Record highs at the pump: Why is petrol so expensive?

By Emile Donovan of RNZ

The price of petrol bottomed out in early 2020 during Aotearoa's first lockdown, but in just two years it's shot up to over $3 a litre - the highest it's ever been. The Detail looks at why.

The price of petrol keeps going up and up, and it's unlikely to get better any time soon. Infometrics principal economist Brad Olsen says there's no single reason why we're paying more to fill up our cars - and it can depend on factors such as taxes, rebounding economic activity and shortages caused by Russia's invasion of Ukraine.

What makes up the price of petrol we pay at the pump? 

About half of what you pay for a litre of petrol comes from taxes, Olsen says.  

"You've got a few of them: the fuel excise duty, which is charged on every litre of fuel. 

"You've got the likes of the local authority fuel tax - in Auckland you've got the regional fuel tax - you've got GST and you've also got the emissions trading scheme, and that's risen to be about six-odd percent of the total cost of fuel." 

About 40 percent of the price of a litre of petrol comes from importers buying the actual product, crude oil, and shipping and transport costs, while about 10 percent is the margin retailers make.  

Could we cut petrol taxes to make it cheaper? 

We could, Olsen says, but this would invariably cause more problems down the road.  

The taxes levied on petrol primarily go towards transport infrastructure - building and maintaining roads, for example - so any removal of taxes would be an effective funding cut.  

"Unless we're willing to accept less money going into that transport budget, we could cut tax on petrol, but we'd need to make up for that somewhere else." 

Petrol was so cheap during the first lockdown, what happened? 

"At the start of the pandemic, [economic activity] fell off a cliff. Because of this, what we saw was people had bought fuel, and now wanted to sell it at a loss," Olsen says. 

"You had prices absolutely tank, plunge, and hold at that lower level, because everyone went, well, there isn't enough demand for fuel, and if there isn't demand for fuel, I'm not going to produce all that much. 

"As you started to see the economy wake back up again, you saw the demand for fuel and moving around increase, but you can't turn supply on quite so easily. 

"There was a ramping up of supply, but demand continued to run faster, so you've seen a mismatch: there is more people that people want, than (there is) fuel available, and that's what's pushing the prices."  

How big an impact is the war in Ukraine having? 

In a word: big. 

Russia produces about eight percent of the world's crude oil, millions of barrels every day. 

But with President Vladimir Putin announcing a freeze on Russian commodity exports in retaliation for tough sanctions applied by many countries around the world, the supply of oil has dropped. 

Oil-rich countries in the Middle East, such as the UAE, could increase their production to help meet the shortfall, but again, this takes time.  

"The one hope, if you will, is when you get fuel prices getting to the level they're at now, it makes it more affordable for some of the large-scale shale oil producers in North America to come online.  

"But again, the worry is that with such a massive reduction in global oil at the same time as the world is struggling to find energy resources, this is the perfect storm really putting the screws on energy prices globally."