The 15% drop in the price of oil since the start of August is a cause to celebrate for most. Acres of newsprint have been spent on debates as to which Governmental policy would be the most effective against high fuel prices. The Prime Minister even offered to take calls on the issue at the Lodge.
As at the close of the New York Mercantile Exchange, light sweet crude oil was being traded at US$65.61 per barrel, around 16% down from the peak of US$78.40 reached on 13 July. Drivers are also feeling the relief, with the price of petrol dropping by around 15 cents per litre, and in some cases by up to 20 cents.
As a result of the drop in petrol, consumer confidence has strengthened in recent weeks. During August, when consumers were dealing with the interest rate hike and higher petrol prices, the Roy Morgan Consumer Confidence Rating plummeted by a record 14.4 points to 103.7. However, the September Roy Morgan Consumer Confidence Rating recovered 4.9 points as cheaper petrol added extra cash into pockets.
However, to some, the drop in the price of oil is far from good news. According investment bankers Morgan Stanley, the recent oil price drop signifies the end of the five-year commodity boom. As reported in today’s Age, Morgan Stanley chief global economist Stephen Roach stated: “The mega-run for commodities has run its course”.
There are also those grumpy economists who see the reduction in petrol prices as adding upward pressure to inflation rates. The quite sensible rationale behind this theory is that the reduction in the fuel bill will simply add more spending cash into people’s budgets. And considering that consumer spending makes up around 60% of the Australian GDP, a little extra pocket money is likely to have a large impact.
However, the most unfortunate side-effect of falling oil prices is that it is a not-so-subtle incentive to consume more oil, hardly a great outcome given the potential impacts of global warming.
This is why economics is known as the dismal science.
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