Repeat of 1970s oil crisis not expected

Fast rising oil prices are bringing back uneasy memories of the 1970s, but there is optimism a return to the economic darkness can be avoided.

That is despite oil prices near $US94 a barrel overnight, closing in on inflation-adjusted highs hit in early 1980.

Depending on how the adjustment is calculated, $US38 a barrel then would be worth $US96 to $US101 or more today, Associated Press is reporting.

With oil at its current level, even with the US dollar weakening, prices at the pump in New Zealand have risen as high as $1.69 for 91 octane petrol, not too far from the record of $1.77 hit last July.

Energy consultant Richard Hale predicted today the price would stay below $2 a litre in the lead up to Christmas.

"I'll make that call and I may be proved wrong," Mr Hale told Radio New Zealand today.

While his gut feeling was that on fundamentals alone a rise to $2 a litre was unlikely now, factors such as increasing tension in the Middle East were contributing to a "volatile mix in the overall price contribution".

But prices would need to go up by $US30 a barrel in order to get to $2 a litre at the pump, he said.

"I'm sitting here thinking, 'is it going to do that', and I'm a bit doubtful."

ANZ chief economist Cameron Bagrie said that with this country being a net oil importer, rising world crude prices were siphoning money out of New Zealand, counterbalancing the benefits of booming international commodities prices.

On balance, the commodity price story was still good, just not the "exceptional story" it could have been had oil prices not risen so steeply, Mr Bagrie said.

"New Zealand families are getting very good income growth. . . but money is heading out the door pretty quickly."

A combination of rises in petrol prices, rates, electricity, food and mortgages was putting a "big squeeze" on disposable incomes.

While rising petrol prices added to inflation pressure, they also left less money to spend on other areas, which potentially could dampen inflation, he said.

For the moment he suspected the Reserve Bank would be concerned by the former scenario as it sought to keep inflation under control.

The rise in oil prices is a sobering reminder of bad economic times in the 1970s and early 1980s.

Then sharp rises in international oil prices in 1973 and 1974 coincided with falls in prices received for New Zealand exports. The country's position deteriorated even further after the next major shift in oil and commodity prices in 1979 and 1980.

Mr Bagrie said that for there to be a risk of a return to the economic problems of those days oil prices would need to go well beyond $US100 a barrel.

While still high, New Zealand's oil intensity – the amount of oil needed per unit of GDP – was lower than it had been in the 1970s.

Also during the 1970s there had been a global recession but - "touch wood" - the global economy looked solid now, he said.

The rise in oil prices now was partly a reflection of solid demand growth around the world, while in the 1970s oil prices rose as a result of a supply shock.

Still, rising oil prices might not be all bad news, at least in the opinion of former Federal Reserve Board chairman Alan Greenspan.

Speaking at an investment conference in Bermuda, he said the climb in crude prices was "forcing us to break our addiction to oil".

He also suggested the argument that high oil prices were helping restrain global economies, potentially keeping inflation under wraps, "is not an altogether crazy" theory.

NZPA