The price of petrol

Press, 2 March 1984, Page 14

The price of petrol

After a long period in which the price of oil has been steady, or even decreasing, the oil companies are seeking an increase in the price of petrol of 6 cents a litre. The main justification given is that although the price has been stable or going down, this price is in American dollars which have been increasing in value against the New Zealand dollar. The increased costs of the Marsden Point oil refinery expansion are also given as a justification. There is an added factor which may influence the policy of the Government on the price of petrol. The production of synthetic petrol has not yet begun, but the costs of that could be high. One estimate is that if the costs of the gas used to produce synthetic petrol were the same as the cost of gas used for the’ production of, say, liquefied petroleum gas, then synthetic petrol would cost a third more to produce than the present price of petrol from the oil refinery, before its expansion. The Government has several ways to change the figures, including charging less for the gas. Such an arrangement would mean that the country would benefit less from its natural gas. The Government is committed to charging the same for the synthetic petrol as for petrol from the refinery. An increase in the price of petrol over all would help recover the costs of dearer synthetic petrol. The estimates about the costing of synthetic petrol are largely obscured by a lack of adequate detail. More is known about the costs of the refinery expansion. The Minister of Energy, Mr Birch, said that, the refinery cost was a,Small component of the oil companies’ application for a price increase, but he was not specific about the size. Under a 1977 Government assurance the New Zealand Refining Company, which runs the refinery, is protected against loss on the project by an agreement that allows it to add the costs to the processing fee it charges the oil companies. Under the same assurance, the oil companies are able to recoup the fee by building it into fuel prices and passing it on to consumers. 'ftid- ■staggering rises in the cost of the expansion of- the oil refinery have not only affected the oil companies, but also the economic benefit of the whole project. One of the critics of the project, Mr Michael Barnett, was superintendent of civil engineering

contracts on the expansion site. Even the annual report of the Ministry of Energy last year observed that the refinery’s position as a good investment was changing because of cost over runs, partly associated with delays in construction. Delays because of industrial action added to the costs, but there are other causes that do not lend themselves readily to calculation.

One is that the demand for some of the oil products that the refinery will produce was expected to increase faster than it has. The level of demand forecast for 1987 is not now expected to be reached until 1992. This reduces the benefit of having vehicles converted to alternative fuels. The magazine “Energywatch” argues that the total cost of the project is likely to be $2.7 billion, including interest on loans (the latest official estimate is $1.65 billion), that petrol from the expanded refinery will be more costly for 11 years than imported petrol would have been, and that it seems unlikely that the expansion will make significant savings and pay back its costs during its 20-year economic life.

When the estimate of the cost of the refinery expansion rose to $1.65 billion, Mr Birch said that the Government would not automatically accept that the motorist would have to foot the bill for more cost overruns. He did not say whether the motorist would have to pick up the bill to that point, though that would be a reasonable conclusion. Although the Ministry of Energy calculated that when the expansion of the refinery was complete the country would be saved $lBO million a year, such a calculation has to be based on the difference between crude and refined ' oil products.

Undoubtedly the expanded oil refinery will mean that New Zealand will be able to make use of a greater range of oils. It will still be dependent on imported oil. The Government campaigned on its energy and development programmes during the last election. If its confidence in its own calculations and plans remains high, it should be prepared to make the figures available so that others can share its confidence. Otherwise there must be suspicion that motorists and other New Zealanders are going to have to pay an unduly high price for petrol, for an indefinite period.