If Messrs Rudd, Nelson and Turnbull stop and think about petrol prices, they’ll find there’s a silver lining in allowing rising petrol prices to eat into consumer confidence and spending.
But first some background.
First off: Australia has the fourth cheapest petrol among major economies of the OECD. The US, Mexico and a couple of other countries have cheaper fuel among the 24 most developed economies in the world. We are under-pricing this scarce resource.
Prices and pain are for more hurtful for drivers in Europe than here; especially with diesel (which has a higher proportion of the motor fuel market because more diesel-powered vehicles are sold), still at a significant premium to petrol.
Yes quite a few people are feeling the pain in Australia: but it is nothing like the pain of the first and second oil shocks in the 1970s: oil prices rose by five to seven times in the space of six to seven years. And there were shortages because of associated embargoes and real gouging by some suppliers and distributors.
Demand for a host of products was hit, retailing was miserable, as were airlines and the car industry while travel became expensive for a while: that sounds a lot like now, doesn’t it?
When oil plunged to $US10 a barrel by 1986, no one said this was a bad thing, but it was because it lulled us into a false sense of energy security that was compounded in the 1990s by a similar experience after the world wide recession and slow recovery.
We are paying the price for years of under investment and the push by energy companies (egged on or directed by shareholders) to be efficient and slash spending on exploration and development, or to return profits to shareholders that could have been reinvested in existing or new energy technologies.
Despite that history, there is a more recent lesson which we have ignored.
In the mid to late months of 2006 retailers like Big W, Target, Harvey Norman and Kmart, airlines like Qantas and other oil using or associated companies took a hammering as consumer spending slumped because oil prices surged, helped by a much lower Australian dollar.
Around August 2006 when fighting between Israel and Hezbollah broke out in Southern Lebanon oil prices reached $US77 a barrel in New York and the Aussie dollar was around 77 US cents. That produced an Australian dollar oil price of around $100 a barrel.
But if you look now in 2008 and use the exchange rate in August 2006 of around 77 US cents: the current oil price at around $US a barrel becomes $A170 a barrel.
That’s a big difference: the current exchange rate for the Aussie is around 96 US cents and that gives a local oil price around $A137 a barrel, based on that $US132 a barrel figure.
So in effect that 19 US cents rise in the value of the Australian dollar since August 2006 has cut the 2008 price of oil by over $A40, even after the big rise we have seen in the past year. That is a big cost saving.
Seeing oil fell from around $US77 a barrel in August 3006 to around $US50 a barrel in January 2007, there’s been a significant switch in sentiment here, and yet the financial pain would have been more damaging back in 2006.
In fact while oil prices rose through 2007 from January, retailing boomed. it was only when the credit crunch hit and then the Reserve Bank lifted interest rates four times between August 2007 and March this year, that retailing slowed and people really started noticing the impact of the rising price of petrol.
The AMP’s chief economist and strategist, Dr Shane Oliver says cutting petrol excise is not a solution to rising oil and petrol prices as it would simply encourage more petrol usage.
He wrote in his end of week commentary on Friday: "Australia could get the petrol price back to near $1 a liter if it wanted to simply by eliminating all petrol taxes but Australian petrol prices are already about the fourth lowest in the OECD, behind Mexico, the US and Canada solely because the tax imposed on petrol is relatively low in Australia.
"More importantly, cutting or eliminating petrol taxes would mute the price signal being sent by rising petrol prices that it is a finite resource and that we need to cut back on its use.
"Rather the best way to help households cope with rising petrol prices is via income tax cuts & these are already underway.
"The surge in the oil price is tightening the screws on Australian households with capital city petrol prices breaking above $1.60 a liter and the weekly petrol bill for a typical Australian family pushing above $70.
“The surging petrol bill along with rising mortgage stress and low consumer confidence is likely to ensure pretty weak consumer spending over the year ahead, even with the tax cuts.
“The strengthening $A has shielded motorists from the global oil price surge but only partially – so far this year the world oil price is up 36% in $US but the $A is up only 10%."
It might be unpalatable to the likes of politicians, muddle headed motorists groups and those people feeling genuine financial hardship, but we here have been spared the full impact of the oil price shock because of the stronger economy, energy exports and those high interest rates.
The dollar is high because of the resources boom (in which we are a net exporter of energy) so we are benefiting from higher oil and coal prices, and from the Reserve Bank’s lift in interest rates (Which Nelson and Turnbull have opposed).
So those hated higher interest rate rises are in fact helping ease the pain of higher oil prices on petrol and other fuel costs in the country by lowering the Australian dollar cost.
Now where are the Opposition and all those moaners complaining about interest rates and inflation targeting on this particular point?
