This is the graph of the oil price forecasts Treasury used to underpin its fiscal model for the Budget. It assumes that oil would touch $115 a barrel US in about July this year before easing off to a long-run level of $100 a barrel. That is already up on Treasury’s forecast from November, which had the peak at $90 a barrel and the long-run at $75.
The red dot is where oil prices are today. Literally off the chart.
This has some important implications for the economy. Oil consumption is likely to be lower than forecast meaning less fuel excise revenue for the government but expenditure on oil will be higher, impeding growth, and we will get better prices for our oil exports, bringing more growth and bigger tax revenues. Add in that Fonterra’s milk payouts for this year and next also well above the Treasury’s forcasts and the Budget assumptions are starting to look hopelessly out-of-date only 12 days after they were published.
It also illustrates how hopelessly optimistic government assumptions about oil prices are. Oil prices have been rising ever faster since 1998, are up 30% in the last half-year alone, and show no signs of slowing. But acknowledging we are at peak oil, that the price is not going to drop back to ‘normal’, is simply not something that Treasury can do.