Why Have Fuel Prices Risen?

by Chanel Clark | 29-06-2018

 

It's no secret that the cost of fuel is rising and will continue to rise - but why? We thought we'd give you guys a breakdown of why the price of fuel changes and what that means for you. 

There are 4 main reasons for fluctuations in fuel pricing:

 

Supply & Demand

Oil reserves are diminishing as the world’s demand exceeds supply from new sources of exploration and refinery capacity.  The size of the oil fields is a significant factor affecting economic viability, plus the ease of obtaining crude oil and gaining access to refineries, as well as transport and geopolitical conditions

Scarcity of supply leads to increased prices – this factor is pretty much Economics: 101.

As a commodity item, oil prices are determined by supply and demand factors.  Let us look at this;

When the world’s demand for oil exceeds supply capabilities, then prices rise.  These price fluctuations can occur with increases in:

  1. Seasonal demand: Particularly cold weather conditions increase the demand for oil consumption for heating; sometimes this can be more than reserve stocks.  In addition, severe weather conditions, such as hurricanes over the Gulf of Mexico, can affect production and refinery operations in the Gulf resulting in increased fuel prices

  2. Production demand: Petroleum-based product production also impacts demand requirements, with China and India being major users both in the production process and the end product
  3. Refinery outages or pipeline problems can also restrict the flow of crude oil and petroleum products to market. These events can lead to a temporary supply disruption that could increase prices.

 

Regional unrest

Any hint of war, natural disaster, or potential disruption in refinery capabilities in oil supplies will see oil prices rise.  In particular, destabilisation in the Middle East has historically been a cause for crude oil price increases given uncertainty of supply.  When spare capacity and inventories are low, any disruption has a greater impact on oil prices, than just supply and demand.

Along with ongoing wars in the region, the USA recently announced it was exiting the Iran Accord.  This action has put at risk the agreement enabling Iran to export oil (and allowing the lifting of other international sanctions), in return for it closing down its contested nuclear program.  In addition, the unrest in Israel caused by the relocation of the US embassy to Jerusalem, as well as other geopolitical events in Iraq, Libya, Nigeria, Syria, and Venezuela have also contributed to supply disruptions and caused increased oil prices.

 

Investment Speculation

In response to a weaker world economic climate and a fluctuating US dollar, investment funds are being diverted into commodities such as food and oil. 

 

The effect of the exchange rate: NZ$ vs US$

Oil is paid for in US dollars; therefore, any fluctuations in the NZ exchange rate against the US dollar will see pump prices rise or fall.  When the NZ dollar falls against the US dollar, we pay more for oil; and the reverse is true when the NZ dollar rises. 

 

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Fuel prices in New Zealand are at an all time high - but why? Fuel prices in New Zealand are at an all time high - but why?

 

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