Petrol prices likely to remain high as oil surge bites

Photo / Dean Purcell

New Zealanders have been warned to brace for continued high petrol prices which one expert analyst says could spike to levels that endanger world economic recovery.

Pump prices here are approaching the all-time high motorists faced in May last year when war broke out in Libya. Tension in the Middle East is contributing to a premium of up to US$30 ($36) a barrel, according to research by Craigs Investment Partners.

While prices have been volatile over the past two months - yesterday falling on a rumour there would be a co-ordinated release of reserves by Britain and the United States - the trend has been up.

Here oil price rises have dented consumer confidence, blamed by one airline for its pulling out of New Zealand and are putting the squeeze on retailers and exporters. Fuel retailer Z Energy says its margins are also under pressure and volumes are threatened as motorists cut down driving.

Research by Craigs analyst James Schofield finds crude prices are already 4 per cent higher than last May. Yesterday Brent crude was trading at US$123.55 a barrel, not far short of US$130, which he said could be a tipping point for the global economy.

Oil costs make up almost 6 per cent of global GDP, approaching the 7 per cent level last seen during the late 1970s and early 1980s oil shock.

Escalating tension between Iran and the West poses the greatest risk to supplies since that oil shock, said Schofield, formerly a refining industry specialist for Merrill Lynch in London.

The threat of further conflict in the Middle East was "the wildcard".

"It is unusually difficult to predict at the moment but what I can say is that we expect continued high oil prices. You need to keep watching this space over geopolitical risk."

Options for oil in June show there is a 36 per cent chance oil will exceed US$130 a barrel.

"One thing that is sure is that if there is Middle East conflict then it could go through it which would put pressure on the global economy," he said.

Rising oil prices are already hitting the New Zealand economy.

Retailers have been hit by higher transport costs and decreased discretionary income for consumers. Exporters have been hit by higher freight costs coupled with reduced economic growth among trading partners. This week Air Asia X blamed high jet fuel costs for having to quit services here.

Z's chief executive Mike Bennetts said there were signs prices could slip back from $2.19 for a litre of 91octane petrol in the short term.

"The people who are making the loot are the producers. Refiners get squeezed on their margins as the distributors like us."

Last year Z's after-tax profit was less than 3c a litre and was likely to be less this financial period. That amounted to a 6 per cent rate of return on capital and "that's hardly anything to skite about," Bennetts said.

The relatively strong kiwi dollar against the US dollar had insulated motorists from the worst of high oil prices.

As a general rule a 1c move in the value of the dollar was worth about a 1c change in pump prices and a US$1 change in the barrel price equated to 1c at the pump, he said. ANZ chief economist Cameron Bagrie said high global commodity prices were generally good for New Zealand but consumers facing rising prices could struggle to see that.