As we wait to see what Saudi Arabia’s ‘Day of Rage’ will bring and if it will send oil prices into the stratosphere, some economists, including our Reserve Bank Governor, are trying to pretend we’re not in the midst of an oil shock and there is no threat to the economy. They’re dead wrong.
Alan Bollard has shown he has his head firmly in the sand:
“MPs questioned Dr Bollard about the impact of oil price rises, and he said the Reserve Bank was watching the situation closely although it did not think there was a long term problem.”
Oh dear. This is the same mindset that prevailed during the last oil shock. You know, the one that was only three years ago. I can just imagine Bollard’s thinking ‘Hmm. The cost of the energy source that powers our entire transport system and provides 40% of humanity’s energy demand keeps on leaping to economy-crippling prices due to stagnant or falling supply. This is all in line with modeling that has been around for decades, which predicts a cycle of deep recessions separated by only brief interludes of anemic growth. Could this be a long-term problem? Nah.’
Finance Minister Bill English, on the other hand, seems to get that there’s a problem, it’s just he won’t do anything about it:
Gareth Hughes: Does he agree with analysts at Morgan Stanley who say that sharp increases in global oil prices pose the biggest threat to the global economy and that the last five major recessions followed oil price shocks?
Hon BILL ENGLISH: I think we are all concerned about the impact of a sharp rise in oil prices, in terms of both the pressure it could put on households and the way it takes more resources from our economy to keep petrol and diesel running. However, we are resilient. The latest spike is not yet as big a spike as the one experienced in 2008. We have plenty to do to get this economy in better order, but we cannot actually influence the oil prices.
Gareth Hughes: Does he expect—as many commentators expect—that the next decade will see continuing oil price spikes?
Hon BILL ENGLISH: It is possible. That is why, if we are to expect continued instability in oil prices, we need a resilient economy that is able to adapt quickly both in a straight economic sense and in terms of how people live their lives.
Gareth Hughes: Why does New Zealand not have a strategy to reduce our current vulnerability to higher oil prices, as many other countries do?
Hon BILL ENGLISH: People are pretty sensible. When they see prices going up, they start thinking about whether they want to continue with their energy-intensive business or lifestyle. As it happens, over the years New Zealand, as I understand it, has become less energy-intensive in its production, which is a trend that will probably continue if oil prices keep going up.
Gareth Hughes: How is spending $10 billion on new motorways reducing our vulnerability to higher oil prices?
Hon BILL ENGLISH: Spending on the motorways creates a more efficient traffic system whereby commuters get better value out of what they invest in their cars, bus fares, and petrol. We are keen to make sure we finish the current roading infrastructure investment because, despite the earthquake, it is important for New Zealand’s long-term productivity and standard of living.
Bill’s smart enough to see the problem. He’s just not quite at the point where he thinks he ought to stop being part of it and start being part of the solution.
Internationally, economists are starting to acknowledge that the last oil shock caused the last recession. But they’re drawing the wrong lesson. Oil hit $147 US a barrel last time, they say, therefore we don’t have to worry until oil gets up around $150 again.
Actually, oil only touched $147 briefly during one day. The world was driven into recession by lower oil prices than that – around $100 a barrel in the first half of 2008. We’re already at that price again.
Think of the oil price like the brakes on your car. $150 a barrel oil would be like chucking on the handbrake – it would bring you to a screeching halt but it’s not the only way to stop. The high and rising oil prices we’ve experienced for the last two years are like pressing on the brake pedal while trying to accelerate, no wonder the ‘recovery’ was so pathetic. With oil now over $100 a barrel again, we’re paying near-record prices for petrol and it’s like the brake pedal is all the way to the ground.
The world economy simply can’t grow with energy this expensive. If $100 oil was enough to send the world into recession last time, it will only be easier this time with economies already so weak. By December, 6 OECD countries had already started to slip into recession, including us. And that was before the oil price shock really took.
Last March, 4% of world daily GDP was going on getting enough oil, today it’s 5.5% to get the same amount of the stuff. Every time oil has consumed over 5% of world GDP, currently $100 a barrel, there has been a recession.
There’s plenty we can do, like stop spending $10 billion on new highways when traffic is falling. But we need our leaders to stop turning a blind eye to the problem and commit to action.