This week, Transporting New Zealand has been closely monitoring updates on fuel prices and fuel security, including attending a special meeting of the Freight Advisory Council along with transport bodies covering road, air, and sea transport.
While the situation is serious, and price increases are putting immediate cost pressure on transport businesses, New Zealand still has 49.9 days of diesel stock either in-country or on-water, and no fuel companies are reporting major supply chain issues.
At the Freight Advisory Council meeting, we emphasised the importance of MBIE keeping industry closely updated on developments, ensuring the Commerce Commission increases its scrutiny of fuel price increases, and noted the cost pressures that all road freighters are under.
Oil supply and pricing has been dramatically impacted following the US/Israeli air strike on Iran and refineries in the region being bombed, more so after the Iranian regime effectively closed the Strait of Hormuz, through which about 20% of the world’s oil is shipped.
Although NZ no longer imports oil for refining at Marsden Point – we now import all our refined fuel needs, mainly from refineries in Asia – we are still subject to oil price fluctuations which flow onto the refined fuel price.
The price of Brent crude oil, the relevant benchmark for our refined fuel sources, has risen about 30% or US$22/barrel in the past fortnight to around US$92/barrel (after briefly spiking to US$117/barrel), which in turn saw petrol and diesel pump prices jumping 20 cents per litre (cpl) in a matter of days (with discounted diesel fuelcard prices hiking a massive 44cpl seemingly to match).
As a rough rule of thumb, a $1 increase in oil prices equates to a 1cpl increase in pump prices. Westpac modelling suggests oil prices could rise to US$130/barrel if the Strait of Hormuz remains closed for a month, with diesel prices surging to $2.50/litre. Inevitably, this will flow into freight costs, with fuel being the second biggest cost component after wages.
Transporting New Zealand strongly advises members not to absorb these fuel price increases, and consider using fuel adjustment factors in your contract rates, and proactively communicate to your customers that price increases should be expected as fuel costs rise.
We have been here before though, when Brent oil prices hit US$120/barrel as recently as June 2022 (and peaked at a record high of US$147.50/barrel in July 2008). At that time in 2022, according to MBIE monitoring, petrol prices breached $3/litre for the first time (reaching $3.32 for 95 octane), with retail diesel hitting $2.99/litre believe it or not (pump prices never got that high in mid-2008 thanks mainly to a much higher exchange rate offsetting some of the pain). In response, the-then government temporarily cut petrol excise by 25cpl, and discounted RUC rates by 36% in turn (since there is no excise on diesel). Interestingly, the NZ Taxpayers Union are calling for the same response again, but the government is not considering doing so. Transporting New Zealand doesn’t support a repeat either as any tax cut is unlikely to match the fuel price volatility so prices will still (need to) rise, plus any excise/RUC cut would reduce the funds available for much needed road maintenance and improvements.
At the time of writing, the average retail price of diesel according to Gaspy was $2.26/litre, so in theory an oil price of US$130/barrel would equate to around a further 38cpl increase in pump prices, putting retail diesel up to as much as $2.64/litre. It’s not quite that simple though, as global market prices for refined fuels can and do move independently of oil prices (and each other), and we have seen in the past refined diesel prices rise above that of oil or petrol movements; as seen above when the gap between diesel and petrol was little as 30cpl, despite petrol having an additional 76cpl worth of excise on it.
But just how much could oil prices rise? The first oil shock, way back in 1973, saw oil prices treble, albeit from a low base. The second oil shock in 1979 (which triggered the ‘carless days’ here) saw oil prices rise 71%, but there have been plenty of other price spikes since then due to geopolitical events. Most recently, the Russian invasion of Ukraine in mid-2022 saw oil prices jump 72%. Average them all out, and oil prices tend to rise about 51% in the aftermath of some crisis in the Middle East.
Further concern is that an ongoing blockage of the Strait of Hormuz could constrain oil supplies and in turn refined fuel. The Chinese government has ordered its refineries to halt exports of refined fuel, not that NZ sources any from there. There was some concern expressed when the Marsden Point refinery was being shut down that it could affect NZ’s security of supply. But in reality, it is oil that is more subject to global supply shocks, not refined fuel, so having our own refinery didn’t solve that risk, although today it does act as a huge storage depot.
In fact, fuel importers are required to have a minimum of 21 days’ supply of diesel on hand in New Zealand, 28 days’ supply of petrol, and 24 days’ worth of jet fuel. That doesn’t include fuel already being shipped here, which MBIE estimates at 22 days’ worth of diesel alone.
On top of that, New Zealand is required to hold at least 90 days of oil stocks precisely in case of some sort of global supply emergency. That figure includes the domestic fuel stocks, with the balance being covered by “oil tickets” or agreements with several other countries to hold oil stocks on our behalf. It’s yet to be proven, in the event of a global oil supply shortage, that those contracts will be honoured. But with previous geopolitical conflicts, like the US invasions of Iraq, that scenario has never eventuated.
Thus far, shipments of refined fuel out of Singapore – one of the main refining hubs – has not been impacted, a point echoed by the main NZ importers who all report no supply issues, with the commodity price spikes being driven by a surge in global demand.
Written by Mark Stockdale. Contact Mark at mark@transporting.nz
