“Now, unfortunately, if we stay at these levels, airfares are going to have to go up, and we’re going have to pass them on.”
‘Tax on spending’ could cause economic downturn
Despite a pandemic-led explosion in work-from-home arrangements, the vast majority of Australians need to travel to earn their living.
Beyond a small amount of discretionary travel, people also generally cannot reduce the amount they need to use their cars for essential transport related to school, shopping and errands.
“We believe that the average household is forking out around about $260 a month in terms of petrol,” CommSec’s Craig James said.
“That’s up around about $35 since the start of this year, so that restrains people spending across the economy.
Goods where transport is a key part of the cost — such as fresh food — will also start to cost more, increasing that “tax on spending”.
Figures from the US Producer Price Index estimate that refined petroleum products, mostly petrol, contributed about 3 per cent of costs for final products, but almost 8 per cent when you went further up the industrial production chain.
Dr Oliver said that was why surging oil prices had historically often played a role in triggering recessions.
“Past oil price surges have played a role in US and global downturns — in the mid-1970s, the early 1980s, the early 1990s, early 2000s and even prior to the GFC (global financial crisis),” he noted.
“They weren’t necessarily the driver of these recessions as other factors (like tight monetary policy after multiple interest rate hikes, the tech wreck of 2000 and the housing downturn prior to the GFC) often played a much bigger role.
“But they made things worse because a rise in energy prices is a tax on consumer spending which leads to lower spending power.”
Dr Oliver said the size and speed of the oil price shock was the key thing to watch.
“It’s not so much the oil price level that counts as its rate of change, as businesses and consumers get used to higher prices over time,” he said.
Although, Dr Oliver also noted that the relative importance of oil prices had fallen as fuel efficiency had improved and alternative energy sources had become more important.
“The oil intensity of economic activity has been falling owing to energy efficiencies and the growth of the services sector,” he said.
“The amount of oil required to generate a given level of US GDP today is around 65 per cent less than it was in 1973 and about 20 per cent less than it was in 2007.”
The boss of Australia’s biggest miner is anticipating that the Russia-Ukraine war and resulting higher oil and other commodity prices will dent the global economic outlook.
“There are too many variables to be able to predict accurately [but] what we can see is, in BHP’s business, it’s had a dramatic impact in terms of commodity prices,” chief executive Mike Henry told the AFR’s Business Summit yesterday.
“And that’s a combination of the impacts of Russia, Ukraine, but also China coming up with a slightly more positive or aggressive growth target than some were anticipating.”
Extracted in full from: Russia-Ukraine war causes petrol price panic, with ‘new normal’ above $2 a litre – ABC News