How do oil price swings impact Australian economy?

Highlights

  • Petrol prices have delivered a massive blow to Australian household budgets in the recent past.
  • The uptick in headline inflation has been fuelled by a 24% rise in petrol prices over the past year.
  • The jump in oil prices generally has a negative effect on overall growth of the Australian economy.

Just before the latest COVID-19 variant Omicron hit the world, oil prices had surged to an extent that they threatened to derail economic recoveries, throwing a spanner in tightening plans of some central banks. The Australian economy was no exception. In fact, the surge in oil prices had the Reserve Bank of Australia’s (RBA) concerned, with Governor Philip Lowe accepting that elevated global oil prices have affected the Australian headline inflation rate.

Petrol prices, in particular, have been a substantial contributor to dents in household budgets in the recent past. The uptick in headline inflation has been fuelled by a 24% rise in petrol prices over the past year. Retail unleaded petrol prices currently remain elevated across Australia.

In the last two weeks, the price of unleaded petrol across the country have jumped by nearly two cents a litre, according to Australian Institute of Petroleum data. The average price for Unleaded 91, is currently AU$1.84 per litre in Brisbane, AU$1.74 in Melbourne and AU$1.64 in Sydney, according to online aggregator FuelPrice Australia.

What does oil price rise mean for the Australian economy?

The jump in oil prices generally has a negative effect on the overall growth of the Australian economy.

Household budgets

Petrol prices have turned out to be one of the biggest household expenses for Australians. According to an analysis by CommSec, petrol is currently the fifth largest weekly expense for household budgets. On an average, Aussie households are splurging AU$237 a month in petrol expenses.

 The jump in oil prices generally has a negative effect on overall growth of the Australian economy.

Image Source: © Kodym | Megapixl.com

Transport costs

The rise in oil prices has not only hit motorists but also has had a toll on transport costs. In the past year, overall transport costs have risen by over 10%, according to the Australian Bureau of Statistics (ABS). It may have an indirect effect on a broader range of consumer prices through their effects on the cost of production.

Terms of trade

As a net importer of oil, rising oil price tend to have a negative impact on Australia’s terms of trade and on the purchasing power of national income. However, in practice, the oil price movement is partly absorbed into margins and any pass-through tends to occur over a long period.

Production costs

Even as intensity of oil production has been falling in Australia for many decades, oil is still an important input into the production of many goods and services, particularly in industries such as mining, transportation, and some parts of manufacturing. Thus, higher oil prices will lead to increased costs of production in these industries.

Omicron smashes oil prices

However, with Omicron’s formidable entry, oil prices fell sharply last Friday. Oil prices fell US$10 on Friday, their largest one-day dip since April 2020, as Omicron threatened the Australian economic recovery and raised concerns that a supply surplus could swell in the first quarter.

Last Friday, Brent crude ended 11.6% down, to US$72.72 a barrel, a weekly decline of over 8%, while US West Texas Intermediate (WTI) crude settled 13.1% down, at US$68.15 a barrel, falling over 10.4%.

RELATED ARTICLE: How is Omicron affecting financial markets?

RELATED ARTICLE: 7 ASX mid-cap stocks that outperformed MidCap 50 Index

RELATED ARTICLE: 5 fashion retail stocks to watch amid increasing consumer discretionary spending

Comment


Disclaimer