April 22, 2008...5:50 pm
Petrol heading for $2 a litre? Once there, it would be close to the all-time 1985 real-terms high
Perversely, one way to make petrol prices fall could be to suggest they are heading for $2 a litre. Tonight, I saw my local BP selling 91 Octane for 188.9c a litre, up another 3c on top of the 3c rise only last Thursday.
With overnight world oil prices breaching $US 117 a barrel, the $2 litre does not look far off. The latest rise takes 95 Octane to 194.9c, so there is only 5.1c to go.
Frog, who believes in Peak Oil theory, thinks I’m wrong that oil is a commodity whose price will fall again. I do believe prices will reach a peak and then fall back to much lower levels, as happened after the 1973, 1979 and 1991 oil price surges, but I may be completely wrong. Unlike Frog, though, I hope not!
The very knowledgable Insider, who regularly posts comments on this blog, recommends following the Macros petrol price tracker for clues to the ups and downs of pump prices.
I asked Insider about today’s BP rise, and he said: “BP is usually the aggressor, so there is obviously a trigger point there where they are getting commercially uncomfortable, but Shell seems to follow at that point, which is required for a market increase to stick. Note that that margin is not retail but ex-refinery and includes all the transport, storage, sale costs etc that must come out of that.”
Insider continued: “What does this mean? It means that New Zealand is a market taker and responds to price signals, so predicting where it might go is, as always, very risky. It seems very sensitive on the upside at present, meaning any increases are passing through very quickly. This may be because there are much bigger economic costs/risks involved, especially when inventories are being revalued daily, as some companies do. There is a fallacy that stock is valued at its purchase price and new stuff is revalued at the new price, when really it is regularly revalued at a single price for all stock, meaning prices need to go up to recover margins or room is left for price cutting. That means you really want to capture that margin as soon as possible. So going on that, if refined costs go up expect a quick response on the forecourt.”
And Insider points out that even at today’s prices, petrol still costs less in real terms than the all-time peak average pump price of $2 a litre for 91 Octane in current prices it was in 1985, as shown by a very informative Ministry of Economic Development paper he kindly referred me to. But when, if, the pump price gets to $2 a litre, that will equate closely in real terms to that all-time high.
Thanks for all the help, Insider.
Update 7am Wednesday: Brent crude has fallen overnight slightly to around $US 112 a barrel, but Texas light is up another $US 2 to more than $US 119.
12 Comments
April 22, 2008 at 6:55 pm
Climate change is hogwash and oil will “fall back to much lower levels”. We’ll find out soon.
April 22, 2008 at 7:59 pm
There are two ways of looking at the present oil supply situation, either it’s a temporary restriction , or it’s a long term restriction, in supply.
I haven’t seen any good arguments that it’s temporary.
The world is effectively at capacity production, and while some producing nations are continuing to increase production, notably Brazil and some former USSR states, others, the US, Mexico, Norway and many others are certainly past their peak production and are in decline.
So I think at best we will see only a slow growth in supply.
On the demand side, the consumption of China and India just keeps growing, I read a report in a major economics publication (possibly The Economist?) a while ago that claimed that these countries, because of the lower overall costs in their economies, are in a better to pay higher prices for oil than Western countries.
Another factor that should also be considered is that the economies of many oil exporting nations continue to boom, especially with the higher oil price, this economic growth is dramatically increasing their own domestic oil consumption.
So I don’t see any drop in oil prices internationally in the foreseeable future without a dramatic drop in demand.
I do think that with international food prices also going through the roof that New Zealand, as a food exporting nation, will continue to have at least the benefit of high export prices in part offsetting higher oil prices.
Because of recent shortages in food we have seen India and other countries restricting food exports, so there is also the possibility of export restrictions being introduced by some industrialising oil exporters in an effort to protect domestic interests, or even national hording of oil should worries over peak oil really get serious.
April 23, 2008 at 12:09 am
jeez poneke, couldn’t you have edited it so it made sense?
[Poneke says: It made perfect sense to me! You even spell proper!]
April 23, 2008 at 9:05 am
I note Shell have not moved this morning
[Poneke says: Nor had my local Mobil, I saw as my brand-new trolley bus glided past it earlier. But Caltex has.]
April 23, 2008 at 10:03 am
I heard it said that the supply of oil - and now food - has been de-coupled from price by the surge of speculative money into futures trading on these markets. The idea that speculators are driving up the price of basic commodities is an attractive one to conspiracy theorists and and-globalisation campaigners, but I would very much like to hear someone in a position to know asked this question.
April 23, 2008 at 11:41 am
Quite apart from the bio-fuels disaster, there is a direct connection between oil prices and food prices because fossil fuel contributes to much to food production and distribution.
For example the over 30% of the average Aussie household’s carbon footprint is from food while only 10.5% is from all transport - including cars, planes, buses and trains.
If NZ wants to reduce GHG emissions we should put everyone on weight watchers rather than worry about our cars - which are more fuel efficient than public transport anyway. (probably excluding shuttles.)
I wonder when petrol will get to be as expensive as bottled NZ water?
April 23, 2008 at 11:55 am
it’s about there now Owen, but not if you take off all the taxes.
