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Home / Business / Companies / Freight and logistics

Liam Dann: Beware more pain at the pump

Liam Dann
By Liam Dann
Business Editor at Large·Herald on Sunday·
11 Nov, 2017 04:00 PM5 mins to read

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Rising oil prices could have a significant effect on our economy. Photo / Duncan Brown

Rising oil prices could have a significant effect on our economy. Photo / Duncan Brown

Petrol prices are on the rise again. Some parts of the country have seen pump prices rise three times in the past week, prompting complaints from the Automobile Association that consumers are being ripped off.

I don't know if the rises have been excessive, but they don't surprise me.

Oil prices have risen about 40 per cent since June. At US$63.45 ($91.22), Brent Crude - the version that affects local pump prices - is at its highest for more than two years.

Meanwhile, in roughly the same period, our dollar has fallen 8 per cent.

That's the entirely wrong combination for drivers hoping for a bargain.

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It's not great timing for an Auckland fuel tax, either, although the region still pays a lot less for petrol than the rest of New Zealand.

If the rising oil price trend continues it's going to start to have a significant effect on the economy.

One of the most obvious reasons for the prolonged deflationary cycle we've been in since the Global Financial Crisis is the oil price crash three years ago.

Just as the world was preparing to shake off the GFC and return to some sort of normal economic settings, oil slumped in mid-2014, taking global commodity prices with it, wiping out inflation and forcing central banks around the world to put rate rises on hold.

In fact, in New Zealand's case, the Reserve Bank had to backtrack on rate rises.

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Dairy demand slumped, as did demand for minerals, which seriously dented Australia's economy.

Brent Crude oil was trading above US$113 a barrel at the end of June 2014. By the end of year it slumped to just US$48. A year later it hit bottom at just US$34.

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Just as the oil shocks of the 1970s blew out inflation around the world with rising prices, the shocks of this decade sucked inflation out of the global economy.

Despite the rise of renewable energy and electric cars the global economy is still, quite literally, driven by oil.

Sadly, that's not about to change anytime soon.

In a report published last week, Opec (Organization of the Petroleum Exporting Countries) estimated a peak for global oil consumption is finally in sight.

Although some might suspect the organisation representing oil producing nations to be overly optimistic about the future of fossil fuels, the report offered a range of scenarios based on uptake of renewables and electric vehicles.

Unfortunately for those of us concerned about global warming, even the scenario with the fastest uptake of electric cars only sees demand for oil peaking in the late 2030s.

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Bloomberg reports Opec's main forecast still sees consumption rising for much longer than that, based on more conservative assumptions about electric car growth.

But its report notes the inclusion of the faster-growth scenario shows Opec is starting to take the threat more seriously.

Fans of fossil fuel engines can also take heart the industry is confident of meeting demand for the next few decades as US shale oil production outpaces previous predictions.

The fears of the 1970s that oil would run out on us look, sadly, more unrealistic than ever.

Meanwhile Opec, which meets in Vienna later this month, is starting to get its act together in controlling supply - and that's driving prices up.

There are also all sorts of complex geopolitical issues, not least the dramatic political change in Saudi Arabia, that may also be behind some of the rise.

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But many industry analysts seem to believe we are finally seeing a shift back to more normal pricing.

If the trend continues, we will see it start to weigh on the thinking of central banks around the world as higher oil prices are likely to mean higher inflation.

Higher oil prices don't just cause price inflation at the petrol pump, they lift transport costs for almost everything.

The golden age of super-cheap air fares may draw to an end. Oil prices also factor into production costs of many plastic and synthetic goods.

Rising inflation and interest rates would be a spanner in the works for the Labour Government's stimulatory fiscal plans.

They'd certainly make any further falls in our dollar a lot more painful for ordinary working Kiwis.

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And they are a reason Labour won't want to waste time getting its core economic policies in place.

So far the economic cycle has been turning at a glacial pace.

Forecasts for interest rate hikes and for inflation suggest they should have a year or so in which policies like minimum wage rises and increased social investment will add more value by stimulating the economy than they will do damage by pumping up inflation.

There's already plenty of concern about the risk of overly inflated equity and property markets correcting sharply and ruining the economic recovery.

History has shown oil markets also have the power to change economic equations at a startling pace.

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