Oil plunge won’t sway US Fed

Plunging cost of crude should keep a lid on the prices Kiwis pay at the petrol pump

Energy Minister Judith Collins and officials investigating whether consumers are being ripped off at the petrol pump have some new calculations to do after the latest oil price slump.

The fresh plunge began last Thursday when the price of US benchmark (West Texas Crude) fell more than 5 per cent in a day. It has continued to slide and after fresh falls last night is off nearly 12 per cent since its most recent peak in late February

Last month Collins announced that the Ministry of Business, Innovation and Employment would look into how fair petrol and diesel prices were at the pump.

The equation on pump prices is complicated by variables like currency and there is no doubt the Kiwi dollar has also fallen in the past few weeks.

But the dramatic slump, which also affects Brent crude that New Zealand imports, ought to more than offset the 4 per cent decline of the kiwi in the same period.

Commodity analysts fear the selloff may have some way to go after Saudi Arabia revealed it raised output back above 10 million barrels a day in February, reversing about a third of the cuts made the previous month.

There are big economic implications, too.

The historic slump in fuel prices began in 2014 and exacerbated deflationary conditions around the world, prolonging a period of historically low interest rates.

Oil bottomed out in late 2015 and has been in recovery mode since.

Late last year the Opec group of oil-producing nations agreed to production cuts, which accelerated the recovery. In tandem with a US economic recovery, that had fuelled hopes more normal inflation levels were returning to the world economy.

A lot now depends on whether these oil price falls are sustained but the new trend worries some economists. Harvard’s Leonardo Maugeri, who in 2012 picked the big slump was coming, published a new report this week. He argues Opec’s cuts have been largely symbolic and there is still too much oil in global markets to call expect a price recovery.

The risk of a fresh oil slump is unlikely to affect the thinking of the US Federal Reserve, which is expected to raise interest rates this week.

But it will have serious implications for the rate outlook if the trend continues. A Bloomberg report quotes Goldman Sachs research saying the rally in US credit has left little “buffer for shocks”.

Meanwhile, keep an eye on your local petrol pump. Prices shouldn't be rising any time soon.

Minister Collins has said she expects her report by the end of June.