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Wednesday, 12 February 1986
Page: 183

Senator GARETH EVANS (Minister for Resources and Energy)(3.34) —It was to be expected that there would be just a little opportunism in the air this week on the subject of oil prices. But, as always, the sheer shamelessness of the line being advanced by the Opposition today through Senator Durack really is a little breathtaking. A little extra time will have to be put into the confessional this weekend, I think, after that particular speech from Senator Durack. The Government's position, by comparison with the Opposition's, which I will describe in a few moments, is absolutely straightforward and absolutely honest. What we have said and what I will be saying again today is simply this, and let me spell out the relevant propositions step by step eschewing the flights of rhetoric, or attempted rhetoric, with which Senator Durack burdened his contribution to this debate.

The first point to make is that there has been a collapse in the world price of oil over the last month, the direction of which was certainly widely anticipated, as Senator Durack said, but the magnitude and timing of which has taken everyone-not everyone, because it seems that Senator Durack was party to a different perception; but everyone else-really quite by surprise. I am glad to know that Senator Durack had this perception as to precisely where oil prices would end up. I would be indebted if he would point me to one occasion when he communicated that perception on the public record to anybody else because I am not aware of any occasion when he made such a prediction as to the order of magnitude of the particular drop, and the speed and suddenness of that drop, that has occurred.

The reasons for it are pretty evident in terms of the reaction by the Saudis, the decision that they made to increase their production for reasons of their own, the way in which that has been unaccompanied by any escalation of demand around the world, and the way in which, so far from encouraging other producers to reduce the level of production, on the contrary, there has been such a scramble to maintain market shares that there has been no sign of that cutback in production, and the world is awash with oil and prices have been responding accordingly.

The second point to make is that the market is presently in an extremely volatile situation. Nobody, I think, can predict or is predicting with any great confidence at the moment whether prices in the next few days and weeks will go up or down or sideways. It may be that they will settle out at around $US20 as compared with the present $US17 or $US18, and as also compared with the $US28 to $US30 that we were experiencing late last year. But nobody can guarantee and nobody can plan on the assumption that this will in fact be the case.

This situation that I have described has produced very substantial problems for governments all around the world and especially governments of oil producing nations which depend, in some cases solely, in other cases significantly, on oil for both balance of payments and budgetary stability. It is not only, however, a matter of the producer nations having problems in this respect. Very real problems for the world banking and financial systems flow from the possibility, indeed probability if the present price situation is maintained, of very great difficulties being experienced by Mexico and a number of other countries with very large debts in this respect. Although there are compensating advantages for the export manufacturing countries, there are very real problems and a great many people appreciate that that is so. The Australian Government, in common with governments everywhere else in the world, is wrestling with those problems and a proper response to them at the moment. We hope, as the Prime Minister (Mr Hawke) indicated earlier in the week, to make a decision or at least to be close to making a decision before the end of this week.

In wrestling with the problem, as the Government is now doing, we are acutely conscious of all the different factors that need to be taken into account in formulating a final decision. Those factors include the implications of a price drop so far as producers are concerned for the future of oil exploration. They require attention to be paid to the implications of a price drop, domestically and overseas, for other energy commodities, including, in particular, coal. They include obviously attention having to be paid to the implications for government revenue and our overall macroeconomic management. Those considerations certainly, however, include pre-eminently among them the desirability-in the interests of farmers, of industry, including the industrial consumers of petrochemical feed stock that were mentioned at Question Time today, and consumers generally, and the implications, of course, for the consumer price index as a whole and the macroeconomic management that is associated with that-of passing on as much as possible of the decline in crude prices, and that is very much present to our mind.

Australian prices are not at the moment high by international standards. Australia has, along with the United States and Canada, the lowest petrol prices in the industrialised world. The reason for that is that we have the lowest levels of product taxation at the pump. It is in that sense, by a reference to international comparisons, that the point can obviously be made that in international terms the situation so far as consumers could be concerned and so far as taxation is concerned could be very much more burdensome. But there is no doubt that the question of petroleum prices represents a very significant proportion of domestic household outlays. It is a particular burden for particular sectors of the community, not least in rural and provincial areas, and a price drop would make a significant contribution to improving the overall inflationary situation as well as, of course, as a result of that, helping to improve what is very important for the health of the Australian economy, our international competitiveness.

