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Interest rates unchanged -

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Interest rates unchanged

Reporter: Emma Alberici

KERRY O'BRIEN: Despite its public warnings that interest rates had to rise to rein in an overheated
economy, the Reserve Bank left rates unchanged today. Economists were divided about the need for
another rise, citing more recent figures which showed the economy slowing, at least in part. With
the housing bubble deflating and an oil price that's up 40 per cent since January, it's little
wonder consumer sentiment is at its lowest point on record. While only a third of all Australian
households have a mortgage, higher petrol prices affect almost every hip pocket. The oil price hit
a new high this week and is now edging closer to $US60 a barrel with US investment bank Goldman
Sachs predicting it could top $US100 inside two years. OPEC, the oil producers' cartel, has
promised to raise its production by another 500,000 barrels a day to help ease the pain, but with
demand growing and political instability rife among the main supplier countries, high oil prices
could be here to stay. Finance reporter Emma Alberici reports.

ROBIN KYDD: They're very, very calming to drive, very quiet, and I honestly believe that after a
long trip you get out of the car perhaps more rested than you do in a traditional car.

EMMA ALBERICI: It's not unusual to hear a bloke raving about his car, but when small businessman
Robin Kydd talks about his Toyota Prius fleet, he has more reason than most to sound smug.

ROBIN KYDD: We've put our money where our mouth is and, happily for us, perhaps, petrol prices have
gone up and so in financial terms I'm looking perhaps a little smarter than I actually am.

EMMA ALBERICI: With oil prices up 40 per cent since January, driving a hybrid car makes more sense
than ever. As the name suggests, it runs on part petrol, part battery power and is so fuel
efficient, you can drive up to 1,000 kilometres without needing to fill up. With the petrol price
hovering around $1.10 a litre and tipped to go even higher, the popularity of these
energy-efficient alternatives is on the rise. There's now a four month waiting list for a Toyota
Prius in Australia.

DAVID THURTELL, COMMODITIES ANALYST, COMMONWEALTH BANK: Hybrid car sales are actually climbing, and
sales of SUVs and heavy consuming vehicles are starting to fall. And you will see more and more
people get rid of that second car, catch public transport and take measures to try and limit their
expenditure.

EMMA ALBERICI: In 1999, respected analysts were punting on the $US10 per barrel oil price holding
steady for the foreseeable feature. The Commonwealth Bank's David Thurtell was among them. If
someone had offered him a bet that the price would rise 500 per cent in six years, he would have
surely taken it and lost his money.

DAVID THURTELL: I thought probably oil would get back up towards the $20 mark over the next coming
few years, but certainly nowhere near where we are now.

EMMA ALBERICI: During the oil shock of the 70s, consumption dropped dramatically. For the next two
decades demand stayed low, driving the price of oil down to just $US10 a barrel. There was little
incentive to look for new oilfields or to expand refining capacity. The Organisation of Petroleum
Exporting Countries, OPEC, decided to boost the price by cutting back on production. Over the last
four years, increased demand from China, civil unrest in Venezuela, a hurricane in the Gulf of
Mexico and the war in Iraq made matters worse, pushing the price of oil to an all-time high.

DAVID THURTELL: Russia was supposed to be the world's salvation in regards to oil. There's a huge
amount of oil in the Caspian Sea near Russia and Kazakhstan. The trouble has been in the last sort
of year or so that the Russian Government has moved to effectively re-nationalise Yukos, which is
one of the bigger Russian producers, and that's been enormously destructive in terms of new
production and development coming on through Yukos.

EMMA ALBERICI: Earlier in the week, the oil price peaked at $US58 following a report by US
investment bank Goldman Sachs that predicted the price could reach $US105 by 2007. The document
refers to a super spike period, brought on by growing demand from China and India and longer
response times in bringing on new supply. The world uses around 84 million barrels of oil a day,
which is expected to rise to 100 million barrels between 2010 and 2020. Proven oil reserves are
estimated to last at least 40 years based on current levels of demand, which takes no account of
China's extraordinary economic growth and the industrialisation of India.

RICHARD GIBB, CHIEF ECONOMIST, MACQUARIE BANK: The 105 prediction is credible, given what we
already know about the demand pressures in the global market for oil, versus the very tight supply
situation. Bear in mind that the other point Goldmans make is of course OPEC do not have a lot more
additional capacity they can bring to the market. OPEC are talking about increasing production by
500,000 barrels a day. They really only have about another million barrels a day they could bring
to the market. There isn't any more supply to be had. So certainly if we were to see any of that
existing supply disrupted, we would have a major price problem.

