It’s time for some unpalatable facts about petrol.
Australia has the fourth cheapest petrol in the world among major economies of the OECD. Only the US, Mexico and Canada charge more. We are underpricing this scarce resource.
Yes, people are feeling the pain in Australia, but it is nothing like the pain of the first and second oil shocks in the 1970s: oil prices rose by five to seven times in the space of six to seven years. And there were shortages because of associated embargoes and real gouging by some suppliers and distributors.
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When oil plunged to $US10 a barrel by 1986, no-one said this was a bad thing, but it was because it lulled us into a false sense of energy security that was compounded in the 1990s by a similar experience after the worldwide recession and slow recovery.
We are paying the price for years of under-investment and the push by energy companies to be efficient and slash spending on exploration and development, or to return profits to shareholders that could have been reinvested in existing or new energy technologies.
Despite that history, there is a more recent lesson which we have ignored.
In the mid to late months of 2006, oil prices spiked to then record levels and petrol rose sharply. Petrol was around $1.35 to $1.45 a litre at times. Retailers like Big W, Target, Harvey Norman and Kmart, and airlines like Qantas and other oil-using or associated companies took a hammering as consumer spending slumped because oil prices surged, helped by a much lower Australian dollar.
Malcolm Turnbull and Brendan Nelson were members of a Government that did nothing to lower the impact of the higher prices.
Around August 2006, when fighting between Israel and Hezbollah broke out in Southern Lebanon, oil prices reached $US77 a barrel in New York and the Aussie dollar was around 77 USc. That produced an Australian dollar oil price of around $100 a barrel.
But if you look now in 2008 and use the exchange rate in August 2006 of around 77 USc, the current oil price becomes $A170 a barrel.
That’s a big difference: the current exchange rate for the Aussie dollar is around 96 USc and that gives an actual local oil price around $A137 a barrel, based on the most recent $US132 a barrel figure.
So in effect that 19 USc rise in the value of the Australian dollar since August 2006 has cut the 2008 price of oil by over $A40, even after the big rise we have seen in the past year. That is a big cost saving — at 2006 exchange rates, petrol would now be costing $A2 a litre!
Seeing oil fell from around $US77 a barrel in August 2006 to around $US50 a barrel in January 2007, there’s been a significant switch in sentiment here, and yet the financial pain would have been more damaging back in 2006.
In fact, while oil prices rose through 2007 from January, retailing boomed. It was only when the credit crunch hit and then the Reserve Bank lifted interest rates four times between August 2007 and March this year, that retailing slowed and people really started noticing the impact of the rising price of petrol.
The AMP’s chief economist and strategist, Dr Shane Oliver, says cutting petrol excise is not a solution to rising oil and petrol prices as it would simply encourage more petrol usage.
We are underpricing this scarce resource.