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1 economics@
The rising price of oil and its The rising price of oil and its economic consequenceseconomic consequences
Presentation toPresentation to
Premier of Victoria’sPremier of Victoria’sBusiness Advisory NetworkBusiness Advisory Network
MelbourneMelbourne1414thth November 2005November 2005
Saul EslakeSaul EslakeChief EconomistChief EconomistANZ BankANZ Bank
www.anz/com/go/economicswww.anz/com/go/economicswww.anz/com/go/economics
2 economics@
Although the oil price has risen sharply, in real terms it is still well below its 1980 peak Although the oil price has risen sharply, in real Although the oil price has risen sharply, in real terms it is still well below its 1980 peak terms it is still well below its 1980 peak
Nominal and real oil price
Oil price inH1:2005 dollars
0
10
20
30
40
50
60
70
80
90
100
70 75 80 85 90 95 00 05
US$ per barrel
Oil price
Note: Oil price is West Texas IntermediateSource: Thomson Financial Datastream; US Bureau ofLabor Statistics; Economics@ANZ.
3 economics@
‘Rules of thumb’ based on previous oil shocks suggest that world growth should slow sharply‘Rules of thumb’ based on previous oil shocks ‘Rules of thumb’ based on previous oil shocks suggest that world growth should slow sharplysuggest that world growth should slow sharply
Impact of a sustained US$10 per barrel increase in crude oil prices after one year
Real GDP (%)
Inflation (%)
Trade balance
(% of GDP)
United States -0.8 0.6 -0.2JapanEuro area
Industrial countriesAsia
Latin America
World
-0.4 0.2 -0.2-0.8 0.6 -0.2
-0.6 0.4 -0.2-0.8 1.4 -1.0
-0.1 1.2 0.0
-0.6
Source: Adapted from IMF, The Impact of Higher Oil Prices on the Global Economy (Washington DC: 2000).
4 economics@
Economic growth has been much less affected by higher oil prices than in previous ‘oil shocks’Economic growth has been much less affected Economic growth has been much less affected by higher oil prices than in previous ‘oil shocks’by higher oil prices than in previous ‘oil shocks’
Oil prices and economic growth
0
10
20
30
40
50
60
70
80
90
100
70 75 80 85 90 95 00 05-2
-1
0
1
2
3
4
5
6
7
8US$ per barrel(2005 prices) Real oil price
(left scale)
Real % changefrom year earlier
OECD GDP growth(right scale)
Note: Shaded areas denote oil price ‘shocks’.Source: Thomson Financial Datastream; OECD.
5 economics@
This oil price shock is different from those of the mid-1970s and late 1970s-early 1980sThis oil price shock is different from those of the This oil price shock is different from those of the midmid--1970s and late 1970s1970s and late 1970s--early 1980searly 1980s
Oil prices have risen more gradually
For Americans, the rise in oil prices has not been accompanied by reminders of their nation’s diminished power
– 1973 – Vietnam and Watergate
– 1979-80 – fall of the Shah of Iran and failure of efforts to extricate hostages in Tehran embassy
Oil prices are not feeding into higher inflation– thanks to the enhanced credibility of central banks,
which is keeping inflation expectations down
– and the impact of globalization on pricing power
The rise in oil prices has been driven by stronger demand, not by abrupt interruptions to supply
– and so oil (and its derivatives) are more expensive, but they are not also less available
6 economics@
What the world is now experiencing is a demand-driven rise in oil prices, not a ‘supply’ shockWhat the world is now experiencing is a demandWhat the world is now experiencing is a demand--driven rise in oil prices, not a ‘supply’ shockdriven rise in oil prices, not a ‘supply’ shock
World oil supply and demand
45
50
55
60
65
70
75
80
85
90
70 73 76 79 82 85 88 91 94 97 00 03 06
Mn barrels ofoil per day
Demand
Supply
Sources: BP Statistical Review of World Energy 2005;OPEC
7 economics@
OPEC is pumping about as much oil as it can: the OPEC is pumping about as much oil as it can: the supply constraints are in nonsupply constraints are in non--OPEC producers OPEC producers
OPEC production asas p.c. of capacity
60
65
70
75
80
85
90
95
100
70 75 80 85 90 95 00 05
%
OPEC and non-OPEC production
0
5
10
15
20
25
30
35
40
70 75 80 85 90 95 00 05
Millions of barrelsper day
OPEC
Non-OPEC
FormerSoviet Union
Sources: BP Statistical Review of World Energy 2005;OPEC Monthly Oil Market Report July 2005; IMF WorldEconomic Outlook April 2005.
