THE PRESS WEDNESDAY, DECEMBER 20, 1978. 14.5% more for oil

Press, 20 December 1978, Page 20

THE PRESS WEDNESDAY, DECEMBER 20, 1978. 14.5% more for oil

The decision at Abu Dhabi by the Organisation of Petroleum Exporting Countries to increase the price of oil by 14.5 per cent is depressing news both for the New Zealand motorist and for those concerned about the country’s trade position. The effect on the price of petrol was announced by the Minister of Energy (Mr W. F. Birch) as 1.4 cents a litre. Other factors, including the margin of mark-up for petrol retailers, currency movements, and taxation, have to be taken into account, and probably the final price to which petrol will rise will be determined later. Considering the Government’s intention to cut the costs of imported energy, it would be unduly optimistic to believe that the increased price of petrol, expected before the middle of next year, will be held to the modest 1.4 cents a litre. The further drain on overseas funds to pay for the increase will worsen New Zealand’s balance-of-payments deficit. It should also give more impetus to putting natural resources to more efficient use.

The 14.5 per cent increase is for the standard oil. Lighter crude oils are expected to cost more than 5U514.40 a barrel which has been fixed. New Zealand imports light crudes from Iran, both heavy and light crudes from Saudi Arabia, and some light crudes from Malaysia. New Zealand also imports from Indonesia and Kuwait. Over the last six months some of the heavy crudes have been discounted in an effort to sell them. Saudi Arabia has limited its production of light crudes to 35 per cent of its total production, thereby helping to create a greater demand for the lighter crudes.

Apart from the cost to the private motorist, the effects of the increase will be felt throughout the economy. The distances which goods need to travel within New Zealand to reach different centres, and from New Zealand to reach overseas markets, and from overseas producers to come to New Zealand mean that every change in freight costs is felt. The sooner commercial domestic transport looks to domestic energy the better.

The higher costs are also bound to have an effect on both domestic and world-wide inflation. Vigilance will be needed lest the higher oil prices are used as an excuse for increased charges unrelated to the price of oil.

Iran normally accounts for 15 per cent of O.P.E.C.’s total production, and the disruption there, which has cut production by half, has contributed to the ability of O.P.E.C. to raise its prices. The world no longer has a glut of oil. The fact that O.P.E.C. was expected to raise its prices led to some panic buying of oil, which also contributed to a greater demand. One of the advantages of the staggered increase is that future panic buying in anticipation of a substantial increase might be averted. The possibility that quarterly increases may be made in future leads to considerations about the relationship between the world economy and the price of oil.

Although the strikes in Iran which have reduced production are important, it would be incorrect to think that if Iran had managed to solve its domestic problems strong pressures would have been made for an increase in the price of oil. A staff member of “The Press” who talked to a number of Arab oil officials during a tour of the Middle East in September and October, wrote shortly afterwards that feeling about the .drop in the value of the American dollar was strong. World inflation and the instability of the American dollar, in which oil is priced, have been the strongest factors influencing the attitudes of the O.P.E.C. ministers. As Sheikh Ahmed Zaki Yamani of Saudi Arabia said, in some countries, such as West Germany and Japan, whose currencies have risen against the American dollar, oil is costing less than it did. The extensive development programmes undertaken by some O.P.E.C. nations have also created balance-of-payments difficulties for them, making them look to their sources of revenue. Whether the world has to look forward to further substantial increases appears to depend on a number of factors, the most important being the stability of the American dollar. O.P E.C. anger against a sliding dollar will not make it alone possible to raise the price of oil, but a shortage — whether coincidental, as in the Iran crisis, or engineered —- would. New Zealand must hope that in the coming months the American dollar will be more stable than it has been over the last few months.