Oil still shy of harmful highs

Meredith Booth
15aug05

OIL has surged to a record $US67 ($A86) a barrel but prices would need to hit at least $US75 to cause a shock to the Australian economy, economists said yesterday.

While supply-thirsty Chinese and Indian economies have fuelled crude oil prices higher, the impact to Australian consumers and companies has remained at reasonable levels CommSec chief equities economist Craig James said.

"If we get a situation where we get $US75-80 a barrel then we start to see the effects. It serves both to boost inflation and slow economic growth," he said.

"If we see $US75-80 a barrel then the RBA will cut rates to stimulate growth and keep the economy on an even keel."

However Mr James said fuel was now only 3.4 per cent of household spending, down from 4.5 per cent in the 1980s.

Australian Stock Exchange-listed energy stocks Woodside, Santos, Oil Search and BHP Billiton are thriving as a result of the oil price boom.

Their share prices have risen between 30 and almost 100 per cent so far this year.

"It's good for Australia as a net energy exporter," Mr James said.

AMP Capital chief economist Shane Oliver said crude oil prices rising to $US100 a barrel would be equal to the prices which sparked an oil shock in the 1970s.

"That was the level where it caused major problems for the global economy," Dr Oliver said.

Mr James said the first oil shock was caused by a quadrupling in price between December 1972 and March 1974. There have been four steep spikes in oil prices since, each followed by a recession in the US.

However, the current steady rise of oil prices is reflecting stronger demand, not tighter supply or a geopolitical event.

"While the world is better-placed to weather the latest oil shock, it still represents a threat that must be monitored closely," Mr James said.

Dr Oliver forecast prices to get to $US100 in the next six to 12 months but said "the risk is that we get there sooner."

"If there's a major supply disruption, such as a terrorist attack, then there would be more parallels to the 1970s. The problem would really arise if something went wrong on the supply side," he said.

Though a correction is likely once hedge funds take profits, few analysts expect prices to drop below $US50 before 2007.