When international oil prices pushed past US$75 (NZ$93) a barrel a year ago, it was feared that the crippling burden of high energy costs would end the world economy's dream run.
The crunch never came. Despite several years of strong global growth, last year's oil price record was not primarily driven by excess demand, but was instead the result of expectations of shortages to come.
In the end, those predictions were proved wrong, oil prices dropped back to below US$60 a barrel by the end of last year, and concerns about growth dissipated.
However, the downward price correction did not last long. Leaving the usual volatility aside, oil prices have been going up again since March.
This time, prices seem to be driven by actual supply shortages rather than expectations.
In response to softening prices last year, Opec – the 12-member cartel of oil-producing and exporting countries that provides about 40 per cent of global oil supply – cut its production quota by 1.5 million barrels a day.
On the other hand, over the past 12 months the buoyant world economy has added another one million barrels a day to demand.
Even though oil prices are back around US$75 a barrel, this time there seems to be less concern about global growth.
That may reflect a certain attitude that "we've been there before and it didn't do any harm".
However, last year the price rise was short-lived. This time it may be different. Opec appears determined to maintain tight supply, with its members sticking to the agreed production quotas. That is a change from previous years, when it was common practice to cheat on the cartel.
Alternative oil producers can't come to the rescue. Many years of under-investment, the faster-than- expected depletion of North Sea oil reserves, and the dismantling of Russian oil exporter Yukos are only some of the reasons behind the International Energy Agency's projection that non-Opec oil production will remain flat for the next five years.
Opec will not review its supply quotas till September, but the cartel is acutely aware that pushing its luck too hard may slow world growth and hurt revenues.
However, so far there is little evidence of that.
AS IS often pointed out, if one takes inflation into account, real oil prices were actually higher in the late 1970s and early 1980s.
However, leaving that brief period aside, the real cost of a barrel of oil is now more than double the average over the past 30 years.
The decline in the relative intensity of oil use over that period has provided some offset.
Furthermore, most economies now experience relatively low inflation, interest rates and unemployment, which could explain the apparent resilience to the oil shock.
The tipping point may not come till central banks decide to add to the pain by raising interest rates in an attempt to contain inflation pressure from rising energy costs.
In that situation, Opec could literally turn on the tap fairly quickly and cause prices to drop.
Present spare production capacity is estimated to be about three million barrels a day, which undermines some analysts' predictions that oil will reach US$95 a barrel.
The more likely scenario seems to be a range between US$65 and US$75 a barrel over the next year.
What does all this mean for New Zealand?
Four years ago, when global crude prices were sitting below US$30 a barrel, New Zealand's annual import bill for oil was about $2.8 billion. Since then, oil consumption has risen by only 7 per cent, but the import bill has risen to more than $5 billion on the back of record oil prices.
If it were not for the unprecedented strength of the New Zealand dollar, that amount would be significantly higher.
Present petrol prices reflect the sheltering influence of the exchange rate. Last year, when international crude prices were at similar levels, a litre of 91 cost $1.77, compared with about $1.55 today.
The full effect of the global oil price shock will not be felt till weak economic data finally convinces the Reserve Bank to lower interest rates and the New Zealand dollar reverses its bull run.
If the currency settles at its long- run sustainable level of just below 60 cents, the annual oil import bill will end up being about $3 billion higher than it was in 2003.
Ironically, that is close to the amount Dubai Aerospace has offered for the majority share in Auckland International Airport.
It is even more ironic that New Zealand predominantly imports crude oil from Dubai.
One could argue that our economy as a whole would effectively recycle the proceeds from the airport sale back to Dubai to pay for the increased cost of a year's worth of crude oil.
Would that be a particularly cynical view of the world, or simply describe the unpleasant economic reality of the situation?
The crunch never came. Despite several years of strong global growth, last year's oil price record was not primarily driven by excess demand, but was instead the result of expectations of shortages to come.
In the end, those predictions were proved wrong, oil prices dropped back to below US$60 a barrel by the end of last year, and concerns about growth dissipated.
However, the downward price correction did not last long. Leaving the usual volatility aside, oil prices have been going up again since March.
This time, prices seem to be driven by actual supply shortages rather than expectations.
In response to softening prices last year, Opec – the 12-member cartel of oil-producing and exporting countries that provides about 40 per cent of global oil supply – cut its production quota by 1.5 million barrels a day.
On the other hand, over the past 12 months the buoyant world economy has added another one million barrels a day to demand.
Even though oil prices are back around US$75 a barrel, this time there seems to be less concern about global growth.
That may reflect a certain attitude that "we've been there before and it didn't do any harm".
However, last year the price rise was short-lived. This time it may be different. Opec appears determined to maintain tight supply, with its members sticking to the agreed production quotas. That is a change from previous years, when it was common practice to cheat on the cartel.
Alternative oil producers can't come to the rescue. Many years of under-investment, the faster-than- expected depletion of North Sea oil reserves, and the dismantling of Russian oil exporter Yukos are only some of the reasons behind the International Energy Agency's projection that non-Opec oil production will remain flat for the next five years.
Opec will not review its supply quotas till September, but the cartel is acutely aware that pushing its luck too hard may slow world growth and hurt revenues.
However, so far there is little evidence of that.
AS IS often pointed out, if one takes inflation into account, real oil prices were actually higher in the late 1970s and early 1980s.
However, leaving that brief period aside, the real cost of a barrel of oil is now more than double the average over the past 30 years.
The decline in the relative intensity of oil use over that period has provided some offset.
Furthermore, most economies now experience relatively low inflation, interest rates and unemployment, which could explain the apparent resilience to the oil shock.
The tipping point may not come till central banks decide to add to the pain by raising interest rates in an attempt to contain inflation pressure from rising energy costs.
In that situation, Opec could literally turn on the tap fairly quickly and cause prices to drop.
Present spare production capacity is estimated to be about three million barrels a day, which undermines some analysts' predictions that oil will reach US$95 a barrel.
The more likely scenario seems to be a range between US$65 and US$75 a barrel over the next year.
What does all this mean for New Zealand?
Four years ago, when global crude prices were sitting below US$30 a barrel, New Zealand's annual import bill for oil was about $2.8 billion. Since then, oil consumption has risen by only 7 per cent, but the import bill has risen to more than $5 billion on the back of record oil prices.
If it were not for the unprecedented strength of the New Zealand dollar, that amount would be significantly higher.
Present petrol prices reflect the sheltering influence of the exchange rate. Last year, when international crude prices were at similar levels, a litre of 91 cost $1.77, compared with about $1.55 today.
The full effect of the global oil price shock will not be felt till weak economic data finally convinces the Reserve Bank to lower interest rates and the New Zealand dollar reverses its bull run.
If the currency settles at its long- run sustainable level of just below 60 cents, the annual oil import bill will end up being about $3 billion higher than it was in 2003.
Ironically, that is close to the amount Dubai Aerospace has offered for the majority share in Auckland International Airport.
It is even more ironic that New Zealand predominantly imports crude oil from Dubai.
One could argue that our economy as a whole would effectively recycle the proceeds from the airport sale back to Dubai to pay for the increased cost of a year's worth of crude oil.
Would that be a particularly cynical view of the world, or simply describe the unpleasant economic reality of the situation?
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