High petrol prices have hit the headlines lately. A lot has been written about the causes of it so I won’t go there, I’m more interested in the impacts it might have.
MBIE published the graph below showing the cost of regular petrol.
It shows that pre-covid, fuel costs were relatively flat at just over $2 per litre. As lockdowns hit and demand fell away, that dropped to $1.80. As lockdowns have eased over the last year and a half, petrol prices have gradually risen back to where they were, plus some. Then they suddenly rose more sharply in the last couple of months. The graph has it finishing about $2.70, but it’s continued up since then and it is now just over $3 at my local. I think this graph was produced before the whole Ukraine situation unfolded.
In the last two years, there has been a price rise from roughly $2.10 to $3 per litre, an increase of 43%.
Internationally, petrol typically has been observed to have a short-run elasticity of around -0.1. This means that a 43% increase in price would be expected to result in a 4.3% reduction in consumption, in the short-run.
It typically has been observed to have a long-run elasticity of -0.3. This is greater because people have time to make more substantial changes to their lifestyles in order to reduce consumption, for example shifting houses, jobs or schools. This means there would be expected to be a 12.9% reduction in consumption over a longer timeframe (~5 years).
Another thing the graph above shows is the proportion made up by taxes, levies and the Emissions Trading Scheme. Of special interest to me is the Emissions Trading Scheme component. The graph below shows the cents per litre that the ETS has historically added to the price of petrol. It has done virtually nothing for most of its existence, and has only really started contributing since it’s major restructure in 2020.
Below is a graph plotting the prices from the first five auctions, together with the 2026 government forecast, and a dotted trendline extrapolating to 2030.
At the moment the ETS is adding about 20 cents per litre of fuel – an increase of around 7%.
If you use the same elasticities above, this would result in a reduction in consumption of 0.7% in the short-run and 2.1% in the long-run.
By 2030 it will be somewhere in the vicinity of double to triple what it is now, adding 40-60 cents per litre of fuel – an increase of around 18% on current price. If you use the same elasticities above, this would result in a reduction in consumption of 1.8% in the short-run and 5.4% in the long-run.
I have a sneaking suspicion that the 2026 forecast may be way too low though, given the look of the upward curve starting to emerge on the first five data points.
One thing to note is that elasticity rates are not set in stone. They depend on a whole range of factors including relative attractiveness of alternative travel modes like walking, cycling and public transport, and availability of non-petrol cars like EV’s. And it is different for different demographics, socio-economic groups, and trip types.
As an example, a city with a good network of cycleways and public transport would be expected to have a greater response to increased fuel prices than the same city without them.
High petrol prices are probably not a temporary thing either. The US Energy Information Administration has forecast the price of crude oil to rise by around 35% by 2030, and triple by 2050. This is not even for environmental reasons, it’s due to the easy-to-mine oil running out and us being left only with the stuff that is more expensive to extract.
Add to this the carbon costs, which are also forecast to increase several times over in coming decades, and I think it’s a fairly safe bet to say that in a few years we’ll be looking back on the days of $3/litre petrol with the same nostalgia we now look back to the 1990s $1/litre petrol.
So in the face of petrol prices continuing to rise, what should cities be doing about it? Well my personal view is that they should be trying to ensure their residents have choices available so that they can easily reduce their consumption, if they so desire. For me, the things that would make this easiest would be:
1. A neighbourhood that is safe for my kids to bike around unsupervised;
2. More things within walking distance of my house (i.e. less restrictive land zoning);
3. Useful public transport;
4. The ability to work from home; and
5. Cheaper electric cars.
The last two are difficult for NZ cities to influence, but the first three are their bread and butter.
What will you do as petrol prices keep on rising? What can your city do to make that easier?