Economics & Markets

The impact of higher oil prices

By Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist, AMP Capital Sydney, Australia

Australians can expect to pay more for petrol at the bowser as oil prices move higher in the short-term. Yet the price rises won’t force the Reserve Bank to hike rates as a significant acceleration in inflation is unlikely.

Do I see the oil price continuing to surge higher? In the short term, yes, it could go a bit higher as global demand remains strong.

The cost of oil has risen sharply over the last year, with the price per barrel surging from $US45 to around $US70. The price rise paused on speculation that OPEC will increase production. But the increases were less than expected and the oil rally resumed.

There are many factors driving higher oil prices. Global demand is strong because the global economy is strong.

That demand has meant the world economy has burnt through excess supply and stock piles have declined.
OPEC cut back production a year or so ago, which further restricted supply (and now they’re increasing it again as demand picks up).

Some oil producers, including Libya, Venezuela and Canada, have had their supply disrupted. Iran’s supply to world markets is also under a cloud with the US seeking to reimpose sanctions.

There is a risk we’re going to see more upside with oil prices rising further.

That means Australian consumers will pay more at the bowser for petrol. Over the last year the typical household has had to spend $8 a week more on petrol.

There are two impacts: higher petrol prices but also less spending power. Higher oil prices are going to be a bit of a drag on consumer spending going forward.

That weaker consumer spending will balance the inflationary effects of higher petrol prices. Ultimately, I don’t see a huge flow-on to inflation [from higher oil prices], and I don’t see the RBA jumping in there and raising interest rates.

Oil price rises will ultimately be capped because higher prices should accelerate a shift to alternatives, and supply will increase as producers ramp up production to benefit from higher profits. As a result, we don’t expect to see the oil price pushing up to the levels we saw last decade when it got to around $US140 per barrel.

Still, at the end of the day higher oil prices are a drag on growth, particularly for Australian consumers, and that is something worth keeping an eye on.

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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