O.P.E.C. rise, dollar’s value will both affect the new price of petrol

Press, 22 December 1978, Page 12

O.P.E.C. rise, dollar’s value will both affect the new price of petrol

By

OLIVER RIDDELL

in Wellington

Individual New Zealanders will probably not feel the effects of the decision at Abu Dhabi by the Organisation of Petroleum Exporting Countries to increase the price of oil by 14.5 per cent until the second quarter of 1979. It is not expected that shipments under the new price will reach service stations and other retail outlets until March.

By then, any increase in retail price will be different from the 1.4 cents per litre increase estimated by the Minister of Energy (Mr Birch). If the increase by O.PJE.C. was passed straight on to the consumer now, then the 1.4 cents a litre would keep the motor spirits pool account in balance.

The Government has two basic choices open to it. It can have a small increase now to keep the pool in balance with a further increase later when the full flow-on effect is known; or it can wait until the full effect is known and have a single large increase. It has chosen the latter alternative, perhaps for the unworthy reason that the members of the Government and senior public servants concerned are about to close up shop for their summer vacations. When the increase in the 4

retail price of petrol is announced, it will take into account the 14.5 per cent increase announced by 0.P.E.C., the state of the United States dollar internationally, and the level of the pool account. The pool account is currently in credit, but falling, and a Government which already faces a large deficit in its current Public Account will not want the pool account to fall too far into deficit.

The price New Zealand paid O.P.E.C. countries for oil during 1978 was fixed to the falling United States dollar. This had advantages in holding the price down here, but these benefits may not be repeated in future. Movements in the United States dollar will be crucial in setting the new price needed to keep the pool account in credit.

If the shipments of newprice oil arrive sooner than expected or for any other reason the pool account plunges into deficit earlier than the second quarter of 1979. then the Government is expected to step in immediately to raise the retail price of petrol. But this is not thought likely. There is no real prospect of the Government intervening with a subsidy to hold down petrol prices

below the true cost. To do so would be to smash its own energy strategy that sources of energy must be allowed to compete in order to let them find their, own cost and public demand levels and so restrain expenditure. Also, the deficit in the current Public Accounts is so large that the Government would be most reluctant to increase it in this way. Legislation would be needed for a Government subsidy, involving calling Parliament together earlier than expected and presenting the Opposition with a bonus opportunity to criticise the Government. Petrol is almost certain to be the first oil-based product to feel the increase. Diesel and fuel oil prices will probably be increased in the third quarter of 1979 as the situation becomes clearer.

The ■ pricing of energy sources such as coal and natural gas in New Zealand is tied to the price of fuel oil, so the O.P.E.C. increase would have no direct flowon effect on them until fuel oil prices are increased. That is not to say the cost of coal or natural gas will not increase before then, but if they do the increase will not be related to the O.P.E.C. increase.