Oil price slump hits Australia’s already faltering economy

Saudi Arabia and Russia, two of the world’s hydrocarbon superpowers, clashed recently over oil output, prompting Saudi Arabia to increase their production which then in turn sent the global price of oil tumbling.

The cost of crude has fallen by almost two-thirds this year already, which has negatively affected the pricing of liquefied natural gas (LNG) in Australia. This is of concern to policy makers reacting to a faltering economy amidst the coronavirus crisis, as LNG is the nation’s third-largest export (around 2.5% of GDP). 2019 saw a massive 77 million tonnes of LNG exported from Australia, making it the largest exporter in the world, yet the slump in oil prices could more than halve the value of cargoes exported due to the link in prices of LNG and crude oil.

The Reserve Bank will need to consider these new parameters as they go about their task of mitigating the economic impact of the coronavirus. Reserve bank governor Philip Lower cut the cash rate to 0.25% on March 19, implemented quantitative easing measures for the first time in Australia’s history and set up a small business funding facility. The reserve bank is not expected to announce any further measures at tomorrow’s RBA meeting.

With non-essential travel banned, consumers will not see the typical benefit of lower fuel prices to their budget. Caltex Australia has announced that it is bringing forward and extending the shutdown of their Lytton oil refinery, and has hinted that it is evaluating takeover offers from Britain’s EG Group and Canada’s Alimentation Couche-Tard.

The fuel price slump comes as Australia suffered contraction in tourism and education, the nation’s fourth and fifth biggest exports, adding to the economic strain the country has to deal with.

Australia’s biggest export has also seen a decline in value, as iron ore futures have also shrunk in value for the third week in a row.