Rocketing oil prices won't bring country to its knees

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Petrol prices are tipped to hit $1.66 a litre. Record oil prices are adding to the headwinds consumers have to battle, economists say, but they do not expect them to bring the economy to its knees.

Westpac chief economist Brendan O'Donovan sees petrol prices at the pump rising to $1.66 a litre if world oil prices and the exchange rate stick at current levels.

But that is not uncharted territory. Petrol reached a high of $1.77 in August last year. World oil prices were lower then - Dubai crude was at US$70 a barrel compared with US$79 now - but so was the exchange rate, US63c compared with US75c now.

And, when adjusted for inflation, petrol prices in the first half of the 1980s were higher than they are now - in the $1.80 to $2 a litre range in today's dollars, according to the Ministry of Economic Development.

Since then the "energy intensity" of the economy has reduced - the amount of oil consumed per dollar of gross domestic product.

Over the past 10 years the economy has grown 35 per cent while oil consumption has grown 28 per cent.

But it remains an important price in a thinly populated country, remote from its markets.

Oil represents about half of consumer energy demand. Crude oil costs account for 40 per cent of the price of petrol at the pump, and petrol in turn is 5.4 per cent of the consumers price index and would represent a similar share of the average consumer's spending.

Higher petrol prices act like a tax. Consumers still fill up their tanks, but they have less to spend on other things. That has a disinflationary effect which offsets, but only partially, the inflationary effect of higher fuel costs.

"The headwinds just keep getting tougher for the consumer," said ANZ National Bank chief economist Cameron Bagrie. "They are getting good income growth but the money is going out the door pretty quickly."

As well as petrol, food and electricity prices were going up at the same time that mortgage payments were rising.

It was part of the rebalancing process whereby the main driver of economic growth switched from consumer spending to the export sector.

Bank of New Zealand chief economist Tony Alexander said: "I don't believe the most recent rise in [oil] prices will make even a noticeable dent in prospects for our growth going forward."

People, rightly, expected petrol prices to be volatile and to trend upward over time, he said, and would change their behaviour accordingly, but only slowly.

"So is it a genuine shock that will drastically affect people's psyche or force a quick change in behaviour? In my view, no."

It reinforced the likelihood of interest rates remaining firm, Alexander said, but would not on its own be enough to drive rates higher. Bagrie agrees.