8 economics@
Over the past four years China has accounted for Over the past four years China has accounted for 38% of the 38% of the growthgrowth in world oil demand in world oil demand
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
89 92 95 98 01 04
Rest of world US China
Millions of barrelsper day
Chinese oil consumptionand production
-2
-1
0
1
2
3
4
5
6
7
8
82 85 88 91 94 97 00 03 06
Millions of barrelsper day
Production
Consumption
Net imports
Growth in worldoil demand
Sources: BP Statistical Review of World Energy 2005; OPEC Monthly Oil Market Report July 2005; Economics@ANZ.
9 economics@
There are some problems on the supply sideThere are some problems on the supply sideThere are some problems on the supply side
No large commercially recoverable sources of oil have been discovered since the early 1980s
The oil industry lacks the capacity to increase supply quickly
– there are 2mn fewer people employed in the oil industry globally than 20 years ago
– the oil services industry has been severely squeezed by the major oil companies during the period of low prices
Multi-national oil companies are returning cash to shareholders rather than spending on exploration
National oil companies’ profits are being raked off by governments to repay debt or to fund new spending
Very few new refineries have been built over the past decade (especially in the US)
– existing refineries are operating at close to full capacity– Hurricane Katrina has exacerbated this problem
10 economics@
Capacity pressures at the refining stage are also Capacity pressures at the refining stage are also contributing to higher prices for ‘heavier’ crudescontributing to higher prices for ‘heavier’ crudes
Capacity utilization inthe global oil industry
70
75
80
85
90
95
100
79 84 89 94 99 04
%
Premium of WTI crude price over Saudi light
-5
0
5
10
15
20
80 85 90 95 00 05
US$ per barrel
12-monthmoving average
Sources: IMF World Economic Outlook April 2005;Thomson Financial Datastream; Economics@ANZ.
11 economics@
The world has become more efficient in its use of oil, so oil price shocks are less damagingThe world has become more efficient in its use of The world has become more efficient in its use of oil, so oil price shocks are less damagingoil, so oil price shocks are less damaging
Oil intensity of economic activity
1.5
2.0
2.5
3.0
3.5
4.0
70 75 80 85 90 95 00 05
Mn barrels of oil per dayper US$1000 of real GDP
World
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
70 75 80 85 90 95 00 05
Mn barrels of oil per dayper US$1000 of real GDP
US
Japan
Euro area
Developing countries
Sources: IMF, World Economic Outlook September 2005;Economics@ANZ.
12 economics@
10
12
14
16
18
20
22
24
26
28
30
70 75 80 85 90 95 00 05
Better macro-economic policies and globalization are combining to keep global inflation downBetter macroBetter macro--economic policies and globalization economic policies and globalization are combining to keep global inflation downare combining to keep global inflation down
Exports as a share of global GDP
Source: IMF, World Economic Outlook April 2005database; Economics@ANZ.
