Petrol price approaches yet another record

ANDREA FOX
Last updated 05:00 21/08/2012

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Petrol prices could prove the grinch of Christmas 2012 as world markets and Middle East war jitters threaten to push prices at the pump to record highs.

The AA said at $2.20 a litre for 91 octane, the price of petrol was now at its highest level since March, and just 2c below the record high of May 2011.

While increases in petrol commodity prices hit motorists immediately in the pocket, the downstream impact on hundreds of other consumer goods affected by transport costs, such as food, was not usually felt for a few months, economists said.

But while the AA said petrol price signals were "not good", the hit to our wallets would be much worse if not for the strength of the New Zealand dollar.

The flipside of the US81c New Zealand dollar so hurting exporters is that it is shielding us from the full effect of the international price of crude oil, currently around US$110 (NZ$135) a barrel.

ANZ senior economist Mark Smith said if the New Zealand dollar was US60c, and assuming the international price and taxes were at today's levels, motorists would be paying $2.60-$2.65 a litre at the pump.

Taxes make up 90c of the cost of every litre of petrol - 30c GST, 50c road tax, and 10c for ACC. Petrol prices increased by 3c a litre in July and then again last week, after price falls in May and June.

BNZ chief economist Tony Alexander said if tensions between Israel and Iran escalated, petrol prices would rise.

History showed a correlation between movements of the New Zealand dollar and commodity prices, and petrol price rises led to a drop in confidence generally, he said.

Drought in the United States was pushing up dairy commodity prices and helping to underpin the New Zealand dollar.

"A really bad scenario would be war in the Middle East. Oil prices would rise and commodity prices would go down, resulting in a double whammy," Alexander said.

It usually took a few months for petrol rises to push up food and transport prices because supermarkets and retailers did not like "changing prices willy nilly", Alexander said.

"They wait a while, like the taxis do."

But airlines felt an immediate effect. They had fuel surcharge systems in place so could bump up fares easily.

Farmers were affected quickly if diesel prices went up. The AA's PetrolWatch yesterday said diesel prices remained unchanged.

Smith said retailers were already feeling the pain of higher costs.

As for the impact of higher petrol prices on inflation and the Consumer Price Index, Smith said the Reserve Bank tended to focus on the medium-term outlook for inflation, which had an influence on central bank interest rates and therefore mortgage interest rates.

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Petrol was about 5 per cent of the CPI by weight.

"If this is a one-off price hit, and as long as it doesn't filter through to wage and price-setting throughout the economy, the Reserve Bank will probably look through it. The problem will be if it starts to influence throughout the economy."

- Waikato Times

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