Business

The big picture – pump prices

11/12/2014 - Industry insights

The big picture – pump prices

Seven consecutive drops in petrol prices at the pump have got people wondering what is happening.

So what is special about now? Why have there been so many price decreases at the pump? The volatility in the pump price is primarily driven by movements in crude oil prices, refined fuel prices and foreign exchange rates.

The pump price is currently lower because of:

  • A downward trend in the cost of crude oil on the international market
  • Our exchange rate not falling as fast as the price of crude oil.
  • Less market demand – not in New Zealand but internationally.
  • Falling refined product prices on the back of falling oil prices.

As it happens, instead of a ‘perfect storm’ we are having a ‘perfect day’.

With our industry there is a long journey and a huge number of factors that come into play at a macro-economic level before we get to the domestic price at the pump.

The best place to start is with the current cost of crude oil and why that is down.

Three key factors are impacting on the cost of crude oil:

  1. The US dollar is continuing its strong position having reached a seven-year high against the Japanese Yen. In turn the Kiwi is also holding up against the US$. Why’s this important? We buy crude oil in US$.
  2. The US, because of shale and fracking (a new way of extracting oil), has reached a 28-year high in terms of crude oil production. Why is this important? It means there’s lots of oil on the market driving down the price.
  3. Crude oil availability within the Organization of the Petroleum Exporting Countries (OPEC) has also been continuing at very high levels and Saudi Arabia has been lowering their export prices further to win market share against other OPEC and non-OPEC producers. Why’s this important? Usually OPEC operates collectively to orchestrate supply to keep the price of a barrel up to their target of at least $US100.

Behind each of these reasonably straightforward factors are more complicated things at play.

In the wider economic picture there has been a slowing down in economies, however, the American economy is growing quite well and shale and fracking has put money into a number of poorer states. This could change – with lots of oil in the market causing a reduction in the cost of oil, how low does the price go before the new production in the US is not profitable?

Politics within the industry, particularly within OPEC impacts the price of crude as does the macro-political environment in the Middle East. In the recent past OPEC countries have agreed on production quantities (“quotas”) to keep the price up at about US$100 a barrel, however, in a stand against some of the other OPEC members and the US and Russia, Saudi Arabia in particular is continuing to produce oil above their quota because the price per barrel is not quite as important to them.

Lots of oil in the market means more competition, which means lower prices.

 


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