It is for all those reasons-because we fully appreciate the nature of those points that can be made, and be made very much better in fact than they were made today by Senator Durack-that it is our very strong wish that prices be kept down as low as possible. But the extent to which it is possible for any responsible government charged not just with the task of speech making but actually governing the community responsibly and well-the problem of balancing out those considerations-is what we are wrestling with this week. There is not doubt, and it has to be understood, that the budgetary implications of the present developments that we are witnessing are absolutely huge and very much greater than have flown from any previous downward adjustment during the life of the import parity pricing system in this country.

The Government has been willing, notwithstanding Senator Durack's implications to the contrary, to lower the import parity price if either exchange rate movements or the world price of crude have in fact justified that. There have been 10 occasions since we came into office in early 1983 when the import parity price has been adjusted. On four of those occasions there was, indeed, a price increase. On one occasion there was no change but five occasions there was actually a drop in the import parity price and a drop in petrol prices in the hand of the consumers. That point is ignored in every contribution that has been made in this debate or in this argument so far. We have moved down as well as up with a parity price system in the past. There has been talk of an increase of 10c in the price of petrol over the life of this Government, nominally, yes, but in real terms the increase in petrol prices over the whole of the last three and a bit years has been only 2c. I think that ought to be understood when some of the more extravagant claims that we have heard today are again being bruited about.

What we are talking about today, this week and this last month are potential changes to the import parity price which are of a very much greater order of magnitude than any of the changes up or down that have been in issue in the past. This is what makes this situation that we now confront so very different and so very much more difficult for any government of any colour to handle. As I said in Question Time yesterday, on the working assumptions of a petrol price of $US18 and a 70c exchange rate, what we are talking about is a revenue loss in the remainder of this financial year of $550m and $1.4 billion in the next financial year, 1986-87. Ignoring for the moment any other possible change in the exchange rate which could make the sums larger still, if the price of petrol fell, as is perfectly conceivable, to $US15 we would be talking about a $1.8 billion budgetary implication in a full year. If the price fell to $US10 we would be talking about a budgetary loss of $2.5 billion.

Changes of that kind simply cannot be accommodated overnight. No government can tear apart the fabric of its outlays and make adjustments on this scale. Of every dollar of revenue lost that we are talking about, it has to be appreciated that 28c of that dollar would have been spent on social security and welfare, 10c of that dollar would have been spent on defence, 10c of that dollar would have been spent on health, 7c on education and another 20c on payments to the States, which again very largely flow through to ordinary citizens in the form of a whole miscellany of services. This is what we are talking about when one talks about revenue losses translated through into Budget cuts of the order of magnitude that we are contemplating in this debate today. Of every dollar of revenue lost one is talking about 28c alone coming off pensions, social security and all the other cuts that I have just talked about. No government has the flexibility to accommodate an assault on government outlays of this scale, at least in the kind of time frame that is being urged upon us.

The alternative to cutting outlays on that sort of scale and with those sorts of implications, with all the horrendous implications for very important areas of government expenditure, is to let the deficit blow out by that sort of order of magnitude, with all the horrendous macro-economic consequences that flow from that in terms of interest rate pressures, exchange rate pressures and, through that, pressures back on inflation. At the end of the day, bearing those various considerations in mind, the question for this Government, as it would be for any responsible government, is how far can we go in accommodating our very genuine desire, and certainly the desire of large sections of the community, for very obvious and worthy reasons, to pass on to consumers the benefits of the drop in the current world market price of crude. Can we afford to cut this year's and next year's Budget apart to do it at the expense, as I have indicated, of health, welfare, defence, education and all the other programs that that involves or can we afford alternatively to let the deficit blow out to the extent necessary to accommodate the sorts of sums that we are here talking about?

