Warning diesel prices unlikely to fall in line with petrol

While petrol prices have lowered somewhat, diesel is unlikely to get much cheaper despite drops in crude because of global refining limitations, a sector adviser says.

Fuel companies cut prices noticeably after Energy Minister and Wigram MP Megan Woods questioned them on Monday about why cuts in the cost of crude oil were not being passed on to New Zealand customers at the pump.

When the government announced its cuts to fuel excise, the minister warned petrol companies the savings would be expected to be carried through to consumers, rather than pocketed as profit.

However, prices for diesel - which until this year was typically cheaper than petrol - remain high.

Automobile Association principal policy adviser Terry Collins told Morning Report that was unlikely to change much, with global refining capacity limited and unable to respond to demand.

"I don't see it happening because we've got limited supply and it's a refinery - which takes years to build, it's expensive to operate, and it's been having difficulty to attract investment because of the low returns.

"The only real reason that this [price] has come back a little bit has been a softening of demand - that is, they've slowly put a bit more production on ... [and] with the global worries about recession, the northern hemisphere driving season hasn't been as big as expected because of the high prices."

Diesel is the economy's main fuel, used in trucks and tractors as well as the production of petrochemicals like fertilisers and plastics, and was a significant factor in pushing annual inflation to 7.3 percent this quarter - the highest it's been in 32 years.

High oil prices have been exacerbated worldwide by higher demand due to supply chain disruption and Russia's war on Ukraine, and Collins said refining costs had risen dramatically in the past year.

"Traditionally refining was not a great profitable business, it cost about $US9.25 for a barrel of petrol and $6.48 for diesel, so it was about 30 percent cheaper to refine diesel. A year later, June of this year, $43 to refine petrol, $51 to refine diesel ... it's 16 percent more to refine diesel, so they were huge jumps."

He said that was largely due to a lack of capacity for diesel refineries.

"It's been a low-profit industry and that's reflected in the decision to shut down the refinery in Marsden Point. That's been happening overseas as well, there's been things like storms, there's been attacks on them, there's been just not the investment necessary and refineries are often optimised for different types of fuel so there was a limited amount of refining capacity in the world and that's just made the prices go up significantly."

He said oil prices were still often swinging by about 5 percent in a day, and markets would be very hard to predict for some time.

"It's just a very abnormal time that we're in with this very tight supply and demand affected by Covid and the ... possible recession."

The transition to renewable energy was adding further complexity to energy investment decisions, he said.

"We had the head of the United Nations saying you're delusional if you invest in petrol or gas, yet 95 percent of the vehicles that we imported this year still run on some form of petrol or diesel.

"We're still going to need this fuel, and we've still got growing middle classes in the likes of India and China - they've got huge demand for petrol and diesel and we compete in that market - so transitioning and investing in renewables at the same time having reliance on hydrocarbons ... it's going to be a difficult time going forward to get those investment decisions right."

While Transport Minister Michael Wood has warned the fuel excise and road user charge cuts and half-price public transport would be unsustainable as permanent measures, they have been extended to early next year to help New Zealanders with the rising cost of living.

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