Cheaper petrol a reminder 2023 inflation is not a 1970s flashback - Liam Dann

Petrol prices will fall in coming days, reflecting cheaper global oil. Photo / 123RF

OPINION

I don’t know if we needed a reminder that the 1970s were 50 years ago. But the Rolling Stones and Martin Scorsese are in fine form this year, Israel is at war and inflation is causing economic stress all around the world.

So perhaps we did.

Thankfully for those fretting that history might be repeating, oil markets have delivered a welcome reminder that the world is a different place in 2023.

There’ll be no oil shock for Christmas - this year at least.

In the 1970s the world’s inflation woes were compounded by two major oil price shocks - in 1973 and 1979.

Last week Opec tried to pull a 1970s-style power play and cut production to boost oil prices. They completely failed.

Oil prices fell sharply. By Friday morning Brent crude was trading at US$74 - its lowest level since June.

We can expect our petrol prices - off about 6 per cent in the past month (according to the Gaspy app) - to follow.

In fact, the Brent crude oil price is down almost 12 per cent since the end of November and 20 per cent since its last peak at the end of September.

That’s going to put some fair winds in the sails of central banks in their fight against inflation.

I suspect most of us didn’t notice the earlier slump this year because we were still worrying about making a down payment on a lettuce.

So what happened? Why are oil prices down and why can’t Opec do anything about it?

Well for starters, America produces significantly more oil than it did in the 1970s. So too do a whole bunch of non-Opec countries, like Canada and Mexico

In 1973 Opec controlled about 55 per cent of global oil supply. Now that figure is less than 30 per cent.

In August, non-Opec producing countries produced 73.3 million barrels of oil a day, or about 73 per cent of the global production.

If you add Russia to Opec (to make Opec+) then the ratio is more like 40 per cent versus 60 per cent for the rest of the world - but still significantly lower than the 70s.

Opec’s historic policy of colluding on supply to manipulate price wouldn’t be considered acceptable if it was strictly subject to World Trade Organisation rules - like we are for dairy - but hey, what can an oil-addicted West do about it.

The point is it didn’t work this time, and that’s quite a big deal. A significant rise in transport costs right now, just as markets are calling victory on the inflation fight, would have been destabilising - not just economically but politically.

So market move in the past week is good news.

The supply side is only half the equation, of course. The demand side is not such great news. The other reason Opec couldn’t shift prices was that markets are betting the global economy will continue to slow next year.

China’s outlook in particular looks very subdued.

On Tuesday, rating agency Moody’s cut its outlook on China’s government credit rating to negative from stable. The move was prompted by lower medium-term economic growth and rising debt.

Moody’s said it expects the country’s annual GDP growth to be 4 per cent in 2024 and 2025. China is battling deflation - consumers aren’t spending and prices are falling.

That is bad news for New Zealand’s exporters, although dairy prices have recently lifted.

Whichever way things go, next year we can take heart in another crucial difference between the economy in the 1970s and now: these days we have monetary policy that works.

And regardless of the tweaks to the mandates that occur with almost every change of Government, both major parties are committed to the basic principals of monetarism.

That is to say they maintain an independent Reserve Bank that targets inflation and economic stability by reducing or increasing the money supply.

Monetarism was never abandoned during the pandemic - it was applied in a way that a lot inflation hawks didn’t like, but that’s a different sort of objection.

Central banks used a monetarist lever to inject cash supply and now they are using a monetarist lever to reduce that supply.

Inflation is now easing in a relatively painless fashion. It might not feel like to some people on fixed incomes , but when benchmarked against the kind of economic and social disruption we would have seen if we’d locked down without stimulus, it is all pretty benign stuff.

Carless days were the Government's answer to the fuel crisis in 1980. Photo / NZ Herald files

And we’re still nowhere near approaching the levels of economic pain we went through after the Global Financial Crisis in 2009.

That may change. Economists have long expected this current (fourth) quarter and the next one to be the roughest we face in the cycle.

Based on nothing but a hunch about the record-breaking wave of immigration we’ve just had, I suspect that slowdown will be less pronounced but longer than initially forecast.

However smooth or bumpy the landing is, we can take heart that we are landing. We won’t be resorting to the weird stuff like carless days or wage and price freezes.

There was always good reason to have faith in the monetary system and so, in my view, it has proved.