Cheap oil tipped to fuel spending

By CHRIS DANIELS and REUTERS

A Christmas retail bonanza could be on the way, fuelled by dramatic petrol price cuts, say economists.

National Bank chief economist John McDermott said the 20 per cent drop in petrol-pump prices in the past two months, if sustained, would put an extra $100 million a year in New Zealanders' wallets.

In times of uncertainty, this tended to stay in the bank, as was the case in the past two months in the aftermath of September 11.

However, consumer confidence was rising, said Dr McDermott, so this delayed discretionary spending might happen over Christmas.

The director of the Institute of Economic Research, Alex Sundakov, said although low petrol prices put more money into consumers' pockets, there was no guarantee they would spend it.

In times of optimism, the extra disposable income would be spent, but when future prospects were not so positive, it was more likely to be saved or used to pay off debts such as credit-card balances.

"I don't think we will necessarily see an increase in GDP because of it," he said.

"There are lots of other factors driving our growth down. There is a sharp slowdown in tourism connected with the US recession and a decline in commodity prices. There are lots of negatives around."

Low petrol prices were one of the "offsetting positives" in the equation, said Mr Sundakov.

Research conducted by economists at Goldman Sachs and reported this week in the Economist magazine suggested that low energy prices in the United States would free money for other household spending.

Goldman Sachs says if crude oil prices average $US18 a barrel throughout next year real household income could jump by $US50 billion ($120 billion), or about 0.5 per cent of GDP.

Oil prices, which started the year around $US25 a barrel and have traded above $US30, are down a quarter since September 11.

Oil-producing countries are struggling to fight this drop by cutting output. Their efforts were dealt a blow this week, when oil prices fell dramatically after a Saudi Government official said the country was disappointed in the small oil production cut Russia had just announced.

London's Brent crude futures fell 92 cents to $US18.36 a barrel, extending Friday's 62c fall.

Russia, which is not an Opec member, said it would trim by a meagre 50,000 barrels per day (bpd) in the fourth quarter and hold talks in early December about further cuts for January.

The market had expected bigger cuts from the world's second-biggest producer, following offers of fairly substantial reductions from Norway and Mexico, which also compete with Opec on the world oil market.

Opec agreed this month to slash cartel output by 1.5 million bpd from January 1 if major non-Opec producers chopped supplies by 500,000 bpd.

While low world oil prices put money into shop tills, one sector of the New Zealand economy loses out.

For the 12 months to March oil was the most valuable export to our biggest trading partner, Australia. It was worth $445 million, well ahead of the next most valuable sector, timber, which accounted for $271 million in the same year.