Net impact of lower oil prices on Australia is assessed to be neutral

January 18, 2016

Alan Oster, Chief Economist at NAB, suggests that the implications of lower oil prices on Australia are multifaceted, but the net impact is overall assessed to be neutral

Key Quotes

"While recent drops to around USD 30 per barrel may be related to fears of reduced demand – notably in China - it’s worth noting that the Chinese economy (unlike its equity markets) did not fall over in the first few weeks of January. Thus we are still comfortable with the view that China will grow by around 6 ¾% this year. Clearly their economy is not crashing although it might feel like it for Australian commodity producers.

On Australia the outcomes are complicated – but are probably net positive to growth and will result in lower inflation. The latter might also increase the risk of further help via rate cuts. But lower oil prices will be especially punishing on LNG profits – via the link between long term LNG contracts and oil prices. And, via that mechanism, it will provide further substantial headwinds to government revenues.

Two other issues are very important in the Australian case. Firstly, are falling oil prices indicative of further falls in broader commodity prices (i.e. demand driven)? If so the negative impacts via the terms of trade will be much larger. Here it is interesting that, while all commodity prices moved down significantly over the last 12 months or so, it is not so recently – with iron ore prices for example still around $USD 40 per tonne. Secondly will the falls in USD commodity prices be offset by further falls in the AUD?

Our forecasts see AUD falling a touch further in coming months – to around USD 68c before recovering to the low 70c mark latter this year. We also see oil and iron ore at around the USD 40 mark per unit by year end.”

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