In both advanced and emerging economies, improvements in the way monetary policy is conducted have contributed significantly to lowering inflation and inflationary expectations
– in particular, the trend towards central bank independence
‘Globalization’ is also contributing to keeping inflation down
– the share of exports in global GDP has almost doubled over the last two decades
– providing a significant additional source of competitive discipline over price-setting behaviour
– and forcing producers to pay much greater attention to controlling costs and lifting productivity
13 economics@
Higher oil prices aren’t (thus far) leading to higher inflation and interest ratesHigher oil prices aren’t (thus far) leading to Higher oil prices aren’t (thus far) leading to higher inflation and interest rateshigher inflation and interest rates
Oil prices and inflation Oil prices and interest rates
0
10
20
30
40
50
60
70
80
90
100
70 75 80 85 90 95 00 050
2
4
6
8
10
12
14
16US$ per barrel(2005 prices)
Real oilprices
% per annum
G7 3-mth interest rates(right scale)
0
10
20
30
40
50
60
70
80
90
100
70 75 80 85 90 95 00 050
2
4
6
8
10
12
14
16US$ per barrel(2005 prices)
Real oil prices
% change fromyear earlier
G7 consumer prices (right scale)
Sources: Datastream; OECD; [email protected]: Shaded areas denote “oil price shocks”
14 economics@
US
So far, there’s not much sign that higher oil prices are being passed through to ‘core’ inflationSo far, there’s not much sign that higher oil prices So far, there’s not much sign that higher oil prices are being passed through to ‘core’ inflationare being passed through to ‘core’ inflation
Japan
-2
-1
0
1
01 02 03 04 05
% change from year earlier
"Headline"
Core (ex-food& energy)
0
1
2
3
4
5
01 02 03 04 05
% change from year earlier"Headline"
Core (ex-food& energy)
Euro area
Sources: US Bureau of Labor Statistics; Eurostat; OECD;Australian Bureau of Statistics. * Excl. GST impact.
Australia*
0
1
2
3
4
01 02 03 04 05
% change from year earlier
"Headline"
Core (ex-food& energy)
0
1
2
3
4
01 02 03 04 05
% change from year earlier"Headline"
Core (ex-'volatile'items - petrol andfruit & vegetables)
15 economics@
40
50
60
70
80
90
100
110
120
70 75 80 85 90 95 00 05
Barrels of oil per unit ofreal GDP (1971-72 = 100)
Like other economies, Australia has become less oil-intensive over the past thirty yearsLike other economies, Australia has become less Like other economies, Australia has become less oiloil--intensive over the past thirty yearsintensive over the past thirty years
Oil intensity of Australianeconomic activity
Oil consumption asa p.c. of GDP
0
1
2
3
4
5
6
7
70 75 80 85 90 95 00 05
% of GDP
Source: Reserve Bank of Australia, Statement on MonetaryPolicy 7 November 2005, p. 58. Data are for years ended30 June.
16 economics@
Some ‘factoids’ for assessing the impact of higher oil prices on AustraliaSome ‘factoids’ for assessing the impact of Some ‘factoids’ for assessing the impact of higher oil prices on Australiahigher oil prices on Australia
The average household buys around 35 litres of petrol (or diesel/LPG) per week
– so a 10¢/l increase costs $3.50 per week
In 2003-04 Australian households spent $32.28 per week on automotive fuel
– roughly 3½% of average household income after tax– the lowest-income fifth of households spent 5½% of
after-tax income on petrol, the highest-income fifth 2½%– contrary to popular belief spending on petrol is only
marginally higher in rural & regional areas ($33.13 per week) than in capital cities ($31.79 per week)
Assuming no change in average consumption, households would have been spending $42.50 per week (4.3% of disposable income) on automotive fuel in the September quarter
Sources: ABS Household Expenditure Survey 2003-04: Detailed Expenditure Items and Economics@ANZ.
17 economics@
Some ‘factoids’ for assessing the impact of higher oil prices on Australia (continued)Some ‘factoids’ for assessing the impact of Some ‘factoids’ for assessing the impact of higher oil prices on Australia (continued)higher oil prices on Australia (continued)
The average household spent $38.24 per week on mortgage interest payments in 2003-04 (and another $34.96 per week on principal repayments)
– a ¼ pc point rise in the mortgage interest rate would thus cost all households an average of $1.39 per week
– so a 10¢/l rise in petrol prices has a similar impact on household finances to a 0.625 pc pt rise in mortgage rates
Automotive fuel has a weight of 3.8% in the CPI– so a 10% rise in petrol prices boosts the CPI by 0.4%
(assuming no pass-through into other prices)– a 10¢/l rise in petrol prices (from a base of $1.20/l)
boosts the CPI by 0.32%
At an exchange rate of US70¢ per A$, a US$1/barrel increase in crude oil prices translates (roughly) into a 1¢ per litre increase in the Australian retail petrol price
Sources: ABS Household Expenditure Survey 2003-04: Detailed Expenditure Items; Consumer Price Index; and Economics@ANZ.
