Brent crude has risen in price to US$87 a barrel. Photo / Thinkstock, File
Brent crude has risen in price to US$87 a barrel. Photo / Thinkstock, File
EDITORIAL
Economists are nervously watching oil markets again. Unfortunately, that black sticky stuff that we’re all trying to stop using still underpins the price of almost everything in the global economy.
And it has been on the rise again in recent weeks.
That’s already starting to hit most of usin the pocket as we fill up our cars at the petrol pump.
Commodity prices usually take a few weeks to filter through to consumers so, sadly, local petrol prices are likely headed back above the $3 per litre mark.
Since hitting a post-pandemic low in late June, the barrel price of oil has risen more than 20 per cent on global commodity markets to around US$87 a barrel (for Brent Crude yesterday). Some analysts warn this rally - underpinned by Saudi Arabian efforts to cut supply and push prices up - could send the price to US$100.
Either way, the bounce of the past two months serves as a reminder that the easy gains in the battle against inflation have now largely been made. That would be very bad news for the global fight against inflation, which was finally starting to look like it was won.
Global commodity prices have been falling for more than a year and the inflation we are battling now is largely the domestic variety - the sticky tail-end of a wage-price spiral that was kick-started by global pandemic supply issues.
All things being equal, the path back to controlled inflation in the Goldilocks zone of 1-3 per cent looks clear-cut.
Give or take one more Reserve Bank rate hike and a few points in either direction on the unemployment rate, the economy is widely expected to be back in neutral by this time next year.
But oil’s rise is an ominous reminder that nothing is ever certain.
There are all sorts of geopolitical issues at play that threaten a second wave of global price rises.
Readers of a certain age will recall the economic crisis the world went through in the 1970s and early 1980s - with both inflation and unemployment running high - symptomatic of not one but two global commodity price shocks.
Oil prices spiked sharply in 1973 and again in 1979.
Of course, New Zealand had a few other issues back then; a bloated Government with big fiscal problems, and we’d lost our major trading partner with the UK joining Europe.
The situation now isn’t quite so stark but similar issues lurk below the surface.
Our Crown debt and current account positions are precarious after the three-year battering from the pandemic.
Our major trading partner - now China - faces some economic wobbles, with low growth and deflation which doesn’t bode well for key New Zealand export prices.
Local economists still see a pathway for the Government and Reserve Bank to pull off a soft(ish) landing out of this bumpy economic cycle. But that pathway is narrowing.
Another global spike in oil price inflation would only add to the difficulty of sticking this landing.
