OIL PRICE OUTLOOK REMAINS UNCERTAIN IN THE FACE OF CONTINUING WORLD OVERSUPPLY

Abstract

Australia's oil industry has just emerged from the most difficult period in its short history, following the unprecedented collapse in world oil prices during the first half of 1986, and the continuing weakness during the rest of the year. As a result, the oil industry has undergone painful cost-cutting measures to survive the new environment. Thousands of jobs have been lost for good, exploration activity has been dramatically cut back to the levels of the late 1970s, and the industry now faces the bleak prospect that oil prices may not return to previous high levels until sometime in the 1990s, ironically at a time when Australian oil production is expected to begin a major decline.

The Australian federal government has also felt the pain, through significantly reduced revenues from oil production and exports, although this has been anaesthetised to a large degree by a hike in petrol pump excise rates.

Oil and petroleum product exports, which rose during the second half of 1985 to become Australia's number two export earner (behind coal) with sales valued at over $150 million a month, came to a dramatic halt during the first half of 1986 before resuming again at considerably lower levels during the second half, only after the government had lowered the top Bass Strait excise rate from 87 per cent to 80 per cent.

Government revenue from Bass Strait excises, which reached a record $4.2 billion in 1984-85, fell slightly to $4 billion in fiscal 1985-86 and is forecast to tumble to $1.7 billion during 1986-87.

The industry was granted a slight relief from the pressures of low oil prices during the second half of 1986 by the temporary scrapping of onshore levies and a reduction in the top Bass Strait levies. It was unclear, however, at the time of going to press just how long the government was prepared to continue with the tax holiday.

The short to medium term outlook is far from healthy. The continuing world over-supply of oil is expected to last until at least the end of the decade, and perhaps into the 1990s. The OPEC nations continue to struggle with meeting the level of production ceilings which will ensure long term oil price stability. While signs are hopeful that OPEC may succeed in holding production at around 16-17 million barrels a day (mmbpd), continuing high output from the non-OPEC countries ensures the prospects for prices firming much above the US$15-18/barrel range for any length of time are not bright. The market supply/demand equation will ensure world prices remain precariously balanced for some time to come.