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Oil prices have doubled since 2007, peaking at just under $US139 a barrel in June. While commentators are divided over when and whether the relentless increases will stop, most agree that if prices do continue to rise they will threaten the stability of the global economy.
InvestorTV speaks to AMP’s chief economist Dr Shane Oliver.
“Over the last decade or so we have seen the oil price steadily increasing, and it was increasing at a pace that allowed consumers and businesses to gradually get used to it,” says Dr Oliver.
“However over the last year the world oil price has doubled, and that’s a far greater pace of increase. That I think it causing a lot of indigestion globally and in Australia, [with] businesses facing a huge increase in their costs, [and] consumers facing a big increase in petrol bills,” Dr Oliver says.
“That in turn will cut into profit margins for businesses and it will also cut into consumer spending power. And I think we’ve now seen the oil price at a level where it’s now threatening the global outlook and the risk of recession has gone up significantly.”
Citigroup recently raised its 2008 oil price forecast from $US95 a barrel to $117, but remained cautious for the 2009 outlook. Citigroup predicted a long-term oil price of $US100 a barrel. Goldman Sachs meanwhile predicted in May that by 2009 oil prices will average $US148 a barrel.
“I think that the oil price is now at a choking point for the global economy,” warns Dr Oliver.
“It’s now causing major problems. That in turn will lead to a reduction in oil demand over the very short term and in fact in Australia, for example, oil imports for the year to April were down 28 per cent.
“That in turn I think will lead to a reduction in the oil price some time in the next six months, so it wouldn’t surprise me if we see the oil price spike back down to $100 a barrel, but I think over the long term we face an on-going situation where supply of oil globally will struggle to keep up with demand, particularly demand from the emerging world and that will ensure that the long term trend will remain up.”
However as the emerging world’s thirst for oil continues to grow, there is a real worry that skyrocketing prices could begin to choke these fragile economies.
“I think a collapse in growth in the emerging world, particularly China and India would be a major problem for the Australian economy because a lot of the strength we’ve seen in recent years has been a function of the commodity boom,” says Dr Oliver.
“My feeling is that it probably won’t go that far. I think the more likely scenario is that growth in the emerging world just slows down a touch. China for example recorded growth of 11.9 per cent, this year it’s probably going to record growth of around 9.5 per cent. So at this stage I think what we’re looking at is just a slow down, not a collapse.”
Shane Oliver says that for the past decade oil prices have been driven by growing demand from emerging economies. However he says that in the last 12 months, a new power has taken over the market.
“I think what’s happened is that speculators are now playing a much bigger role in the setting of the oil price and commodity prices generally,” says Dr Oliver.
“Shares and of course bonds and property have been doing it a bit tougher lately, so globally speculators have been looking at one of the only things that is working and that of course is the oil market, and over the last six to 12 months you’ve seen speculators jump on to a bandwagon that of course has gathered momentum this year and of course pushed the price even higher.
“So I think there is a big speculative element in the current oil price and as the evidence mounts that the global economy is slowing and demand for oil is slowing down, then I think we will see some of that speculative element fall out allowing the price to fall back in the short term.
InvestorTV speaks to AMP’s chief economist Dr Shane Oliver.
“Over the last decade or so we have seen the oil price steadily increasing, and it was increasing at a pace that allowed consumers and businesses to gradually get used to it,” says Dr Oliver.
“However over the last year the world oil price has doubled, and that’s a far greater pace of increase. That I think it causing a lot of indigestion globally and in Australia, [with] businesses facing a huge increase in their costs, [and] consumers facing a big increase in petrol bills,” Dr Oliver says.
“That in turn will cut into profit margins for businesses and it will also cut into consumer spending power. And I think we’ve now seen the oil price at a level where it’s now threatening the global outlook and the risk of recession has gone up significantly.”
Citigroup recently raised its 2008 oil price forecast from $US95 a barrel to $117, but remained cautious for the 2009 outlook. Citigroup predicted a long-term oil price of $US100 a barrel. Goldman Sachs meanwhile predicted in May that by 2009 oil prices will average $US148 a barrel.
“I think that the oil price is now at a choking point for the global economy,” warns Dr Oliver.
“It’s now causing major problems. That in turn will lead to a reduction in oil demand over the very short term and in fact in Australia, for example, oil imports for the year to April were down 28 per cent.
“That in turn I think will lead to a reduction in the oil price some time in the next six months, so it wouldn’t surprise me if we see the oil price spike back down to $100 a barrel, but I think over the long term we face an on-going situation where supply of oil globally will struggle to keep up with demand, particularly demand from the emerging world and that will ensure that the long term trend will remain up.”
However as the emerging world’s thirst for oil continues to grow, there is a real worry that skyrocketing prices could begin to choke these fragile economies.
“I think a collapse in growth in the emerging world, particularly China and India would be a major problem for the Australian economy because a lot of the strength we’ve seen in recent years has been a function of the commodity boom,” says Dr Oliver.
“My feeling is that it probably won’t go that far. I think the more likely scenario is that growth in the emerging world just slows down a touch. China for example recorded growth of 11.9 per cent, this year it’s probably going to record growth of around 9.5 per cent. So at this stage I think what we’re looking at is just a slow down, not a collapse.”
Shane Oliver says that for the past decade oil prices have been driven by growing demand from emerging economies. However he says that in the last 12 months, a new power has taken over the market.
“I think what’s happened is that speculators are now playing a much bigger role in the setting of the oil price and commodity prices generally,” says Dr Oliver.
“Shares and of course bonds and property have been doing it a bit tougher lately, so globally speculators have been looking at one of the only things that is working and that of course is the oil market, and over the last six to 12 months you’ve seen speculators jump on to a bandwagon that of course has gathered momentum this year and of course pushed the price even higher.
“So I think there is a big speculative element in the current oil price and as the evidence mounts that the global economy is slowing and demand for oil is slowing down, then I think we will see some of that speculative element fall out allowing the price to fall back in the short term.
