Oil Price For Australia Economy

Oil Price Harms Australia's Economy

Charlie Nelson
director foreseechange
February 2003

The recent rapid rise in oil prices, and possible future increases, will slow growth in several sectors of the economy.   These include retail sales, new vehicle sales, and dwelling investment.   Furthermore, rising oil prices impact consumer price inflation both directly and indirectly through increasing the cost of transportation and the cost of food production.   Motor fuel and food, whose prices are rising due to drought, are frequently purchased commodities and could quickly influence inflation expectations.   As the Reserve Bank of Australia (RBA) primarily targets consumer price inflation, a sustained increase in oil prices could force an increase in interest rates, further slowing the economy.

The economy slowed dramatically in late 2000 under the combined pressure of rapidly rising motor fuel prices, rising interest rates, and post-GST uncertainty.   Similarly, the last recession in 1991 was caused by the RBA hiking interest rates too high combined with rising motor fuel prices resulting from the Gulf War in 1990.

While consumer spending is likely to continue to support economic growth in Australia, a sustained rise in motor fuel prices combined with a miscalculation by the RBA, or an extension of the drought, could slow discretionary spending dramatically.

When the Australian Bureau of Statistics conducted the last Household Expenditure Survey in 1998/99 (based on 6,893 households), they found that weekly spending on motor fuel and lubricants averaged $26.43 per household per week.   This represented 3.8% of average spending on all goods and services and 3.0% of average income.   Between the March 1999 quarter and the December 2002 quarter, the price of motor fuel has increased by 36.2% while the overall consumer price index has increased by 14.5%.

Most spending on motor fuel is not discretionary and research by foreseechange has found that for every 10%...