One of the numerous difficulties with the motion before us today is that it simply acknowledges none of these difficulties. It simply asserts that there is only one possible and appropriate and responsible course, and that is to pass on the full amount of any price cuts that might flow from the world market price, deteriorating as it has, whatever those cuts are, whatever their order of magnitude and whatever the cost to the national budget and the national accounts as a whole. We might have been able to accommodate a motion had it been cast in terms not of passing on the full benefit of the drop in world oil prices but had there been a reference to passing on some appropriate benefit from the drop in world oil prices. But the absolutist way in which this motion has been cast, coming as it does at a time when the Government has not had a full and final opportunity to weigh and balance all these different factors that I mentioned, means that the Government has no alternative but to vote against it.

I hope that the reason for voting against the motion is understood. It is not that we are unsympathetic to the need to pass on as much as possible of the price drop that is implied by the world market price; it is just that we cannot possibly go so far as to commit ourselves at this stage, weighing as we are all the relevant arguments, in the absolute terms that this motion demands. In approaching the problem this way, fairly calmly I hope, the Government has not been helped, nor has, I think, the community been helped, by the strident politicking we have heard from the Opposition. Its performance, repeated again by Senator Durack today, has been, as I described it, a shameless one.

Let me explain why. In the first place, it has been a performance which has been quite shameless in its opportunism. All last year, despite what Senator Durack said a few minutes ago, the Opposition was decrying the import parity pricing system. It was arguing that we ought to abandon that system in favour of a free market for crude oil, and the assumption underlying that particular argument was that to abandon the import parity pricing system would be to produce cheaper oil in this country than would be the case by the operation of that particular system. The argument was that we should sever the link with world oil prices, ignore world oil price movements, and let things sort themselves out domestically to the possible advantage, although that was never demonstrated, of the consumer.

With the implications of world prices running the other way, the Opposition has scrambled to attach itself to the coat tails of that movement in world prices. Watching that scramble has been a most unedifying spectacle, including the way Senator Chaney and Senator Durack have flip-flopped and behaved in a way which has been nakedly opportunistic.

The other bit of shamelessness in the Opposition's performance has been its ignoring of its role when previously in government in creating the very reliance on oil and petroleum revenue which is at the essence of the Government's present budgetary problem. The Treasurer (Mr Keating) said yesterday that John Howard, increased oil revenue by 700 per cent between 1977-78 and 1982-83. John Howard came to office when crude oil and liquefied petroleum gas excise constituted 1.4 per cent of government revenue. He left office having taken the proportion of oil taxation up to 9 per cent of total taxation revenue, a situation which the Australian Labor Party has sought to reverse with long term scenarios in mind of a reduced capacity to derive revenue from oil. We have reduced the reliance on oil taxation to 6.8 per cent of total revenue.

John Howard increased oil revenue by 700 per cent during his term in office and increased the proportion of that revenue as a proportion of total taxation from 1.4 per cent to 9 per cent. This is the man who is leading the party which has the shamelessness to argue that we are somehow behaving inappropriately and irresponsibly in thinking twice about the implications of the situation in which we find ourselves. We criticised the then Government at the time. That criticism of the way it went about the task of accumulating that taxation stands. It was taxation by stealth.

The then Government made the arguably very necessary transition from low cost to high cost domestic crude. It made that transition too fast and in a way which flowed straight through into a very considerable inflationary burden on the economy. I notice, Mr Acting Deputy President, that you are nodding at that statement because you, presumably alone among your colleagues at the time, were alert to that consequence. The Fraser Government spent irresponsibly on massive white elephant public works and pork- barrelling projects on the kind of magic pudding assumption, which was subsequently unrealised, that oil revenue would continue to increase at the rate that it was being poured into the then Government's coffers. Because of that lack of discipline which was associated with the previous Government's approach to oil taxation, when the magic pudding dried up the Government's budgetary problems were resolved by way of having a massive deficit, which blew out to $9.6 billion by the time we inherited office.

We inherited an economy and a system of national accounts which still has a very substantial reliance on oil and petroleum revenue, although we have been doing our best to reduce that reliance because we understand the long term dynamics of this for the Australian economy. However, we cannot turn that reliance around overnight. It would be irresponsible to try to do so in the way we are being urged. But because we recognise the other side of the coin to this argument-the desirability of lower inflation, a lower consumer price index and a lower burden on consumers-we will try to maximise the extent to which that price drop is passed on. But we will not be stampeded by the opportunism and grandstanding of the Opposition into supporting the proposition now before us in the absolute form in which it is expressed.