Economy Hub: Petrol prices due to fall on global demand

The good news for drivers is that petrol prices are due to start falling soon

Westpac chief economist Dominick Stephens told the Economy Hub that his forecast was for prices to ease off in the coming year.

The bad news is that the fall will likely be driven by a slowing global economy.

Oil prices have already fallen more than 10 per cent since peaking in early October, which should flow through to retail prices in the next few days.

Brent Crude oil, for example, peaked at US$86.29 a barrel on October 3 and was trading down almost 12 per cent at US$75.95 today.

Stephens said petrol prices had spiked sharply this year due year due to a combination of factors.

Demand, driven by the strong global economy, had pushed crude oil prices up, the New Zealand dollar had fallen and there had been some supply issues with producers in Iran, Venezuela and Angola.

That had coincided with the new Auckland regional fuel tax and increase in the nationwide tax to really hit consumers in the pocket.

"Tax makes up about 45 per cent of the cost of petrol at the pump now but actually the lift in tax was a relatively small part of the lift in prices," Stephens said.

Consumer concerns about the retail prices weren't entirely unfounded either, he said.

Petrol companies' profits had increased.

"The importers' margin, or retailers' margin, is a lot wider now than it was five years ago," he said. "You also look across the regions and you see that the ones with more competition had lower prices. So there certainly is an element of lack of competition in the market"

Meanwhile, the rise in costs would have an impact on the wider economy, Stephens said.

But the higher prices were taking an extra $10 a week off families on average but the timing had coincided with an increase in the Government's Working for Families payment so consumer spending had held up reasonably well so far.

In the short run, consumers tended to react to higher fuel costs by spending less, he said.

Longer term the higher prices tended to change behaviour, which meant from an environmental point of view there was an upside.

"If we want to avert climate change, one of the best ways to achieve that globally would be to make petrol more expensive," Stephens said.

However, his long-term forecasts were for petrol prices to ease further next year.

"That's based on our view that global economy is peaking right now. We're seeing China slow, we're seeing Europe slow. I don't think America's economic largesse can continue forever either," he said.

"Secondly you are seeing the shale oil [producers], or frackers, in the United States ... Love them or hate them, they are sinking a lot more wells in response to prices and that burst of supply should bring global oil prices down."

Lastly, the kiwi dollar was expected to be more stable - having dropped around 10 per cent against the US dollar this year.