April 24, 2008 at 8:25 am
I don’t think anyone knows whether the upsurge in oil prices is caused by speculation in commodity markets or supply constraints. They are described as “dark markets”. Some say speculation follows rising prices driven by fundamentals. OPEC blames commodity traders, however OPEC needs to be more transparent.
It must affect sales revenue, which angle is taken in a news item (hence TV3’s last night… Insider predicts prices will fall by $.80)
April 24, 2008 at 1:20 pm
Oil prices may have nothing to do with peak oil. It may simply be that demands is outstripping physical ability to supply. Refineries take years to build. Demand can rise in much shorter time frames. Particularly when China and India are both growing as rapidly as they are. China’s is almost 10% growth per annum - compounding. That has to have an impact on price.
Plus the instability due to the war in Iraq and the insurgency there. Plus the ongoing monstering of Iran by the US, with Israel chiming in threatening a pre-emptive nuclear strike on Iran every few weeks or months since late 2002, risking plunging the region into a very messy state. Just last week the Israeli military was conducting a test of their ability to conduct such an attack. That got people excited. That also has to have an impact. Plus the US refinery cartel ceasing to refine oil when their profits are in danger, tightening the supply a wee bit to perk up their domestic prices.
Plus the US dollar is going down against everything in sight. Our own currency has declined in value by between 5% and 10% against the Yen, the A$ and the Euro over the past two months. But our exporters can’t seem to deal in anything but US dollars….to their cost.
Imagine we had the “40 cent” dollar some exporters dream of and we were paying over $4 / litre for petrol now, ever mind the future. Would your wages under that scenario now be double what they are? I don’t think so. You’d just be a lot poorer.
There is a lot of crap going around about the dollar and oil.
If you look back, you could be forgiven for thinking everything G W Bush did since taking office was intended to make the price of oil go up. Just imagine the trillions of dollars that has cost everyone, everywhere….with the oil price - what, trebling? - during his term to date. What was the price of oil it in January, 2001?
Owen: You’re claiming that one bus uses more fuel than the 55 cars it would take to get the same 55 people who ride the bus to work and back each day? I find that hard to believe. My car isn’t 55 times more fuel efficient than an Auckland bus and nowhere close to an electric Wellington trolley bus.
[Poneke says: I may be wrong, but I recall that Owen even came out in support of Act's Heather Roy when she claimed last year that Wellington's ELECTRIC trains emit more CO2 than a diesel bus and should thus be replaced with diesel buses. Owen doesn't like public transport, but he most dislikes any public transport that is clean and electric. When I heard Heather say that, I thought she'd been misquoted by the local rag, which reported it, but she's kept on saying it! Repetition, I suppose. I'm sure Owen believes her.]
April 24, 2008 at 1:31 pm
Plus the ongoing monstering of Iran by the US, with Israel chiming in threatening a pre-emptive nuclear strike on Iran every few weeks or months
Did you hear Hillary yesterday saying she would “obliterate” Iran by nuclear attack if Iran attacked Israel with nuclear weapons?
Talk about rattling sabres. I always liked her up to that point. I think it was the point that will win McCain the presidency.
On the other hand, Israel is terrified that Iran will use the nuclear weapons it is demonstrably making to nuke Israel. Ahmadinejad is on record as saying Israel should be wiped off the map and that it would take just one nuke to destroy the whole of Israel, while all 300 of Israel’s nukes could not wipe out the entire Islamic world.
Someone mad enough even to say such a thing is mad enough to give the order, and when you put it beside his hatred of Jews, as evidenced in his Holocaust-deniers summit and much more, well, it makes me hope he frightens enough of his own good people (and they are) for them to give him the heave at the next election. Yes, he is elected.
April 24, 2008 at 3:33 pm
I have no objection to public transport - I use taxis, aircraft and shuttle buses all the time.
However, I do object to the current infatuation with public transport and the assumption that cars are bad and buses are virtuous and trains bestow sainthood. I do not remember supporting that claim of Heather Roy’s if only because it makes no sense.
The problem is that fake analysts tend to cherry pick their comparison. You have to compare the whole of day use (payload) of the family car with the whole of day use (payload) of the bus or train.
The bus beats the car for those trips centred on downtown during peakhour - when buses are at their fullest – say 65% (except when they go out empty in the morning) and when cars are only 30% loaded. Over the whole of day cars are about 45% loaded and the buses are about 15% loaded –and they stop and start all the time. The fossil fuel performance of trains depends on the source of their electricity if they are electric, but diesel- electric trains, even in the UK, use about 4 times the fossil fuel of the car per passenger mile.
Next time you see a train or bus go by guess the loading and then guess the loading of the cars around you at the same time.
You might also go here:
http://www.cato.org/pubs/pas/pa-615.pdf
Finally cars are getting more efficient by the day but rail in particular is in a rut. I might say that for a number of reasons public transport works better in Wellington than in most cities. One reason is that public servants’ travel behavior is more predictable and more radial.
April 24, 2008 at 8:14 pm
You’d expect production to increase as prices rise. Some Senators in the US are threating to stop arms shipments to middle eastern countries if they don’t increase production. King Abdullah has said he will leave some discoveries untapped for the future.
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