EMMA ALBERICI: While few in the financial markets will publicly back the Goldman Sachs forecast,
few can ignore its basic premise, given its likely influence over the Reserve Bank's decision to
keep interest rates steady this month.

RICHARD GIBB: We've had a further surge in crude oil prices and, of course, petrol pump bowser
prices have increased accordingly. The bank would be cognisant of that and its impact on household
spending and household income. Clearly petrol purchase is basically a non-discretionary expenditure
item for most households, given the extensive use of private transport in Australia in urban and
regional centres. We estimate that probably the increases you have seen in the last couple of weeks
alone in terms of retail petrol prices would be almost equivalent to a quarter of a per cent
increase on most people's mortgages.

EMMA ALBERICI: 70 per cent of the world's oil is used for transport. At a conference in New York
this week, the head of the International Air Travel Association said fuel was responsible for
$US4.8 billion worth of industry losses in 2004. He forecast further losses of $5.5 billion for
2005, assuming an oil price of just $US43 a barrel.

PETER GREGG, CFO QANTAS: Well, it's going to impact on a lot of things. We're going to have to try
and find adjustments in our business to make changes to make ourselves more efficient to bridge
that gap. We are going to have to look at ways in which we can recover some of those higher fuel
costs.

EMMA ALBERICI: Today, Air New Zealand said it would increase the fuel surcharge on its airfares
following the price hike. Qantas is likely to follow suit, according to its chief financial
officer, Peter Gregg.

PETER GREGG: Well, it means a change in the way we do our business. Obviously ticket prices will go
up if the surcharge goes up, but also I think you'll find we have to look at the way we do business
here in Australia.

EMMA ALBERICI: So how seriously did you take the Goldman Sachs report this past week, that prices
are heading to something like $US105 a barrel?

PETER GREGG: Well, you know, certainly you listen to what they have to say but that was from their
equity division. Their commodities division has a different outlook on prices. They think prices
are going to stay high, but whether they get to 100 or not, we think that the market couldn't
sustain that. We'd have a recession globally at those sorts of prices.

EMMA ALBERICI: In the past few days, stock market analysts have downgraded their profit estimates
for Qantas and for Patrick Corporation, which owns Virgin Blue, and is a major shareholder of
Pacific National, the country's biggest private sector rail operator. Fuel represents about 10 per
cent of the company's costs, which they pass on by way of a surcharge to customers.

STEPHEN O'DONNELL, CHIEF EXECUTIVE, PACIFIC NATIONAL: Given the margins in our business, we have no
choice but to pass these on. It's been a program that's been in place for several years now and I
think everybody understands that. So our customers have the opportunity, when they negotiate their
contracts with their customers, to take this surcharge program into account.

GERRY HARVEY, CHAIRMAN, HARVEY NORMAN: I think the oil price has a bigger impact on more people
than an increase in the interest rates.

EMMA ALBERICI: If anyone has reason to fear the impact of rising fuel prices on household budget,
it's Gerry Harvey, whose furniture, electrical and computer stores are already reporting fewer
shoppers. A sluggish report on retail sales this week came just days after the Goldman Sachs oil
report.

GERRY HARVEY: If it goes up as much as they're predicting, it will certainly have an effect on our
sales.

EMMA ALBERICI: The effect of rising oil prices is taken out of the official inflation statistics.
Economists judge their impact on the country in isolation.

RICHARD GIBB: Rising oil prices generally tax growth, so they basically result in a lower growth
outcome, a lower level of activity than would otherwise be the case.

DAVID THURTELL: Higher oil prices, I believe, have already led to a global slowdown. Econometric
studies show that $10 a barrel extra on oil price knocks something like 0.4 or 0.5 per cent of GDP
growth in the world, and there's evidence that growth has slowed in countries like Japan and Europe
in the last six to 12 months, on the back of these higher oil prices. So, yeah, it's already
actually having an impact.

EMMA ALBERICI: On Monday, OPEC agreed to increase production by 500,000 barrels a day if prices
remain high. It already lifted global supplies by 500,000 barrels last month. The non-OPEC nations
are thought to be producing about as much as they can. Experts say prices will only fall after a
sustained period of high prices sparks a change in consumer and country behaviour.

DAVID THURTELL: I guess, too, part of the pressure that you're starting to see is towards alternate
fuel technologies. The Bush administration in recent weeks has started to talk about looking at
hydrogen cars. So these high prices push people towards trying to find more oil, but also trying to
find alternate technologies.

KERRY O'BRIEN: Finance editor, Emma Alberici.