Oil prices and what it actually means for the NZ economy

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International oil prices halved during 2014

There has been a lot of talk in the press in the last few months about the falling price of oil.  International oil prices have halved during 2014, from a high of US $105 a barrel to US $53 a barrel at the end of 2014.  As of writing this, oil sits at US $51.70 a barrel.

Lowered transport costs

The economic impact is that global oil consumers (like us here in NZ) are enjoying substantially reduced energy prices.

This has an immediate positive impact on the bottom line for businesses with significant transport costs (trucking companies, Fonterra, taxis, courier companies, airlines).  This, in turn, and will have a flow on effect in retail businesses which move their stock by truck (supermarkets, large chain stores), and hopefully, they will pass some of their cost savings onto consumers through lower prices.

As consumers, we also experience lower fuel prices at the pump, which gives people more disposable income to spend – or save.

Kiwis spending less on fuel and more on other things will give our economy a boost.

Global oil producers are hurting

There will be questions about the cost effectiveness of producing oil from some sources.

Why?  Because it will cost more to produce the oil than what it’s selling for.  An example of this is as shale fracking in the USA and some production fields in Russia.

Direct investors in oil energy businesses will have seen a significant drop in the share price of their investments.  This could result in many investors who have purchased fixed interest bonds from oil company issuers getting slightly nervous.

Short term effect on inflation

It is estimated that the reduced oil price will take NZ’s projected 2015 inflation from 1.8% to under 1% (Westpac Institutional Bank, 10 December 2014).

Reduced inflation in New Zealand means that it makes the possibility of any further increases in the Official Cash Rate (OCR) highly unlikely for some time.

Some global economies are even facing the risk of negative inflation (deflation).  This can potentially put economies into a downward spiral of depression, where people invest only in cash and do not spend for the future.

Supply and demand

Oil prices are generally controlled by the economic basics of supply and demand.  Supply and demand is the backbone of the global market economy.   Supply is how much of a product the market can offer.  Conversely, demand is how much of a product the market wishes to buy.

Price is a reflection of the relationship between supply and demand.

Oil is generally viewed as a supplier-driven commodity.  The current consensus is that a slowing of oil production could lead to an increase in prices.

What could the future hold?

A survey of a panel of experts indicates that the general consensus is that the oil price should sit around US$75 by the end of 2015.

This would be a happy medium for all concerned!

 

Janet Natta is a financial adviser and director of Smart Money Advice, offering investment portfolio construction and management services to clients throughout NZ, as well as comprehensive financial planning advice to assist clients to build and protect wealth to achieve their dreams.

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