Liam Dann: Global oil slump offers some respite as petrol tax comes back

Petrol prices will rise by around 29c a litre as the 18-month tax break ends on July 1. Photo / NZME

ANALYSIS:

Falls of around 6 per cent in the global oil price over the past week should soften the blow for Kiwis as they brace for the end of the Government’s fuel tax subsidy on Friday.

Petrol prices will rise by around 29c a litre as the 18-month tax break ends on July 1, but will remain well shy of the peaks they hit as the invasion of Ukraine war pushed up global prices in March 2022.

Motorists take some comfort in the ongoing fall in global oil prices which have plunged this year by almost 40 per cent.

This week the price of Brent Crude - the benchmark for the petrol we use - dipped close to its lowest level in 18 months, just above US$72 a barrel.

That is well shy of the US$114 peak that forced the Government to cut the fuel tax and around the average level across the past 10 years.

That means the pump price after Friday will still be nowhere near the eyewatering levels that forced the Government to bring in the subsidy.

In early March last year, pump prices for 91 and 98 octane fuel had hit 3.07 per litre and 3.33 per litre respectively.

Fuel price tracking website Gaspy had the average price of 91 at 2.34 per litre on Wednesday - suggesting we’ll likely be paying about $2.60 when the taxes return.

That’s 25c as the tax and road user charges return, plus the GST, but assuming the retail price should continue to fall over the next week, reflecting those commodity prices.

If that still seems high compared with our memories of the last time oil prices were this low - in August 2021 - it is probably due to the lower value of the kiwi dollar, which has fallen from around US70c in August 2021 to just US62c today.

Oil trades globally in US dollars, which means when the kiwi falls the import price effectively rises.

Broadly, the global trend for oil prices is downward.

An attempt by Saudi Arabia and Opec, at the start of June, to cut oil production and boost prices has failed.

Opec’s power to control pricing - the way it did with oil shocks in 1973 and 1979 - has been greatly diminished by the technological advancements of the past few decades, allowing the extraction of shale oil in the US.

The Ukraine invasion and Russian embargo caused a big supply shock at the start of 2022 but the fact it was so shortlived just highlights the extent that the oil supply dynamic has changed in the last few decades.

US production quickly ramped up and global prices were back at historically normal levels within about nine months of the initial shock.

In fact, the speed of the return to normal begs the question of whether the Government has left the subsidy in place too long.

It was originally planned as just three months of tax relief but was extended twice.

It was initially costed by Treasury at $350 million in lost tax revenue for the three-month period.

That suggests the Government has ended up missing out on more than $1.5 billion in tax revenue and now faces the politically unpalatable task of bringing the tax back months out from the election.

They may get lucky if oil prices continue to fall, but we should be careful what we wish for when it comes to commodity prices.

The big driver of prices is currently the slowdown of the global economy which is reducing consumer demand.

The UK, US and Europe are all forecast to experience low growth or recession in the next year as central banks raise interest rates to get inflation under control.

China’s economy is also bouncing back much more slowly than had been expected, further dampening commodity prices around the world - including our big exports: dairy, meat and wood.

This week S&P Global downgraded its forecast for China’s GDP growth this year from 5.5 per cent 5.2 per cent.

The slower growth in China appears to be undermined by weak consumer confidence and a subdued property market.

All of this adds up to good news in the battle to beat inflation but adds to the risk that New Zealand may face a real recession late this year or early next.

“Slowing global growth is one of many headwinds the economy is facing into,” said BNZ chief economist Mike Jones in a report this week.

“A strong, post-lockdown bounce in China’s economy was expected to cut through some of this gloom from a New Zealand perspective, but this view is now being severely tested.”

China’s economy is bouncing back much more slowly than had been expected. Photo / Getty Images

Inflation indicators were going the right way, though.

“The silver lining to the lacklustre global growth pulse is that global inflation indicators continue to move in the right direction. Higher interest rates appear to be working, although normalising supply conditions have been just as important,” Jones said.

“Headline rates of inflation in the developed world have continued to fall. Forward-looking indicators suggest this will continue.”

There was a strong chance that annual US inflation would be back to around 2 per cent in the next two to three months, he said.

“That would mark quite a turnaround from the almost 9 per cent peak in June last year.”

Other parts of the world - most notably the UK - were not as positive and there was still a risk of “sticky” inflation even as it eased.

“But falling global headline inflation in concert with the rapid easing in supply constraints – for both materials and labour – allows us at least to be more confident in our forecasts for NZ inflation to fall to around 4.5 per cent by year-end, from 6.7 per cent currently.”

Liam Dann is Business Editor at Large for the New Zealand Herald. He is a senior writer and columnist as well as presenting and producing videos and podcasts. He joined the Herald in 2003.