When Petrol Hits $2 a Litre
It’s not as far-fetched as it sounds. Economists say fuel could reach $2 a litre if price rises continue on their current track. What impact will it have on the Kiwi lifestyle? Sarah Boyd investigates.
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THE four-wheel drive you bought two years ago now spends most of its time in the garage. Last time you filled up it cost $120. You’ve been trying to offload it, but so has everyone else who owns a big, thirsty car.
With petrol at $2 a litre you only drive to work when the weather is really miserable. When you do, the neighbour catches a lift and chips in for petrol. You make sure you pick up the groceries and dry cleaning on those days to save a couple of trips.
The rest of the week you catch the bus, getting up 20 minutes earlier to make the hike up the hill to the bus stop. The bus is packed. There’s nowhere to sit and the guy next to you has bad breath. You arrive at the office fuming.
At work, the company has cancelled the fortnightly sales meetings in Auckland — they were always a good chance to catch up with the parents — because of the $100 fuel surcharge on the flight. You do a teleconference instead. The accountant guards the taxi chits like a Rottweiler.
Meanwhile, the kids are getting fit walking to school and you’ve got a car-pool roster for after-school activities. When the 17-year- old wants to use the car at the weekend, the petrol gets docked from his pocket money.
That week away in Sydney is cancelled — the fuel surcharge has added $200 to the cost of the ticket and the taxi to the airport costs another $80. You’re wondering if you can still afford the South Island tour planned for Christmas — the petrol alone will cost at least $400. Still, it’s easier to get a motel now that international tourist numbers are way down.
You know people who’ve moved back into the city from up the coast because of the cost of commuting. They’ve taken a bath on those expensive lifestyle spreads they bought a couple of years ago. The demand for properties in town hasn’t escaped landlords and rents are skyrocketing.
But even though you’ve cut back your car use, you still seem to be worse off. More evenings are spent at home watching TV because a cab ride to and from town costs $50. Perhaps it’s just as well, because everything from beer to sushi has gone up along with road transport costs. You invite a few friends around for a barbecue, but those across town can’t make it — they’ve already blown their self- imposed petrol allowance for the week.
Food, clothing and appliances all cost more. But at least you can do the sums and realise it won’t take you as long as before to recoup the investment in a hybrid car. If you do, you’ll get a big rebate on your car registration fee. But you have to get rid of the old one first.
On the bright side, you have lost a few kilograms, what with all that walking, less alcohol and fewer meals out. Suddenly, you’re getting to know people in the neighbourhood as you walk and wait at the bus stop. The conversation moves knowledgeably to “food miles” – - the environmental price tag of transporting food — and the need to buy local produce.
And you talk fondly of the good old days when petrol was only $1.48 . . .
IT’S not as far-fetched as it might have seemed a few years ago, when the price at the pump was under $1 a litre, or a year ago, when New Zealanders were grumbling about the new high of $1.23. It’s now hit $1.53 a litre for unleaded 91. That’s a 35 per cent increase so far this year. It would only take the New Zealand dollar to settle down to a more usual exchange rate to push prices at the pump up another 20 cents a litre.
“A price of $2 is not impossible,” says ANZ National Bank chief economist John McDermott. “I hope not, but it’s within the realms of what credible people are forecasting.”
He says it’d take a world petrol price of US$100 a barrel to add up to $2 a litre here, even without a depreciating Kiwi dollar. It’s currently about US$70.
Ulf Schoefisch of Deutsche Bank says that as the price of a barrel rises, other factors come into play. “If it gets to $2 a litre, global activity and global demand will drop off quite sharply and that will ease the price off.”
However, Goldman Sachs — the biggest trader of energy derivatives — is predicting a super-spike in oil prices to US$105 a barrel. It says that only after that has forced a drop in consumption will prices start to fall again.
The futures market in oil assumes prices will remain in the US$50- $60 a barrel for years to come.
But, of course, nobody really knows where it’s heading, certainly not the futures market or Treasury and the Ministry of Economic Development (MED) here, which based their assumptions on futures and were way out.
Though this latest spike in prices took most people by surprise, everyone has explanations for it in hindsight. It’s due, says the Economist magazine, to an unprecedented combination of tight supply, surging demand and financial speculation. A much stronger than expected demand is coming from China, coupled with a lack of refining capacity to cope. That’s not something that can be quickly remedied.
The other big unknown hanging over all this is the future of oil supplies. Some experts believe the world is at, or near, peak oil — the point at which total oil production peaks and begins to rapidly decline. Then there are others who think peak production is not likely till about 2030 and that factors such as technological advances will push supplies out well beyond that.
