Cheap fuel fails to oil wheels of consumer sentiment

Lower oil prices have not proved to be the economic silver bullet that many commentators had expected. Photo / Brett Phibbs

In the US cheap oil hasn't provided the economic stimulus that it was widely expected to.

More than six months into the great oil price crash, US growth remains sluggish.

GDP growth in the first quarter of this year was almost nonexistent at just 0.2 per cent.

That has US commentators concluding that the negative impact of the US energy sector contraction has weighed more heavily on the economy than expected.

The US energy sector built on shale oil and fracking has grown and grown in the past decade to produce all this surplus oil. Now it is so big that its contraction is hitting the US data harder than anticipated.

Meanwhile cautious US consumers have banked the savings.

While some argue the stimulatory effect may just be taking longer to flow through, many US economists are now re-evaluating the assumptions to determine the influence of fuel prices, according to a report by the Associated Press.

The failure of inflation to kick in as the global economy recovers has been a reminder that the world is no longer the same place it was in the 1970s.

Now perhaps we are seeing the failure of cheap oil to stimulate the economy remind us that we've also moved on from the dynamics of the 1990s.

In New Zealand we have actually seen some pretty strong consumer confidence and retail spending data over the same period.

Economists tipped lower fuel costs, along with falling interest rates, as factors in a record 2.7 per cent increase in local retail spending during the first three months of this year.

But the data showed a definite Auckland skew and it is hard to believe there isn't a degree of "wealth effect" involved as soaring house prices tempt Aucklanders to feel more wealthy than they really are.

It's also not clear that stimulus that drives increased domestic consumption is all that good for us in the long run. It is the productive end of the economy that is struggling.

One would hope that lower fuel costs will still provide a boost to New Zealand manufacturers and other businesses.

At local pumps 91 octane petrol has quietly crept back above $2 a litre. It seems that, from a consumer point of view, we may have seen the best of the price savings.

A combination of the oil price rebound and a lower Kiwi dollar have eroded the gains over the past few months.

This weekend oil prices surged upwards again. Brent North crude, which provides a global benchmark price, closed at US$66.54 a barrel in London trade, a gain of US$1.51.

That's well off January's lows of around US$47 although it's still at historically subdued levels - at least by the standards of recent years.

Market watchers started calling the oil slump when prices went through US$70 a barrel.

After several months of wildly conflicting predictions about the extent of global oversupply and where prices were headed, there now seems to be a consensus that the cycle has bottomed out - that demand is returning to the market and long-term reductions in US shale oil production will ensure higher prices eventually.

It is too early to say the slump is over. Recoveries seldom make for a straight line on the graph and it may yet be some time before pump prices return to levels which we were well and truly used to this time lastyear.

The slump was never a slam-dunk win for New Zealand anyway, as BNZ economist Doug Steel pointed out in December. New Zealand exports about $1.5 billion in petroleum products.

A rising oil price and falling Kiwi dollar won't be popular with most Kiwi consumers but is likely to be welcomed in fossil-fuel-producing regions like Taranaki.

One other point Steel made at the time may provide a more substantial silver lining.

Oil prices seem to bear some correlation with dairy prices.

If that's case, then signs that this commodity slump is through its lowest ebb will be welcome news indeed.