Why do fuel prices rise?
There are two main reasons for rising fuel prices:
1. World demand exceeds exploration and refinery capacity – meaning people need more fuel than can be supplied. If supply is already tight, any further disruption (or threat of disruption) to oil well or refinery capacity will likely produce a price spike.
2. Investment speculation: Investors put money into commodities such as food and oil at times when the US dollar and the world economy are weaker – driving up petrol prices.
The New Zealand dollar as a buffer to rising oil prices
The strength of the New Zealand dollar can impact oil prices as well. If the dollar is strong, it can act as a buffer to rising prices – delaying any rise at the pump for motorists. But if the dollar falls, prices at the pump rise, as fuel is purchased in US dollars.
Generally, any fluctuation in international fuel prices will be reflected immediately at the pump. Motorists enjoy the benefits of this immediate change if prices are falling, but are not so pleased if prices are rising – especially if companies have purchased the oil at the previous lower price.
Government taxes: Fuel tax, carbon tax and GST
The price of petrol is also affected by taxes charged by the New Zealand Government.
Fuel tax: this money goes directly into the National Land Transport Fund, to be spent mainly on roads, road safety policy and public transport. Previously about 19c per litre of tax paid by motorists was diverted to non-road transport projects.
Carbon tax: The emissions trading scheme was introduced in July 2010. This increased the price of fuel by up to 3 cents per litre when it was introduced.
GST: Goods and Services tax was increased to 15 per cent on October 1, 2010 – adding 4c per litre to the price of fuel. There has been some debate on this issue, as the government benefits from more GST collected when fuel prices increase.
Note that there is no fuel excise tax on diesel. Owners of diesel vehicles pay road use charges instead.
Contentious issues around petrol pricing
The cost of fuel has been increasing in recent years due to a variety of factors.
Although motorists have no choice but to pay the prices demanded, there are some calls for changes in the industry.
Lobby groups, such as the New Zealand AA, constantly monitor the fuel price situation in New Zealand, and recommend improvements to the system. They have made suggestions regarding the unfairness of both Regional Petrol Tax and GST.
Regional Petrol Tax: There has been discussion of a regional petrol tax (or ‘green tax’). This has been argued against, as it would result in some motorists unfairly subsidising the transport decisions of others.
GST: The reduction of GST for the price of fuels would reduce the cost of fuel by approximately 8c per litre. Many consider GST in this situation a ‘tax on a tax’. Removing GST from the equation would make fuel more affordable, especially in times of high prices.