Liam Dann: Petrol prices the big risk for Government right now

Prices at the pump are starting to bite. Photo / 123RF

COMMENT: Rising petrol prices pose a bigger threat to this Government than any of the management controversies they've been grappling with in the past few months.

While I've been fascinated, for example, by the bungling of the appointment of a chief technology officer, it's hard to see this issue landing hard on the radar of the average worker.

You could make the case that the CTO role is important for future proofing the national economy, you could even argue it goes to larger concerns about the Government's competence — but it isn't hitting anyone in the pocket.

Meanwhile, petrol prices are really starting to bite.

While most of the forces driving this are outside the Government's control, the unfortunate timing of fuel-tax hikes this year is going have people pointing in their direction.

Regardless, the extra petrol costs put pressure on businesses and consumers to cut discretionary spending and add to the risk of a steeper and longer economic slowdown.

In fact, as global concern about spiking oil prices this week shows, all sorts of macro-economic risks (such as US inflation and rising interest rates) come in to play.

But let's step back a bit and look at what's happened to the price we're paying here in New Zealand.

In May I wrote a teasing column on the prospect of fuel reaching $3 a litre.

It was meant to be a bit provocative and wasn't likely any time soon, thankfully, but a number of factors I highlighted back then have come to pass.

With places around the country reporting the price for 91 has risen above $2.40, it does look likely that we'll see it closer to $3 a litre than $2 by the end of the year.

Essentially we've seen a combination of a rising global barrel prices, a falling dollar value and new taxes.

The context for all this is that in mid-2014 there was an oil-price crash from which the market didn't start recovering until the end of last year.

The New Zealand dollar was also running at historically high levels through this period.

If there was ever time for a government to impose new fuel taxes and fund infrastructure with very little pain at the pump — this was it.

Unfortunately the combination of the Auckland regional fuel tax, and now the national excise tax increase, couldn't come at a worse time for motorists.

Oil prices haven't been on a straight-line rise since I wrote about them in May.

The barrel price of oil (Brent Crude) had risen to US$77 at that point. They've since been on a bit of a roller coaster. But they started rising again in mid-August and hit US$86 this week amid fears they could be on a path to US$100 a barrel.

The concern is such that US President Donald Trump has been on the phone to his mates in Saudi Arabia asking them to cool it.

Trump's been increasing the pressure on OPEC, saying it's pushing oil prices too high, Bloomberg has reported. As of its latest meeting, the group has ignored his call.

Trump will be worried rising fuel prices will throw extra inflation into the US economy's already red-hot mix.

That will increase pressure on the Federal Reserve to raise interest rates more aggressively, something the US President has said he does not want.

For all the political machinations that threaten to sink the Trump Presidency, history suggests it's the economy that counts.

While the US economy is humming he will retain support among his hardcore base and tolerance from the powerful Republican elite.

Things are far less dramatic back here in New Zealand but fundamentally not that different.

The Coalition is offside with business primarily for policies it will never love —​ like employment law reform.

Though the economy may slow a little this year it is still on solid foundations —​ as strong second-quarter GDP data showed.

The big threat of a US/China trade war slowing global growth has been well highlighted as a threat to New Zealand's long benign economic run.

But those implications for consumers are still largely indirect.

Fixed costs like petrol are acute —​ especially for small businesses and working people on relatively low incomes.

Business faces squeezed margins.

Their costs are rising but they can't risk passing on price increases if consumers —​ faced with their own fixed cost increases —​ start to cut back on discretionary spending.

That's a kind of negative spiral that risks killing off consumer confidence and could sharply curb economic growth —​ just at the wrong time.

Perversely then —​ for all the cultural and trade policy differences —​ the Coalition should be quietly cheering Trump on in his efforts to lobby OPEC.

If he's unsuccessful, is $3 a litre really possible in New Zealand?

Unfortunately yes, although there are plenty of variables.

Barrel prices hit US$140 in 2008 —​ that's 62 per cent higher than they are now.

The New Zealand dollar was trading at US79c then —​ compared to US65c —​ but it has been as low as US50c.

Between those extremes there is potential for New Zealand motorists to find themselves facing the kind of oil shock we haven't seen since the 1970s.