Rising fuel prices hit economy but LNG, coal exports 'soften the blow'


October 29, 2018 12:35:26

Surging oil prices over the past couple of years may have caused pain for motorists, but the effect on Australia’s economy overall is not as negative as it used to be, according to analysis by HSBC.

The bank’s chief economist Paul Bloxham has examined the pros and cons of rising oil prices, and found that the balance between the two is much closer than it was, even in the recent past.

Mr Bloxham said that is because Australia has become a net energy exporter, thanks to the large LNG export terminals that have sprung up across the nation’s northern coastline.

“When the oil price goes up, we get the drag from the rise in petrol prices in the household sector but, at the same time, we’re getting more income from the rest of the world for all of the LNG exports that we push out the door,” Mr Bloxham told ABC News.

“It’s probably still the case that, overall, a rise in oil prices is a little bit of a drag on growth in Australia … but it’s certainly closer to neutral than it used to be.”

Rising fuel prices cost households $10b a year

Automotive fuel makes up about 3 per cent of household spending and becasue its price is very volatile, it can account for a significant proportion of changes in living costs.

Since the last oil price trough in early 2016, crude prices have roughly doubled in Australian dollar terms, while petrol prices are up by about a third.

HSBC estimates that this increase is costing households a little more than $10 billion annually, which equals less money they have to spend elsewhere in the economy.

Mr Bloxham said that the rise in fuel costs over the past three months would likely add close to 1 percentage point to the annual consumer price index (CPI) increase, which is only running at about 2 per cent — meaning fuel will account for about half the inflation in the Australian economy.

Rising fuel prices also increase transport costs in the economy, some of which will be passed through to end consumers.

However, improvements in fuel efficiency and a transition towards a more services-based economy mean fuel is now a smaller proportion of household spending than it used to be, and that the economy also uses less oil per unit of economic activity.

Australia benefits from big energy exports

At the same time as Australia’s economy consumes relatively less oil, export earnings have become relatively more dependent on coal and gas, both of which tend to move in the same direction as oil prices.

“Thermal coal prices do tend to track in broadly the same direction as oil prices,” HSBC’s report noted.

“Even more important, the price received for natural gas sold on long-term contracts (comprising the vast majority of Australia’s gas exports) is directly linked to oil prices.

“This is typical for gas contracts in the Asian region, and even though the market is slowly moving to more spot sales and less contracting, spot prices also show a strong relationship to oil prices.”

As it turns out, coal prices have recently risen even more strongly than oil, due in large part to Chinese production cuts.

However, HSBC said it is widely assumed that only 20 per cent of the coal and gas export earnings remain in Australia through tax revenue or domestic shareholder earnings, meaning that Australia still loses out slightly from rising global energy costs.





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