18 economics@
Victorians spend slightly more on automotive fuel than the national averageVictorians spend slightly more on automotive fuel Victorians spend slightly more on automotive fuel than the national averagethan the national average
Average household spending on automotive fuel, 2003-04
24
26
28
30
32
34
36
38
40
NSW Vic Qld SA WA Tas NT ACT
$ per week
Nationalaverage
Spending on automotive fuel as a p.c. of average income
Sources: ABS Household Expenditure Survey 2003-04: Detailed Expenditure Items and Economics@ANZ.
0
1
2
3
4
5
6
NSW Vic Qld SA WA Tas NT ACT
% of after-taxhousehold income
Nationalaverage
19 economics@
30
60
90
120
150
180
96 97 98 99 00 01 02 03 04 0515
30
45
60
75
90A¢ per litre
Australian averageretail petrol (ULP) price(left scale)
A$ per barrel
WTI crude oilprice in A$
(right scale)
There’s no evidence of ‘profiteering’: retail prices have actually risen by less than crude oil pricesThere’s no evidence of ‘profiteering’: retail prices There’s no evidence of ‘profiteering’: retail prices have actually risen by less than crude oil priceshave actually risen by less than crude oil prices
Crude oil prices in A$ and the Australian average retail petrol price
Note: scales are intentionally equi-proportional.Sources: Fueltrac; Thomson Financial Datastream;Economics@ANZ
20 economics@
Rising oil prices have had a noticeable adverse impact on Australian consumer confidence Rising oil prices have had a noticeable adverse Rising oil prices have had a noticeable adverse impact on Australian consumer confidence impact on Australian consumer confidence
Oil prices and consumer confidence
50
60
70
80
90
100
110
120
130
140
96 97 98 99 00 01 02 03 04 05
90
95
100
105
110
115
120
125
130
¢ per litre
Retail petrol price(left scale)
Ratio of optimists to pessimists(inverted scale)
Consumer confidence(right scale)
Actual
Trend
Sources: Fueltrac; Westpac/Melbourne Institute (trend estimates derived by Economics@ANZ using ABS formula).
21 economics@
Petrol prices
So far, higher petrol prices are not feeding into higher ‘core’ inflation in AustraliaSo far, higher petrol prices are not feeding into So far, higher petrol prices are not feeding into higher ‘core’ inflation in Australiahigher ‘core’ inflation in Australia
Consumer price index
0
1
2
3
4
01 02 03 04 05
% change from year earlier"Headline"
Core (ex-'volatile'items - petrol andfruit & vegetables)
RBA target
-20
-10
0
10
20
30
40
01 02 03 04 05
% change from year earlierMonthly retail price
'Automotivefuel' in CPI
Inflationary expectations
Sources: Fueltrac; ABS; Westpac-Melbourne Institute;National Australia Bank; Reserve Bank of Australia.
RBA measures of ‘core’ inflation
0
1
2
3
4
5
6
01 02 03 04 05
% change from year earlier Households
Business0
1
2
3
4
01 02 03 04 05
% change from year earlier"Weighted
median"
"Trimmedmean"
RBA target
22 economics@
Oil prices may have peaked for the time being Oil prices may have peaked for the time being ––although significant declines seem unlikelyalthough significant declines seem unlikely
WTI oil price (daily) WTI futures
25
30
35
40
45
50
55
60
65
70
75
03 04 05
US$ per barrel
Daily
10-day movingaverage
45
50
55
60
65
70
06 07 08 09 10 11
US$ per barrel
11 Nov 2005
30 Aug 2005
Sources: Thomson Financial Datastream; Bloomberg; Economics@ANZ.
23 economics@
SummarySummarySummary
Oil prices are likely to remain ‘high’ (by the standards of the past decade) for the foreseeable future, absent a major downturn in the world economy
– demand is likely to continue to grow, while the supply response to high prices will be muted
High oil prices will do less damage to the world economy than they did in the 1970s and early 1980s
– oil is less important to the world economy than it once was– high oil prices are less likely to result in high inflation and
hence high interest rates
High oil prices will dampen growth in Australian consumer spending
– but provided higher oil prices don’t result push ‘core’ inflation above 3% they won’t lead to higher interest rates
To the extent that higher oil prices lead to higher prices for other forms of energy there is some partially offsetting benefit for Australia as a net exporter
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