Saturday, April 29, 2006

The Interest in Petrol

I was having breakfast yesterday with some guys and gals from the Paragon Club ( and as you do at these "business related" gatherings, discussion turned to the economy and the effect it is having on some of the members businesses and their clients... The question that was unresolved was "What's going on in the economy?"

Also, one of the members of the group has just purchased a Mercedes Benz (drool, drool) and with the price at the pump currently the question was uttered "Whats it cost to fill up?"

Steve McKnight of made a great commentary on all this and instead of emailing it directly to those around the table, as requested, I thought I would post it here and share it will everyone.

I don't need to tell you that it's becoming more expensive to fill up the
car. Yesterday, when driving to the airport, the price per litre of petrol was
123.9 cents, four hours later, it had jumped to 139.9 cents.
Putting this in
a different context, based on a sixty litre tank which is used over a week's
driving, that petrol price increase equates to $9.60 more to fill up (per week),
or just shy of $500 extra per annum. Further assuming an average 30% tax rate,
that $500 equates to around $710 of pre-tax earnings.
So, piecing this
together, unless fuel prices go back down, in this case you've suffered a pay
cut of $710. Ouch.
And translating this to a real estate context, this is
about the same as a quarter of a percent increase in interest rates on a
$275,000 mortgage (from 6.25% to 6.5%).
The point to note then is that even
though interest rates are not going up at the moment, the loss of earnings as a
result of the higher cost of oil is having an equivalent effect for many
Taken from Steve McKnights 'Insider' newsletter, April 21, 2006
We all know the fuss that is caused when interest rates rise, and the 'yelling' that happens in the media when the pump price rises - but this really made me think about the actual effect it is causing at the bottom of the chain.....


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