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High oil price threatens economy -

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High oil price threatens economy

Reporter: Tim Lester

KERRY O'BRIEN: A recurring question has taken on new urgency in recent weeks - how far can oil
prices climb before the world's economies, Australia included, begin to buckle under the stress?

Crude oil touched new record highs in Asian trade today - at $US55 a barrel, almost three times as
expensive as it's been for most of the past 15 years.

Historically high oil prices have tended to tip the world into recession in the past and already
we're paying for this latest price surge in ways well beyond the petrol pump.

So, is oil going to spoil Australia's economic party this time?

Business and economics editor Tim Lester reports.

STUART RUSHTON, ROYAL VICTORIAN AERO CLUB: As fuel goes up, you tend to sit there and look at it
and say, "Is it going to be just a spike or is it going to continue?"

TIM LESTER: Stuart Rushton sees how high world oil prices hurt in ways well beyond our service

You can forgive the Royal Victorian Aero Club President for wincing every time he hears a Cessna's
engine turn.

STUART RUSHTON: It's the sound of $50 notes being munched up.

Simple as that.

TIM LESTER: Victoria's leading trainer of private pilots, the club is about to announce its second
flight price rise in three months as it chases soaring fuel costs.

STUART RUSHTON: Aeroplanes are an expensive thing to run and to maintain, but fuel's a major part
of it.

If you look at our aircraft here, $130 an hour for a four-seater aeroplane.

$35 of that is fuel.

DAVID HUTTNER, VIRGIN BLUE: Even the smallest increase does have a negative impact.

TIM LESTER: The major airlines are moving to shield themselves.

This week, Virgin Blue is weighing up an increase to its $10-per-flight domestic and $20
international fuel levy.

DAVID HUTTNER: We're trying to make sure that we do offset the cost as best we can, but we also to
be aware that any move or increase in fuel prices does impact upon demand, so we're trying to
balance those two factors as best we can.

TIM LESTER: On Wednesday, Qantas will lift its fuel surcharge to $12 per domestic sector and $29

One analyst described the levy increase as largely unnecessary because Qantas is hedged against oil
price rises.

The airline's chief financial officer has called that malicious and stupid.

He says even with hedging and its surcharge, Qantas faces almost $200 million in above-budget fuel
costs from the last year.

Our airlines and any number of other fuel-reliant businesses are just hoping oil prices will
quickly head back to normal.

DAVID HUTTNER: Certainly, if they do drop, we'll be handing those savings back to the customer as
soon as possible.

GERARD MINACK, CHIEF EQUITY STRATEGIST, ABN AMRO: We've seen oil just about touch $55 a barrel.

I think we're much more likely to see it touch $60 before we see it go back to $40.

TIM LESTER: Even then, ABN AMRO strategist Gerard Minack believes the days of the $20 barrel are
gone for good.

GERARD MINACK: We will be in a new, higher trading range than what we saw through most of the
1990s, so people will have to learn to live with higher oil prices.

particularly in China and the rest of Asia, that it's hard to see oil coming much below $30 in the
foreseeable future.

TIM LESTER: The Commonwealth Bank's David Thurtell argues oil producers aren't about to let the
price come back to the levels we've grown used to.

DAVID THURTELL: If oil does start to come down into the mid- to high-30s in the next year or so,
what you will see is that countries like Saudi Arabia and other OPEC members will cut production
back fairly significantly to levels that they're still quite comfortable with in order to keep oil
stocks very, very low and therefore keep oil prices on the high side.

STUART RUSHTON: Raw material prices have gone absolutely through the roof.

TIM LESTER: Apart from his interest in aviation fuel, Stuart Rushton has just sold his Melbourne
plastic bottle factory.

Fifteen million bottles a year made from a by-product of the oil refining process.

GREG DITTON, PLASTICS MANUFACTURER: It's been a bit of a rude awakening for us, a real hot
introduction into the the plastics industry.

TIM LESTER: The new owners' raw material costs have shot up by 30 per cent.

GREG DITTON: It's amazing that when you sit at home watching television and you see something
happening in Iraq or in Russia and you sort of just scratch your head and think, "This is coming my
way" and it eventually does.

TIM LESTER: Some factors driving oil's extraordinary rise appear short-term - Hurricane Ivan
crippling more than one-quarter of US output from the Gulf of Mexico and problems with Russian oil
giant Yukos.

Others, like China's new-found thirst, changed the picture permanently.

PETER HARRIS, MATERIALS ANALYST, COMMSEC: People have been talking about a hard or soft landing in

We just think China's changing altitude.

We don't think oil prices at the $30-$40 mark will slow China too much.

TIM LESTER: Here's what has happened over the last 35 years to the world's spare oil producing

At a peak in the mid-80s, we could produce about 11 million barrels a day more than we needed.

That margin for change has since plummeted.

We're now burning it all.

DAVID THURTELL: It's very striking and it basically tells us that we're in uncharted territory.

PETER COSTELLO, TREASURER: I think there are a lot of challenges out there, Kerry.

DAVID THURTELL: There just is not enough oil.

TIM LESTER: Last week, the Federal Treasurer told the 7:30 Report high-priced oil is now a big risk
for the Australian economy.

PETER COSTELLO: That could have a very material effect on global growth.

It could have a very material effect on Australian growth.

nominate oil as one of the key risks.

What we've found is that both the temporary and permanent rise have a quite large adverse effect on
OECD economies, that economic growth could be 1.6 per cent - that's the level of real GDP -- could
be 1.6 per cent lower and inflation higher.

TIM LESTER: Andrew Stoeckel says the impact on Australia's and the global economy are worse than
the International Energy Agency's forecast.

DAVID STOECKEL: The level of our GDP in 2007 could be 1.7 per cent lower than otherwise would be
the case.

GERARD MINACK: They may well be the straw that breaks the camel's back.

But the reason the camel's under such stress has to do with other factors not connected to the oil

TIM LESTER: Gerard Minack says oil price rises in the key US market have not hit consumer spending

And the Federal Reserve chairman says it may not be as bad as it looks.

ALAN GREENSPAN, US FEDERAL RESERVE CHAIRMAN: Today, despite its recent surge, the average price of
crude oil in real terms is still only three-fifths of the price peak of February 1981.

STUART RUSHTON: Where does it stop?

And will it ever come down?

At some point in time, you've got to say it's never going to stop and we're going to have to take
that as being our standard cost.