Australian Broadcasting Corporation
Broadcast: 18/10/2004

High oil price threatens economy

Reporter: Tim Lester

KERRY O’BRIEN: A recurring question has taken on
new urgency in recent weeks – how far can oil prices climb before the
world’s economies, Australia included, begin to buckle under the stress?

oil touched new record highs in Asian trade today – at $US55 a barrel,
almost three times as expensive as it’s been for most of the past 15

Historically high oil prices have tended to tip the world
into recession in the past and already we’re paying for this latest
price surge in ways well beyond the petrol pump.

So, is oil going to spoil Australia’s economic party this time?

Business and economics editor Tim Lester reports.

RUSHTON, ROYAL VICTORIAN AERO CLUB: As fuel goes up, you tend to sit
there and look at it and say, “Is it going to be just a spike or is it
going to continue?”

TIM LESTER: Stuart Rushton sees how high world oil prices hurt in ways well beyond our service stations.

You can forgive the Royal Victorian Aero Club President for wincing every time he hears a Cessna’s engine turn.

STUART RUSHTON: It’s the sound of $50 notes being munched up.

Simple as that.

LESTER: Victoria’s leading trainer of private pilots, the club is about
to announce its second flight price rise in three months as it chases
soaring fuel costs.

STUART RUSHTON: Aeroplanes are an expensive thing to run and to maintain, but fuel’s a major part of it.

If you look at our aircraft here, $130 an hour for a four-seater aeroplane.

$35 of that is fuel.

DAVID HUTTNER, VIRGIN BLUE: Even the smallest increase does have a negative impact.

TIM LESTER: The major airlines are moving to shield themselves.

This week, Virgin Blue is weighing up an increase to its $10-per-flight domestic and $20 international fuel levy.

HUTTNER: We’re trying to make sure that we do offset the cost as best
we can, but we also to be aware that any move or increase in fuel
prices does impact upon demand, so we’re trying to balance those two
factors as best we can.

TIM LESTER: On Wednesday, Qantas will lift its fuel surcharge to $12 per domestic sector and $29 international.

One analyst described the levy increase as largely unnecessary because Qantas is hedged against oil price rises.

The airline’s chief financial officer has called that malicious and stupid.

He says even with hedging and its surcharge, Qantas faces almost $200 million in above-budget fuel costs from the last year.

Our airlines and any number of other fuel-reliant businesses are just hoping oil prices will quickly head back to normal.

DAVID HUTTNER: Certainly, if they do drop, we’ll be handing those savings back to the customer as soon as possible.

GERARD MINACK, CHIEF EQUITY STRATEGIST, ABN AMRO: We’ve seen oil just about touch $55 a barrel.

I think we’re much more likely to see it touch $60 before we see it go back to $40.

TIM LESTER: Even then, ABN AMRO strategist Gerard Minack believes the days of the $20 barrel are gone for good.

MINACK: We will be in a new, higher trading range than what we saw
through most of the 1990s, so people will have to learn to live with
higher oil prices.

COMMONWEALTH BANK: And demand is just growing so strongly, particularly
in China and the rest of Asia, that it’s hard to see oil coming much
below $30 in the foreseeable future.

Commonwealth Bank’s David Thurtell argues oil producers aren’t about to
let the price come back to the levels we’ve grown used to.

THURTELL: If oil does start to come down into the mid- to high-30s in
the next year or so, what you will see is that countries like Saudi
Arabia and other OPEC members will cut production back fairly
significantly to levels that they’re still quite comfortable with in
order to keep oil stocks very, very low and therefore keep oil prices
on the high side.

STUART RUSHTON: Raw material prices have gone absolutely through the roof.

TIM LESTER: Apart from his interest in aviation fuel, Stuart Rushton has just sold his Melbourne plastic bottle factory.

Fifteen million bottles a year made from a by-product of the oil refining process.

DITTON, PLASTICS MANUFACTURER: It’s been a bit of a rude awakening for
us, a real hot introduction into the the plastics industry.

TIM LESTER: The new owners’ raw material costs have shot up by 30 per cent.

DITTON: It’s amazing that when you sit at home watching television and
you see something happening in Iraq or in Russia and you sort of just
scratch your head and think, “This is coming my way” and it eventually

TIM LESTER: Some factors driving oil’s extraordinary rise
appear short-term – Hurricane Ivan crippling more than one-quarter of
US output from the Gulf of Mexico and problems with Russian oil giant

Others, like China’s new-found thirst, changed the picture permanently.

PETER HARRIS, MATERIALS ANALYST, COMMSEC: People have been talking about a hard or soft landing in China.

We just think China’s changing altitude.

We don’t think oil prices at the $30-$40 mark will slow China too much.

TIM LESTER: Here’s what has happened over the last 35 years to the world’s spare oil producing capacity.

At a peak in the mid-80s, we could produce about 11 million barrels a day more than we needed.

That margin for change has since plummeted.

We’re now burning it all.

DAVID THURTELL: It’s very striking and it basically tells us that we’re in uncharted territory.

PETER COSTELLO, TREASURER: I think there are a lot of challenges out there, Kerry.

DAVID THURTELL: There just is not enough oil.

TIM LESTER: Last week, the Federal Treasurer told the 7:30 Report high-priced oil is now a big risk for the Australian economy.

PETER COSTELLO: That could have a very material effect on global growth.

It could have a very material effect on Australian growth.

Treasurer is right to nominate oil as one of the key risks.

we’ve found is that both the temporary and permanent rise have a quite
large adverse effect on OECD economies, that economic growth could be
1.6 per cent – that’s the level of real GDP — could be 1.6 per cent
lower and inflation higher.

TIM LESTER: Andrew Stoeckel says the
impact on Australia’s and the global economy are worse than the
International Energy Agency’s forecast.

DAVID STOECKEL: The level of our GDP in 2007 could be 1.7 per cent lower than otherwise would be the case.

GERARD MINACK: They may well be the straw that breaks the camel’s back.

But the reason the camel’s under such stress has to do with other factors not connected to the oil price.

TIM LESTER: Gerard Minack says oil price rises in the key US market have not hit consumer spending margins.

And the Federal Reserve chairman says it may not be as bad as it looks.

surge, the average price of crude oil in real terms is still only
three-fifths of the price peak of February 1981.

STUART RUSHTON: Where does it stop?

And will it ever come down?

some point in time, you’ve got to say it’s never going to stop and
we’re going to have to take that as being our standard cost.