Over the last few months New Zealand households have benefitted directly and indirectly from the decline in the international price for oil, caused through strong increases in supply and weak increases in demand.
The direct benefits have come through lower prices for petrol at the pump, while the indirect benefits have come through the lower cost of transport and production for food and goods.
New Zealand petrol prices at the pump were 221.9 cents per litre for 91 octane in Wellington on the 29th September 2014, but since then have dropped to just 172.9 cents per litre for 91 octane in Wellington on the 14th January 2015. This is a decline of 49 cents per litre (or 22 percent), meaning a saving of around $24.50 when you fill up a 50 litre tank.
Households also benefit from this decline in the international oil price through lower costs of production and transport costs for all the goods purchased.
These lower production and transports costs are passed on to consumers in the form of directly lower.
The international oil price has declined since mid-2014 due to two factors; the first is a surging increase in oil production in the US, causing a drop in demand for imported oil in the US.
The second factor is the weak demand growth in many countries due to slow economic growth around the globe. With supply increasing faster than demand, the price of oil reflected this declined.
A decision in late November 2014 by the Organisation of Petroleum Exporting Countries (OPEC) not to cut supply in order to try and boost the price has meant that oil prices are likely to stay low until either economic growth andtherefore demand picks up or until the supply of oil declines. Unless OPEC decides to cut production the oil price is not likely to increase until marginal oil suppliers go out of business and the supply oil drops.
The growth in US oil production has come from oil extracted from shale formations, but this production is more expensive than traditional methods and was only possible due to high oil price. It is these new US oil producers that are the most likely to go out of businesses if the oil price stays lower than US$100 a barrel cutting supply.
But it may be several more months before this starts to occur, as even with their higher costs of production and the low oil prices these oil producers will continue to produce oil in order to generate revenue streams needed to pay for their large set up costs.