Will Soaring Oil Prices Kill Our Recovery?

Max Bowden's BusinessSense: Will Soaring Oil Prices Kill Our Recovery?

There have been some interesting developments on the business
costs front in the past few days, none of them good.

Proving the adage Govts give with one hand and take with the
other, the Govt announced it will spend billions on roads over
the next few years - but it will recover the cost by boosting the
price of fuel, and road user charges.

Also proving the point - the price of oil is starting to hurt
business, but the high dollar, which is also hurting business, is
making the pain of higher oil (and other input prices) bearable.

The reality is business does not need any further cost increases
at this stage of the recovery. The natural cost of living, the
steady rise in wage levels, the drip feeding of increases across
the board made worse by a high dollar eroding returns are
disturbing signs.

But business will have to to batten down the hatches and prepare
for a burst of inflation - things are set to get worse before
they get better, and oil prices could be the straw which
puts an unhealthy bend in the country's economic backbone

NZ Transport Intelligence Business Week
www.nztransport-logistics.co.nz outlines the thinking on oil.

....Article continues below

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"Prepare For Higher Oil Costs

Businesses need to brace themselves for further fuel price hikes,
is the message from the economic team at Goldman Sachs &
Partners NZ.

Their point comes after recent Consumer Price Index figures for
the second quarter showed transport costs, and specifically fuel
price hikes, were the biggest contributor to inflation pressures
in the period, gaining 2.7% in the three months ending June 30.

This outstripped the headline inflation rate of 1% in the quarter,
and shows no sign of letting up any time soon.

Goldman Sachs is predicting the oil price will hit $US140 a barrel
by the end of next year, as political turmoil in the Middle East and
diminishing reserves put increasing pressure on prices at the pump.

Philip Borkin, an economist at the investment bank says “it’s really
a theme the world needs to get used to, tighter supply and higher
prices.”

The strength of the NZ dollar, which is trading near record high
levels, has cushioned the local economy from the full impact of this
to some degree, but Borkin says local prices are still set to go up as
refinery margins climb and supply side pressures outstrip the currency
gains.

What’s more, once the recovery of the US economy starts to gain
traction, the cost advantages provided by the high currency will
start to erode."

There is a lot to think about for businesses under pressure.

Optimism among business leaders is rising, almost as economic
indicators go the opposite way.

It will be vital for businesses to hold their nerve in the coming
months as costs start to rise. Hopefully the Govt and the Reserve
Bank will be allies in this.

Max Bowden
Publisher/Editor In Chief
NZ Transport Intelligence Business Week

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