Petrol pricing is now back as a 'water cooler' and 'BBQ stopper', or so the Federal Government thinks.
With an election to win the Howard Government has started yet another inquiry into petrol pricing. By some estimates it's around inquiry number 37, but it could be higher.
But as odd as prices sometimes have been in 2007, they haven't generated the same sort of intensity as they did a year ago.
It seems we are becoming used to high and rising price levels, which we accept with a degree of cynicism about the oil companies and the big retailers.
But it is not going to get any better; in fact we face the possibility of years and years of high prices, according to Dr Shane Oliver,the head of Strategy and Chief Economist at AMP Global Investors.
He says oil prices have broken out to their highest level since last September and may be on their way to $US85 a barrel in the next few months on the back of ongoing strong demand & supply concerns. This, he says, is good news for energy shares and will translate to a petrol price of just above $1.50 a litre for Australian motorists. Ouch!
However, he writes that fears that oil is about to run out, leading to global chaos, are misplaced.
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Oil and petrol prices are coming back into the headlines after a brief hiatus. Not only has the Federal Treasurer announced another petrol price inquiry but more fundamentally this time of year often sees oil prices head higher and this is now starting to happen.
Last year's record high of $US78 a barrel was reached in July, 2005's record high of $US70 was reached in August and 2004's record high of $US56 was reached in October. In an ominous sign, oil prices have just broken out to their highest level since September last year.
The rise in oil prices from their low around $US50 in January this year has been driven by a combination of continued strong global demand, worries about the supply of gasoline in the US coming into their "summer driving season" and on-going worries about oil supply.
Oil price fundamentals still point up:
The past five years has been characterised by a steadily rising trend in oil prices, the key fundamental driver of which has been solid growth in underlying demand relative to supply.
Oil consumption is continuing to rise, but new sources of supply are slowing.
Reflecting the rapid industrialisation of emerging markets, global demand for oil is expected to rise at around 1.5 to 2% annually (even allowing for a switch to alternatives and energy efficiencies). For example, while China is targeting lower energy usage per unit of GDP, its GDP is still growing rapidly which means its energy demand overall will continue to rise sharply.
Oil usage in China is running at just over 2 barrels per person per annum. If per capita oil consumption were to rise to just half of Australian and Japanese levels (15 barrels per person pa) it would imply an extra 21 million barrels per day in global oil demand (which is currently 85.5 million barrels a day). If the same occurs in India an additional 18 million barrels per day will be added to global oil demand.
This will occur over time, but the point is that long term growth oil demand will be strong.
• While growth in oil consumption slowed a bit over the last year it is now likely to pick up again consistent with leading indicators of global economic growth which point to solid growth ahead. The oil price normally rises until, using industry parlance, "it kills demand". Certainly there is no evidence that this has occurred.
• Oil supply has been improving (belying the alarmist Peak Oil predictions of an imminent and catastrophic peak). This has allowed OPEC to cut back production and has seen its spare capacity rise to around 4 million barrels per day. But it is still running well below previous peak levels and more broadly supply is constrained as there has been a lack of exploration (thanks to years of low real oil prices up until 2002), existing oil fields are experiencing diminishing returns and the cost of extracting new oil is rising.
Strong growth in demand but constrained supply implies that the long term trend in the oil price remains up. In this environment anything that is seen as threatening the supply of oil (e.g., conflict in the Middle East) will have a disproportionate positive impact on the oil price.
Our assessment remains that an oil price above $US100 a barrel is likely some time in the next few years.
The summer driving season and hurricanes:
Against this background seasonal considerations are particularly relevant. We are now in the period of peak seasonal oil demand associated with the northern hemisphere summer driving season and the hurricane season in the Gulf of Mexico. Typically, oil prices rise into September before relief later in the year. So a spike to a new record high of around $US85 a barrel some time over the next few months would not be surprising.
Implications:
A further increase in oil prices over the months ahead is likely to have the following implications:
First, Australian petrol prices are likely to push higher. In recent times there has been a divergence between the two, which in part helped spur on the latest petrol price inquiry. A rise in the world oil price to $US85 would take local petrol prices to just above $A1.50 a litre.
Second, a further increase in oil prices is likely to help keep a lid on economic growth later this year, but just as we have seen over the last few years the impact is likely to be mild. It represents an ongoing demand shock not a 1970's style reduction in oil supply and the rise in oil prices remains orderly compared to the 1970's surges – so we have been able to get used to it.
Australian consumers seem to be shrugging off the petrol pr
