No Time For Complacency Over Falling Oil Prices
October 23rd, 2008
It is very easy to get lulled into a false sense of security with oil prices apparently in free fall at present. The price of oil has tumbled almost 50% since July due to a combination of speculators initially deserting commodities in favour of sharemarkets and a fall in demand as key oil consuming economies such as the US head into a credit crisis-fuelled recession. However, markets generally work within and react to short term influences not long term trends.
Day Of Reckoning Soon. The shortcoming of markets in telegraphing long term trends has been highlighted by a group of engineers lead by North Shore-based Archer Davis. He is warning the current steep fall in oil prices is unlikely to be sustained and in fact will quickly reverse as the point at which global demand exceeds supply draws nearer possibly as soon as 2012. If this prediction, based on long term data trends from the International Energy Agency, comes to pass, NZ’s economy will be in big trouble with a possible economic contraction of 12% and the transport sector will be one of the hardest hit.
Oil Dependency Hurts. Whether or not such dire predictions come true, the fact remains NZ has had to spend probably at least $5bn more on imported oil over the last three to four years compared with the previous four year period. This is due to our dependence on high cost imported oil most of which is consumed by the transport sector. There will be future price spikes for sure as this is the nature of markets. If we don’t take heed of the lessons from our recent past in terms of reducing our dependency on imported oil especially in the transport sector, there will be more economic pain in the future. Spending 80% of the money allocated to transport on roading over the next 10 years certainly isn’t the smart way ahead.
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