuel-efficient cars, he said.

Olsen said a price over $3 a litre would also lead to higher food prices because transport of all goods and services would be dearer.

'We'd expect to see lower household spending and increased prices at shops – a double whammy on the family budget.'

AA spokesman Mark Stockdale said $2 a litre was a mental threshold that some drivers struggled to accept when prices rose about 10 years ago. 

More people started to use public transport and cut back on their petrol consumption, he said. 'Now it's routine for prices to be above $2 a litre, we are used to it.'