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Thursd ay 22 May 2008

Rising oil price fuels economy fears


MARK COLVIN: The price of oil hit a record-breaking $US130 a barrel overnight.  


In Asian trade today, it edged up to yet another record $US135 a barrel, before easing a bit. 


And its relentless rise is only amplifying predictions among some in the industry of $200 barrel oil in the near future. 


Motorists are always the first to feel it, and more about them shortly, but further down the track, high oil prices have very few benefits to the economy. Petrol prices rise, food prices go up, inflation increases and then rising interest rates set in. 


The big oil producers and refiners, mostly overseas, are the only ones to benefit. 


But even the companies trying to meet demand by exploring for more oil are finding it more and more expensive to drill. 


Brigid Glanville reports  


BRIGID GLANVILLE: To some economists, it seems there is no limit as to how high the price of oil may go. 


Some say $US150 a barrel by the end of the year; others believe more than $US200 a barrel isn't out of the question. 


The record overnight price of $US130 a barrel has already sent petrol prices in Australia soaring, and the pressure is now on the government to act. 


Prime Minister Kevin Rudd: 


KEVIN RUDD: Well there is no silver bullet on petrol, and we've always said there is no silver bullet, and I've looked at what's happened with these price adjustments in Singapore in the last 24 hours, and the flow through impact on the Budget for working families, for working Australians and Australians doing it tough is really big. 


BRIGID GLANVILLE: But there's very little the Government can do to control the price of oil, as its set overseas. 


But the Opposition Leader Brendan Nelson says the government can do to something to control the price of petrol. 


BRENDAN NELSON: We stand for lower petrol prices every day. From now until the next election, every Australian, when you're filling up your car with petrol, need to know that petrol will be five cents a litre cheaper under the Coalition. 


It's very important that Mr Rudd understands it's time to take action and simply watching the price of petrol is not going to bring it down. 


BRIGID GLANVILLE: Consumers are the hardest hit when the oil price rises. 


Along with fuel hikes, the price of food rises as it costs more to produce and transport. 


Scott Haslem is the chief economist with UBS. 


SCOTT HASLEM: Well the economic impacts are quite significant and they're quite varied. Obviously, for the consumer it means more of their disposable dollars are being spent on petrol and therefore they have less money to be spent on other things, so in that sense it's a bit of a drag on the growth story for economies including Australia. 


But also for Australia, we probably do a little bit better than a lot of other economies in the sense that we are actually a net exporter of energy, so there are some offsets for our economy, but clearly, it's a negative for the consumer. 


BRIGID GLANVILLE: Economists like Scott Haslem are now concerned that the higher oil price will cause inflation to stay in dangerous territory above four per cent. 


SCOTT HASLEM: Look, I think it's inevitable if oil prices move, you know, much higher than where we are today, that we are certainly going to see some pass through into some of the other goods that we buy, and I think it seems increasingly likely that inflation is going to be a bit sticky at these sort of levels. 


BRIGID GLANVILLE: Australian Worldwide Exploration is a mid-size oil and gas company. 


It produces oil and explores off the shores of Australia and New Zealand. 


The higher oil price means record profits for companies like AWE.  


Bruce Wood is the managing director of Australian Worldwide Exploration. 


BRUCE WOOD: First one, the obvious benefit, higher prices, higher revenue, higher cash flow. And AWE, in the nine months for our report which we put out after…for the quarter ending March 2008, reported record cash flows, and that's simply fundamentally a function of higher oil prices. 


The second issue is of course is that this drives extra investment into the oil and gas industry. 


BRIGID GLANVILLE: One of the best ways to bring down the price of oil is to increase supply. 


That's up to companies such as AWE to find more oil. 


Bruce Wood says while it can cost more than a hundred million dollars to drill on an off-shore site, the higher price means more companies are now exploring. 


BRUCE WOOD: Certainly our major activities as an operator in New Zealand where we have a very large position across the Taranaki Basin, and in the 2009-10 financial year, we would expect to be drilling between, with our partners there, we would expect to be drilling between five and eight wells altogether, some developments, some appraisal and some exploration. 


BRIGID GLANVILLE: Shareholders were making the most of the higher oil price today. Energy stocks soared today and will no doubt continue to do so as long as the oil price keeps on climbing. 


MARK COLVIN: That's Brigid Glanville.