Oil and the Aussie dollar. World oil prices have jumped and the weakening Australian dollar has steadied after OPEC revealed a surprise cut in its production of 520,000 barrels of oil a day.

Prices jumped from around $US102.50 a barrel early this morning in New York, to more than $US104.20 a barrel just before noon in trading in Asia on the Nymex electronic trading platform. Reuters reported that when asked about the size of a proposed cut to OPEC’s current production, Khelil replied: “I think if you do your own calculations, it is a cut of 520,000 barrels per day.”

“Actions (to cut output) will be taken by members as soon as they can, that means in the next 40 days,” he added.

A statement earlier from OPEC said that members had agreed to “strictly” comply with a quota target of 28.8 million barrels per day excluding Indonesia and Iraq. But whether they will is another thing because at these lower prices, there’s pressure on some countries to maximise their national incomes.

Consumer sentiment gets a boost. The latest Westpac-Melbourne Institute survey shows consumer sentiment rose 7% in September to 92.2 points from 86.2 points in August, the second consecutive improvement in the index but still below the 100 point mark separating pessimists from optimists.

The survey was done after the RBA cut rates a week ago yesterday, so the improvement is understandable. But while the index rose, it’s still 20.3% below where it stood one year ago when the economy was firmer, growth stronger and $$US100 a barrel oil only a forecast from excitable analysts, let alone $US147 a barrel oil.

Last month’s improvement mirrors that noted yesterday in business confidence by the National bank in its August survey. It perked up, but is still very low. The NAB and other analysts now suggest that there is a stabilising of confidence levels for both business and consumers, even though inflation remains high and won’t ease for longer than expected, and the economy is still slowing

But while petrol prices have eased, they haven’t as sharply as the drop in oil prices.

Petrol prices are still around 25% more than they were a year ago, but with oil trading at $US10-3 a barrel this morning in Asia, and the Australian dollar just over 80 US cents, there won’t be any significant fall coming either to relieve the pressure, despite what the NSW NRMA might be demanding in yet another statement today.

The petrol price. If the Australian dollar was still at 98 US cents, around a 25 year high, and oil was around $US103 a barrel, the Australian dollar price would be around $A105 a barrel or a bit more. Instead it’s well over $A128 a barrel and that’s why petrol prices are stuck around the current levels of $A1.50 a litre or more in some areas.

But as oil and commodity prices drop and foreign investors lose their taste for risky and high yields, so the Australian dollar falls. It has lost more than 18 US cents, or around 19% in the pace of seven weeks. The currency fell 1.2% overnight and touched 79.83 US cents, the lowest since August 2007.

That’s good because US dollar receipts will be greater, which will help commodity exporters offset some of the lower world prices, and help other exports repair the damage done to their receipts from the higher value of the Aussie currency over the past year.

But for companies like retailers who import a lot, it’s bad news, but for mining and resource companies in particular, the sharp slump in the currency will offset the falling price of oil, copper and other metals, and shower even more money on the iron ore and coal exporters whose prices rose this year.

But the biggest problem will be that the downward pressure on import costs, especially for oil and fuel products, is no longer there. The RBA has forecast inflation will run at 5% in this and the December quarter, and then start to ease through next year. A sharply weaker dollar means the chances of that easing occurring are now not as good: the RBA might have to leave interest rates higher than it wants, it might have to slow the pace of change, or it may decide to let the economy slow a bit more to put more pressure on companies to absorb the extra cost pressures and take lower profit margins.

That is what has happened before when the Aussie has weakened.