Fuel price relief unlikely

HOUSE prices in outer Perth suburbs collapsed, it was hard to sell old gas guzzlers and there were predictions that the world would run out of oil about now.

That was during the last period of soaring petrol prices, in the late 1970s, and it created a world slump in 1980 that is still remembered.

Could it happen again?

The answer is yes, but it is much less likely. What is more worrying for Australians is the effect on inflation of oil prices that have nearly trebled in 18 months or so and its impact on Asia, where our exports have performed so well in recent years.

First the good news.

Developing countries consume about half the oil, per unit of gross domestic product, than they did 25 years ago; other fuels, such as natural gas, in which Australia has vast reserves, have partly displaced oil.

Even at $US35 a barrel, oil is still about half what it was, in inflation adjusted terms, 20 years ago.

OPEC countries enjoying this cascade of dollars will spend much of it in oil-consuming economies, which will offset some of the worst effects.

Australia is major exporter of hydrocarbons, in the form of coal and liquefied natural gas and high energy prices will provide some consolation, remembering that we produce most of our own oil.

But there are major concerns. One is that even if OPEC significantly increases production (and only one or two members have the capacity to do so) pump prices are unlikely to fall much.

In the search for scapegoats (namely OPEC) motorists have overlooked the fact that soaring prices are as much a result of strong economic growth – with few exceptions refineries around the world are working at capacity.

They could not produce more petroleum even if it was delivered from the oilfields.

The imminent northern hemisphere winter is another factor driving up the market, which is anticipating shortages that will last at least six months.

Predicting the effect on inflation is tricky but in a country like Australia, with such long distances, it could be serious. It has been estimated that transport absorbs nearly a fifth of our GNP.

When OPEC decided to restrict production the analysts predicted that, as in the past, there would be cheating among members and more oil would reach the market than OPEC predicted.

This time, suffering hardship because of low prices (down to $US10 a barrel) members’ discipline was maintained.

Three of the world’s biggest oil companies forecast average prices this year of about $US15 a barrel and when prices reached $US17 a barrel, they released big volumes of crude onto the market, seeing it as a great opportunity.

Even now, most industry leaders believe prices will fall in the medium term, although given the big tax load on petrol, the pump price won’t fall that much.

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