NZ's potential $3 billion windfall thanks to COVID-19 - economist

The plummeting price of oil on world markets could be a $3 billion boon to the New Zealand economy, according to one economist.

The price of Brent Crude has crashed in recent days, with markets reacting to the spread of coronavirus COVID-19 and the Saudis cutting the price of its oil. 

With more countries introducing travel restrictions and airlines struggling to fill their seats, oil has gone from US$70 a barrel at the start of the year to just US$35 now. Just a week ago it was at US$55.

But don't expect fuel prices to drop right away. 

"Usually it takes a couple of weeks to come through - they've already got stock that they've bought ages ago," economist Shamubeel Eaqub told The AM Show on Thursday.

And just because the price on the market has halved, don't expect prices at the pump to do likewise. According to the Automobile Association, only a third of the pump price is actually spent on fuel - the rest is taxes, costs and margins. 

Accounting for inflation, fuel prices peaked in New Zealand in between 2012 and 2014. Aside from a brief spike in 2008, that's also when crude oil was at its most expensive, peaking above US$120 in today's dollars.

Petrol prices at the pump in NZ.
Petrol prices at the pump in NZ. Photo credit: figure.nz

Brent crude is now at its cheapest in nearly 20 years. Eaqub says that's good news for New Zealand.

"Last year we imported something like $7 billion worth of fuel. If prices have almost halved, that means we're getting a boost to the economy of $3 billion."

Airlines will also be flying high on the news. 

"It's going to give them a lot of help because right now, airlines around the world are fearing essentially failing, because they don't have enough customers."

Air New Zealand is "more protected than others", Eaqub says, because it's not wholly reliant on international travel.

"Domestic flights are still relatively full, judging by experience over the last week, exposing myself to the risk of the virus."

Shamubeel Eaqub.
Shamubeel Eaqub. Photo credit: The AM Show

New Zealand has no reported community transmission of COVID-19, meaning so far it appears to have been contained. But the economic shock can't be stopped, with banks already predicting we'll go into recession - which also means the Government will likely end up with a smaller tax take.

Eaqub says that won't matter if the Government takes advantage of dropping interest rates and borrows.

"The public health response by and large has been good - we're quite well-prepared from the public health side... that gives me a lot of confidence in terms of the ability of the public sector to deal with the health side of it, but I think on the economic side I still want to see more urgency and more boldness."

As for petrol prices, he predicts retailers won't want to be seen as profiteering from the international crisis.

"Everybody needs to shoulder the burden of what's going on right now. If they're seen to be holding back - same as will happen if the banks don't pass on interest rate cuts when the Reserve Bank cuts interest rates - I reckon people will get really mad." 

The Reserve Bank is widely tipped to follow its US and UK counterparts and cut interest rates later this month.

 

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