Bernard Hickey: Are we ready for $4 a litre petrol?

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Many voters will have welcomed the government's decision last Tuesday to defer a 1.5 cent a litre fuel tax increase.

The economic and political pain around the rise this year in petrol prices to around $2.20 a litre is intense, but many can't imagine the prospect of it going much higher or haven't thought too much about what a permanently higher petrol price means for them and the wider economy.

The assumption is the rise is temporary in the same way that high oil prices in 1975, 1979 and 2008 were temporary.

But what if this time is different and the price of oil and petrol is about to shift permanently higher?

It's worth looking at the trends in oil production, oil demand and in currencies to get a sense of where prices might head.

Some analysts believe the near record high oil prices are simply a result of financial market speculation and by a rush by many investors to hold 'hard' inflation proof assets rather than the US dollar, which is being printed at an alarming rate and at alarming interest rate of 0 per cent by the US Federal Reserve.

But in recent months the debate around peak oil has migrated from the greener fringes into the centre of economic and financial debate.

This week renowned hedge fund manager Jeremy Grantham issued a detailed paper predicting the world was at one of its "giant inflection points in human history" with an epic shift higher likely in commodity prices, led by oil as rising demand from China and India hit peak oil supply.

He is not the only one. HSBC, one of the world's biggest banks, predicted oil would run out in 50 years, even if demand was flat at current levels.

The trouble for the world and petrol consumers everywhere is that oil demand is not flat. It's growing, largely because of China's explosive and intensive demand for oil. India is not far behind.

Both nations are rapidly motorising their economies and are entering a phase of industrialisation where energy and oil usage becomes most intense.

As well as expanding their fleets of cars and trucks, they are building new motorways, buildings and other infrastructure that uses a lot of steel and concrete.

Both require large amounts of energy. Some of it will come from coal, but the end result is strong demand for oil.

For example, China is now the world's largest car market. It is expected to add another 220 million cars to its fleet by 2020.

That would add 8 million barrels a day of demand at a time when the International Monetary Fund forecasts oil supply rising just 1 million barrels a day.

Some economists are forecasting an oil price well over US$200 a barrel within 5 years.

Even the US Energy Information Agency has forecast a rise to US$200 a barrel within 20 years.

Even if the New Zealand dollar was to rise to parity with the US dollar, a rise in the oil price to US$200 a barrel would push the petrol price towards $4 a litre, particularly once the deferred tax increases are included in 2012 and 2013.

Are New Zealand's businesses ready for that? Are they planning to have smaller, more fuel efficient cars and trucks? Are we building better public transport and encouraging cycling? Higher oil prices also feed through into higher food and other prices because so much of our supply chain is infused with oil and transport costs.

Are we ready to eat and consume less and differently?

Our government should be using tax increases such as the one deferred this week to gradually adjust New Zealanders to permanently higher oil prices rather than focusing on its election prospects.

- INTEREST.CO.NZ