In New Zealand, the MED tends toward the latter view, because it gives more credence to bodies such as the International Energy Agency and the US Geological Survey, which see 2030 as the time the world’s oil reserves will begin to decline.
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Politically, the only group really challenging that thinking are the Greens, who argue for policies based on the assumption that the era of cheap oil is over. They’ve been trying to make “peak oil” a phrase that people bandy about this election.
Their proposals include a ban on imports of vehicles older than seven years unless they meet stringent fuel-efficiency standards, investment in upgrading the railways and requiring the oil companies to include a percentage of renewable fuel, such as ethanol, in petrol by 2008.
They also want to bring in a car registration system that would slap higher fees on less fuel-efficient vehicles. That might see the owner of a hybrid car like the Toyota Prius, with a fuel consumption of less than 5 litres per 100 kilometres, pay nothing or even get a rebate, while an SUV, guzzling more than 10 litres per 100km, might be hit for an extra $200 a year.
The spectre of carless days, reduced speed limits and mass carpooling were all raised recently, but that was in the context of a government having to step in to cut petrol use because of some future short-term supply crisis.
The question of a response to the higher price is left up to individuals, though it may have an impact on support for public transport and walking and cycle lanes.
TTHERE are some signs of change. Seasonal variation aside, patronage of Stagecoach buses in Wellington was up 3-4 per cent in August compared with the previous August — though not in Auckland. Toll spokeswoman Sue Foley says train use in the Wellington region has increased by 4-5 per cent. “We’ve noticed it on the short trips, such as the Johnsonville line, as well as the longer journeys, such as the Capital Connection, which comes from Palmerston North. It looks like people are moving back to public transport.”
There may also be the beginnings of a trend toward smaller, more fuel-efficient cars. Of new passenger car sales, the large car category has dropped from 23.5 per cent of sales to 19.5 per cent, and in the month of July it was just 16.7 per cent of sales, according to the Motor Trade Association.
Hybrid cars using petrol and electricity are still expensive and remain only a tiny segment of the market. Toyota sold 37 hybrid Prius cars (priced about $43,500) throughout the country in July, up from 12 in May and seven in June. However, despite the cost of running them, sales of four-wheel-drive sports utility vehicles (SUVs) are up on last year, at 22 per cent of sales so far this year.
It’s the same in the United States, where a loophole in the law allows owners of SUVs to escape fuel-economy standards. With petrol at record highs in the US, fuel efficiency has begun to climb up the list of priorities for car buyers, according to surveys, but lifestyle and the price of the vehicle are still seen as more important.
Wellington woman Jodi McMahon is sticking with her ute because she uses it for carting motorbikes and kayaks for recreational use. But two months ago the rising cost of petrol encouraged her and her partner to begin biking to work.
They have every reason — both work at Burkes Cycles in Kilbirnie and live reasonably close by in Island Bay. She’s been surprised at how much she’s enjoyed it and the weather hasn’t been a problem. She tends to go through Newtown in the mornings to avoid the wind, but cycles round the bays on the way home.
“I used to do it ages ago, then, with working and our lifestyle, it just stopped.” Now they take the car only if they have to go to the supermarket.
She’s now planning to do Lake Taupo cycle race. “I would have thought about it before, but I always thought I wouldn’t be fit enough.”
LEAVING the car at home might be an option for individuals, but in a narrow, sparsely populated country like New Zealand, all our goods and services depend to some extent on oil.
First hit are businesses with fuel as a large chunk of their costs. Trucking firms have had to pass on increases ranging from 6 to 12 per cent, according to Road Transport Forum chief executive Tony Friedlander. He says there’s nowhere in their margins to absorb the 40 per cent rise in diesel that’s occurred this year.
Air New Zealand recently upped its fuel surcharge for the third time this year and has indicated it may have to do so again. Courier companies are looking at following suit, while Tim Reddish of the Taxi Federation says most companies have had to put up their prices a couple of times over the year, by an average of 30 cents a litre.
“They’re spending an extra $55-$60 a week on petrol. That has to be recovered.”
He’s worried there’ll be consumer resistance, not so much in Wellington, where a lot of business comes from corporates, but in lower socio-economic areas or where theelderly rely on cabs.
Mr Reddish says there’s a real incentive now for cab drivers to look at switching to alternative fuels such as lpg. He thinks hybrid cars will be the taxis of the future, though that’s some time away because of the current cost of the cars.
