The good and bad of oil price rises
This article was first published in November 2022, reflecting the increase in petrol prices to $3.08 per litre in July 2022. It has been updated with the latest vehicle data from the 2023 Census.
Oil prices have significantly increased recently due to the Israeli and United States of America attack on Iran. The subsequent impact on oil prices, mostly due to the closure of the Strait of Hormuz, has been impacting household budgets and pushing the rate of inflation higher. However, is an increase in the price of oil always a bad thing?
Prices rises are “good” when they accurately reflect need and scarcity. Prices rises are “bad” when they do not represent realities of the world in which we live. That occurs when artificial constraints are put on supply or competition among suppliers is limited. That might occur if oil suppliers agree on a minimum price or to limit production.
However, if there are genuine limits to oil production, along with increases in global consumption, then it is good for prices to rise.
Short-term price increases are useful for helping us think about our current use of oil on a daily basis. New Zealand has a very high rate of car ownership and a high share of journeys to work and education are made by car.
Census 2023 transport to work data, excluding people who work from home, shows:
85% of people drove to work or were passengers in a car, truck or van,
7% walked or cycled, and
6% used public transport.
The percentage of people driving to work or travelling as a passenger in a private or work car increased from 83% in 2018 to 85% in 2025. In 2023 60% of children under 15 years were driven to school in a private car or work vehicle.
Technology change has supported an increase in the number of people able to work from home. In 2013 9% of people indicated they worked from home, but by 2023 the share had doubled to 18%.
A trend towards higher car use is shown in Census data, which shows an increase in the percentage of households owning four or more vehicles. The percentage of households with four or more cars increased from 5% of total households in 2013 to 8% in 2023. The number of households with no vehicles decreased from 8% in 2013 to 6% in 2023.
Rapid increases in the price of fuel can be a good catalyst for encouraging households to try alternatives for travel that are good for our wallet and often for our health.
My observation from running finance courses over the past 25 years is that few households understand what their car is really costing them. Access to loans has become much easier for people with mortgages, but it appears few people are told what the cost will be for taking out a top-up loan for a car purchase.
Estimates I have prepared for the cost of owning a car show the annual fixed cost of owning a car is usually higher than the variable costs of running a car.
Fixed costs are those expenses that do not change or change little regardless of how many kilometres you drive in a year.
Fixed costs include vehicle insurance, Warrant of Fitness, vehicle licensing, vehicle depreciation and interest. These last two items account for the largest share of fixed car ownership costs.
Vehicle depreciation is an estimate for how much the value of your car declines each year. The average car in New Zealand lives 21 years and is then scrapped. The annual loss in value is very high for new cars, but low for old cars.
There is an interest cost regardless of whether you borrow to buy a car or you pay with cash. The cost is much higher if you borrow to buy a car. If you have to take money out of a saving account to buy a car, the annual cost is the interest you would have earnt on those savings if you left the money in the bank and didn’t spend it on buying a new car.
Variable costs include fuel, tyres and vehicle maintenance and servicing
It’s difficult to produce a simple estimate for the annual cost of car ownership. It is influenced by how old the car is, how large it is, how far you drive it in one year and how you paid for it. Maintenance costs are usually higher for older cars.
Broad car cost estimates I produced for Horizons Regional Council for second-hand cars suggest an annual cost of $6,700 for a 10-year-old petrol car. The annual cost will be less if it’s a small car or older than 10 years. Ownership costs are likely to be higher for electric cars because the purchase price is usually higher than for petrol cars, but the variable costs are likely to be lower.
The estimates for petrol cars suggested a fixed cost of $3,400 a year and a variable cost of $3,300. The variable cost estimate was prepared before the recent rise in petrol prices, so the variable cost will be higher while petrol prices are high.
Options for reducing your car use or the number of cars you own include:
- greater use of working from home, walking, cycling, car-pooling or public transport,
- on the few occasions that an additional car would be useful, consider using a taxi, hiring a car, or borrowing a car from a friend or family.
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