Federal Treasurer Peter Costello has warned that the record international oil price could deliver a “double whammy” to the Australian economy, describing it as “the third oil price shock”.
In an interview with The Sunday Age, Mr Costello said the rising oil price was the “greatest global risk” to the economy and there was not much relief in sight for motorists until the world oil price fell.
The price of oil hit a new high yesterday of $US55 a barrel and closed at $US54.93. The RACV said the price of a litre of unleaded fuel around Melbourne was as high as $1.09, although some service stations were selling at 99.5 cents.
The Commonwealth Bank issued a report saying the petrol price rise so far had cost the average household an extra $5.80 a week and would have the same effect on the economy as a 0.25 per cent interest rate rise.
The bank’s chief economist, Michael Blythe, said “back of the envelope” calculations showed that if oil hit $US60 a barrel, it could send the price at the bowser to $1.30, which could be the equivalent of an interest rate rise of 2 percentage points.
The report said oil prices were expected to stay high but there would be long-run benefits to the Australian economy.
The federal budget predicted the oil price rise but also assumed it would drop back to $US32 a barrel by June 2005. Mr Costello, who will this week start work on next May’s budget – his 10th – is now concerned that prices may stay high.
“We are now probably in the third oil price shock. We had two oil price shocks in the 1970s. We’re probably in the third one. Now that is a problem for the world economy and it will take management,” Mr Costello said.
“I think the oil price is the biggest threat to the economy at the moment for two reasons – one is that high petrol prices mean that people have reduced consumption elsewhere in the economy and the second is high oil prices could cause growth to turn down in the world and affect us through our trading partners. So you’ve got basically a double whammy coming at you.”
But he stressed that this oil shock was not as big as the Asian financial collapse, the US recession or the drought and the economy withstood those events.
During his period as Treasurer, 32 of the 33 quarterly economic growth report cards have recorded positive growth.
Mr Costello said he understood that motorists did not like rising petrol prices and the Government had frozen its excise. “We don’t like high petrol prices . . . we know that affects people at the bowser and this is because of the world oil price and until the situation stabilises globally, there’s not much relief in sight.”
He said any windfall from the GST on petrol went to the state governments. “Mr Bracks is getting a GST windfall and tolling the Scoresby freeway, can you believe that?”
US Federal Reserve chairman Alan Greenspan devoted a speech in Washington to oil prices, saying that the world economy could be in trouble if continued to rise.
But he said that the impact of “the current surge in oil prices, though noticeable, is likely to prove less consequential to economic growth and inflation than in the 1970s”.
“The risk of more serious negative consequences would intensify if oil prices were to move materially higher.”
Mr Costello moved to temper his post-election comment that a Treasury prediction that the economy would grow by 3.5 per cent a year was “optimistic”.
“I didn’t say it couldn’t be done. I just said it would be a very optimistic person to assume that was in the bag,” he said. “You have spurts of growth and you have slowdowns. It’s not mechanical. That would be a dream that would make Goldilocks proud – not too hot and not too cold.”
He said he repeatedly warned during the election that a strong economy was “not a fluke” and took hard work.