Also hard hit will be oil-derived products such as plastics. But the impact of high oil prices will be wide-reaching, says Consumers Institute chief executive David Russell.
“Everything from the farm to the processing plants, through to manufacturers and supermarkets. It’s going to be incremental for supermarkets, because petrol is probably not a high percentage of their costs.”
That’s echoed by Richard Umbers, managing director of Progressive Enterprises, which owns about 45 per cent of the supermarket sector. Labour costs are more significant than fuel and he says supermarkets are in a competitive market constantly looking at how to contain costs. They can, for example, adjust the frequency of some deliveries and employ software to tweak the daily distribution routes to make them as efficient as possible.
World economies — including New Zealand — are less dependent on oil than they were in 1970s, and many commentators have been surprised at how well the global economy has weathered the rising oil prices to date. One of the reasons may be that this time the increases are generally not coupled with high inflation at the time of the 70s oil shock, the petrol price in New Zealand topped $2 in real, or inflation-adjusted, terms.
Oil prices have gone up and down over the years, but they haven’t been on a relentless trend upward — at least not till recently.
“Six years ago it was up to about $1.20 a litre, then down to below $1,” says Dr McDermott of ANZ National Bank. “But that was over a period of six years. Think about what’s happened to the prices of houses and cars and most goods in that period — they’ve gone up 2-3 per cent a year. In real, inflation-adjusted terms, we’ve seen oil come down.”
However, his bank has reassessed its assumptions in the light of the recent sustained high prices. They represent, says its market focus report out last week, a material threat to the economy, with the price rise to date lowering growth and knocking $500 million out of consumers’ wallets.
“Petrol prices are like a tax increase — they take money out of everyone’s pockets,” Dr McDermott says.
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ALTERNATIVE FUELS
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Oil is not the only option in town. Lpg and cng were both popular after the oil shock of the 1970s. The government began subsidising conversions and new filling stations, but as petrol receded in price the popularity of gas waned. Land Transport figures show that at the end of 2004, there were 3.7 million vehicles in New Zealand, with 2.65 million using petrol, 575,000 using diesel, 2153 using lpg, 389 electric and 380 on cng. However, dual-use petrol/lpg and petrol/ electric vehicles are included in petrol.
Liquified Petroleum Gas (lpg)
Converting a car to lpg costs about $3000, and a litre of lpg costs between 71 and 75 cents. However, cars using lpg require 20 per cent more fuel because it does not have as much energy as petrol. The LPG Association says there are 600 filling stations around the country, and inquiries about lpg conversions are on the increase.
Compressed Natural Gas (cng)
Cng is now a little-used alternative to petrol. Conversions have fallen from a peak of 30,000 to virtually nothing today. There are 16 cng stations, only in the North Island.
Hybrid cars
Cars that use both petrol and electricity have been treated as a novelty so far, but are coming closer to becoming comm-ercially viable as their retail price drops. Both Toyota and Honda make hybrids vehicles, which cost more to buy, but can use as little as four litres of petrol per 100 kilometres.
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FUEL-SAVING TIPS ON THE ROAD
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If you’re stuck with your old gas-guzzler, there are things you can do to save fuel:
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* Drive smoothly–accelerating, stop-start driving and braking use more fuel.
* Cut speed. At 110 kmh your car uses 25 per cent more fuel than it does at 90kmh.
* An extra 50 kilograms can increase your fuel bill by 2 per cent. Remove your roof rack when it is not needed.
* Cold starts and short journeys use 40 per cent more fuel. Combine chores to avoid multiple trips.
* Use the airconditioner sparingly — it can suck up 10 per cent of fuel.
* Keep your tyres at the correct pressure and make sure your car is properly maintained.
* Check out the fuel efficiency of your car at www.greenvehicleguide.gov.au and consider trading up.
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Airlines will increase fuel surcharges, so that holiday will be more expensive.
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Many detergents and cosmetics are made from petroleum, so it’ll be costlier to be clean.
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Sales of fuel-efficient cars are increasing
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Plastics, a petroleum product, will cost more to produce.
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Higher transportation costs will push up the price of food
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People will walk or cycle more, so heart disease may be reduced and overall health will improve.
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More people will ride motorbikes, which could increase the road toll.
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The cost of commuting will make living in town more popular.
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People may cut back on treats to save money, and spend more time at home.
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Higher prices may cause the Reserve Bank to lift interest rates, so mortgage payments could rise.
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High petrol prices also lift business costs, with many firms likely to cut costs and reduce employment rather than lift prices.
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