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The fuel crisis in perspective

By Ben Rees - posted Wednesday, 9 November 2005

Between 1971 and 1989, the productive sector of the Australian economy experienced four major external shocks. Two of these were oil crises in 1973-74 and 1979-80 when severe domestic economic dislocation followed. In fact the period became know as one of stagflation comprising high inflation and unemployment accompanied by low economic growth. Over the 18 years, economic growth averaged 3.2 per cent, unemployment 6.1 per cent, and inflation 9.5 per cent.

Currently, the real sector (productive sector) is facing a third oil crisis. Many in the media and industry have expressed concern over this development. In this article, an attempt is made to draw parallels from the previous two oil crises and point to any implications that might emerge.

From the table below, it can be seen that impacts of the two earlier crises were very different. The whole period, 1972-1989, was one of extraordinary energy price volatility. Petrol prices began to rise in 1974 and this continued almost unabated through to 1981. The highest rate of increase was in the three years 1978-81. Diesel on the other hand began to escalate from 1975 through to 1981. The years 1978 to1981 were again exceptional with highest diesel price increase of 48.9 per cent in 1980. The point that emerges is that more than one year of price escalation is required for severe economic dislocation to occur.


Unemployment &% Change in Energy Prices and CPI

The two previous periods exhibited different patterns of behavior. As energy prices surged in 1974-75, inflation rapidly escalated while unemployment rose marginally relative to contemporary experience. In the 1979-80 crisis both unemployment and inflation remained relatively stable at levels considered at the time historically high. For example, in his 1979 Boyer Lectures, Bob Hawke considered the nation to be facing a crisis of unemployment. The fact we are now repeatedly told that 5 per cent is a tight labour market shows how values and attitudes have changed in past two decades.

Over the 12 months 1978-79, diesel rose by 23.6 per cent while petrol increased by 32.4 per cent. This positions the economy in sympathy with the early 1979-80 experience. In 1979, unemployment stood at 6.3 per cent. It is currently just over 5 per cent. A high percentage of the part-time employed seek more work (around 70 per cent) therefore underemployment represents a considerable proportion of inadequate income in the community. Further, enterprise bargaining has produce a phenomena known as an army of working poor. In other words, the underlying economy is far more fragile now than it was in the early stages of the two former experiences. It now depends upon how protracted the current fuel crisis proves to be, and its level of volatility.

It is important to remember that more than one year of escalating energy prices is required for severe economic dislocation. Nonetheless, there are serious issues in the community that make this energy crisis potentially more serious than the earlier two. Historically high levels of indebtedness by individuals and business; margins thin from forced international competition; high unemployment; underemployment; working poor;, and protracted drought across a large area of eastern Australia make this current energy crisis an apothecary's nightmare for economic management.

For the rural sector industry leaders should be concerned with increased domestic transport costs for inputs and delivery of output to markets. The reorganisation of the transport industry by closure of rural rail services will compound costs through increased dependence upon low capacity road haulage over long distances to service inland farming and grazing industries. This will be felt in particular by the beef industry reorganisation of processing works and feedlots relative to breeding and fattening areas. Vegetation management laws, already under criticism by the Productivity Commission as a significant impediment to farmer efficiency, must now come into sharp focus. Rural Queensland in particular will not handle at all well a repeat performance of the 1970's.

Input costs rise as energy prices feed through the system. Not only do energy prices rise on the farm, but so also do fertiliser and other inputs. Industries heavily dependent upon export markets become particularly vulnerable. Shipping costs to international markets rise. Inflation is not restricted to Australia so overseas consumer demand is also affected. This feeds back to the value of the Australian currency so a vicious cycle becomes established.


Under a pervasive international energy crisis, competitive international devaluations tend to negate any favourable currency movements of a particular country. The emphasis upon international exposure of Australian industry over the past two decades will mean that impacts of an energy crisis will fall disproportionately across industries, communities and farmers.

The role of monetary policy will be critical. In the 1973-74 crises, monetary policy lay in the hands of the treasurer. He set monetary policy to support fiscal policy and external policy under a fixed exchange rate regime. The supply of money was managed according to perceived need. Except for a severe contraction in 1974, monetary policy was largely expansionary and contributed to the inflation outcome. The 90-day bank bill rate rose from 6.4 per cent in 1973 to 8.8 per cent in 1974-75. The Whitlam Government lost office in 1975. They began as Keynesian demand management adherents but lost their way during the economic crisis of the 1970's to finish up mild monetarists.

The Fraser Government was monetarist. Treasurer Phillip Lynch introduced monetary targets in March 1976. Monetary targets remained under Treasurer Howard until their electoral defeat in 1983. The 90-day bank bill rate peaked during Howard's years at 18.75 per cent in 1982. It was their tight rein on monetary growth that held inflation relatively stable through the second crisis and fueled interest rates. Unemployment finally exploded in 1983. Something had to give finally. Like a good politician, Treasurer Howard, blamed trade union cartels and protected uncompetitive Australian industry (Budget papers 1982-83).

Howard is again at the helm in the current crisis. Howard can be identified with the British monetarist school of the 1970's. This school believed that inflation is a macroeconomic phenomenon while unemployment is of microeconomic origin. To lower the number of unemployed labour market flexibility is imperative. This thesis has its origins in Professor Pigou's theory of employment (1920's). Pigou contended that if flexible labour markets functioned properly, the price of labour adjusts automatically to eliminate unemployment. However labour market flexibility is presented, its underlying function is to ensure that a flexible price system adjusts demand to equal available supply

Monetarists target either the money supply or prices. The Reserve Bank was given independence to fight inflation in 1996. The brief of the RBA is inflation (prices), so it will seek to hold inflation at an acceptable level. Policy stance will depend on how long the current oil crisis persists and the level of inflation emerging. If this crisis is short-lived and allowed to feed through the system, then a one off situation of a short period of managed inflation can be accommodated. However, if the crisis repeats the protracted and volatile experience of the 1970's, then inappropriate monetarist policies will compound the dislocation.

Clearly there are some major issues facing Australia in the current oil crisis, particularly in rural Australia. The 2005 economy is more fragile that in either of the past two crises. Sound economic management has never been more critical. The current administration came to office in 1996 with economic recovery from the severe dislocation of 1989-90 well underway. Since 1989-90, there has been no major international dislocation that has impacted upon the productive sector of the economy for any protracted period and the commodities boom has lulled people into a false sense of security. If the current oil crisis persists, this smugness will surely be tested. Rural industry leaders need to be discussing more than an ethanol solution some years down the track. The implication of this approach once again demonstrates how out of touch with reality rural agro-politics has become.

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About the Author

Ben Rees is both a farmer and a research economist. He has been a contributor to QUT research projects such as Rebuilding Rural Australia. Over the years he has been keynote and guest speaker at national and local rural meetings and conferences. Ben also participated in a 2004 Monash Farm Forum.

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