KEY POINTS:
The two main effects of higher oil prices on the economy are to push up the cost of living and to leave consumers less to spend on other things.
Crude oil costs account for around 40 per cent of the price of petrol at the pump. Petrol in turn is 5.4 per cent of the consumers price index and would represent a similar share of the average consumer's spending.
It depends on the exchange rate but assuming a dollar at US80c, Westpac's economists reckon that if the price of Dubai crude (now US$97.50 a barrel) hit $100 it would push petrol to $1.82 a litre at the pump. A further US$10 a barrel increase would be another 9c a litre.
Higher petrol prices act on consumer spending like a tax. People still fill up their tanks but they have less to spend on other things.
That crowding out effect can be seen in yesterday's figures for retail sales in January. They were $328 million or 6.3 per cent higher than in January last year but nearly half of the increase, $143 million, occurred in petrol stations.
Dearer oil also pushes up the cost of transporting goods around the country. How much effect that has on prices depends on the state of the economy at the time - whether it is easy for firms to pass on higher costs or whether they have to take a hit to their profit margins.
There is an impact on the cost of shipping exports from, and flying tourists to, our shores. It also matters what is driving world oil prices higher.
An interruption in supply, as in the oil shocks of the 1970s, is a bigger problem than if it is driven up by rising demand from booming economies like China.
The latter scenario implies higher demand for other commodities as well, including those which New Zealand exports; the former is just unambiguously bad news.
