Everyone’s panicking about the falling oil price. Should we panic too?

The price of oil has fallen an amazing amount in a short time.

Brent
Source: Nasdaq

Which is sending global markets into a bit of a panic.

oil hurts shares
Source: AFR

But is this really the moment where the Australian economy comes crashing down?

Lower petrol prices are already a reality, which has the same effect for many households as a reduction in interest rates – more money in their pocket.

Source: Australian Institute of Petroleum
Source: Australian Institute of Petroleum

Since this graph was made a week ago, retail prices have fallen even further, to 2005-era levels of $1.20/L. The median household spends $40 a week on petrol, so a 25 per cent fall gives them $10 extra to spend on other things.

This is a real boost to the Australian economy at a time when it really needs it.

And our major trading partner, China, is in the same boat. It is an oil importer and it is apparently stockpiling fast during this period of low prices. Like Australia, China is trying to get growth to continue without causing a surge in inflation. The oil price drop just made this a lot easier.

If lower oil prices perk up the Australian consumer just as a lower dollar makes life easier for Australian business, and China is able to continue to grow strongly, that represents just about a best-case scenario for the Australian economy.

But it’s worth remembering: What goes down can go back up.

crude history
Source: Bloomberg

If consumers in China and Australia re-set their oil price expectations, and then the price of oil goes back up, it will feel like an interest rate hike – at the worst possible time. In that scenario, with Australian consumer confidence falling as China suffers a blow to growth, anything could happen.

Published by

thomasthethinkengine

Thomas the Think Engine is the blog of a trained economist. It comes to you from Melbourne Australia.

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