Strong kiwi dollar offsets oil rise

The high New Zealand dollar is insulating this country from rising crude oil prices that have spurred fears for the global economic recovery.

Pump prices have risen here as the Iraq crisis has worsened - and are set to rise again this week because of tax increases - but one economist says they are unlikely to dent the strong New Zealand economy.

NZ Institute of Economic Research principal economist Shamubeel Eaqub said rising fuel costs affected business transport costs and household budgets but the country was being shielded from even higher prices by the consistently strong kiwi dollar which was trading yesterday at about US87.6c - just under a post-float high of US88.4c.

According to the Ministry of Business, Innovation and Employment the average regular petrol price was 219.2c for the week ending June 20, up from 213.9c in April and 216.9c at the end of last year.

"The New Zealand dollar is giving us a huge buffer at the moment, imagine if it was 30 per cent lower," Eaqub said.

"We have to be careful when we wish for a lower dollar - there are winners and losers."

Eaqub said when the price of a litre of petrol tipped $2 in 2007 it badly hit spending, especially among those on lower incomes who spend a higher proportion of household income on fuel.

People modified travel habits then and were likely to do the same again if petrol prices kept on going up.

"I wouldn't have thought of it as a critical thing that derails the economy but certainly one that makes it more difficult with the fragile spending environment," he said.

In 2009 the kiwi dollar was trading below US50c but that coincided with a collapse in oil prices as the global financial crisis sapped demand.

Conflict in the Middle East and the Ukraine have pushed the price of the benchmark Brent crude above US$115 a barrel, although it has retreated to just over US$113 on signs of a lacklustre recovery in the United States.

Bloomberg reports the rule of thumb favoured by many economists is that every US$10 increase in the price of a barrel of oil ends up reducing global growth by about two-tenths of a percentage point, which is significant given the weak expansion.

This month the World Bank cut its outlook for 2014 global growth to 2.8 per cent from 3.2 per cent in January.

"There is no doubt that, beyond a certain point, higher prices become a major constraint on global economic activity, particularly if the price reflects supply problems, rather than buoyant demand," said Julian Jessop, chief global economist at Capital Economics in London.

Analysts say oil now has the probability of all-out civil war in Iraq factored into its price, as well as the prospect of more violence in Ukraine. Iraq had been the second biggest exporter behind Saudi Arabia among the Organisation of the Petroleum Exporting Countries.

Wellington-based analyst Ian Twomey said oil prices could have been even higher without the surge in supply from the US over the past two years.

"We've got a lot of trouble which in the past has sent the price up to US$125 or more - it's a lot more benign because of the increase out of the US."

Horizontal drilling and hydraulic fracturing, or fracking, mean the US is poised to overtake Saudi Arabia next year as the world's biggest source of crude.

The promise of US oil, and other potential big producers such as Brazil, led to forecasts of oil as low as US$50 a barrel before the recent spike.

Twomey said although prices had been elevated for the past few years, they had been stable with volatility at a two-decade low before the outbreak of violence in trouble spots.