of the earthquakes. the largest of these has been the $ 11. 7 billion eqc insurance cost ( and the more recent aftershocks are likely to increase eqc ’ s costs ). the costs of the february 2011 quake have exceeded eqc ’ s reinsurance cover of $ 2. 5 billion per event, and eqc and government, as guarantor, bear the cost of any subsequent cost increase for that event. the total claims are expected to exhaust eqc ’ s available assets – that is, the national disaster fund. bis central bankers ’ speeches earthquake - related building consents source : statistics new zealand the government also faces significant expenses related to the purchase of residential properties in the red zone, support for ami, and costs associated with damage to infrastructure. in addition to these expenses, there are significant costs related to welfare and emergency responses ( totaling around $ 363 million at end of june 2011 ). following the earthquakes, the employment situation of many individuals was at risk with around 40, 000 employees and 9, 000 sole traders seeking assistance. it was also necessary for the government to increase spending related to healthcare, social services and public administration and safety services. earthquake - related public expenditure estimated at $ 13. 6 billion contributed to a marked deterioration in the government ’ s operating deficit over the 2010 / 2011 year, and further earthquake related expenditure will be required over the coming years. the resulting pressure on the government ’ s debt position was highlighted by standard and poor ’ s when they downgraded new zealand ’ s long - term sovereign rating to “ aa ” earlier this year. fitch also noted some concerns about the impact of the earthquakes on the fiscal debt in their latest assessment. in response to the costs associated with the earthquakes, the government ’ s june budget incorporated an increased focus on fiscal consolidation with a reduction in new discretionary spending over the coming four years. in addition, the government has recently announced an increase in the earthquake cover levy component of home insurance, to cover the costs faced by the eqc and to rebuild its natural disaster fund. banks and other financial institutions may have to absorb bad debts from some households and businesses as a result of the earthquakes. the impact on the new zealand banking sector is expected to be manageable, based on banks ’ bad debt provisioning estimates. banks report that the canterbury earthquakes have had a relatively small impact on aggregate asset quality. three of the major banks commented on their earthquake provisioning in their results for

several important risks to this outlook. the first concerns oil prices. so far the world economy has apparently taken a tripling in oil prices in its stride, thanks to the much lower oil intensity of output, and the greater flexibility in labour markets, in most advanced economies compared with a generation ago. it is also true that the short term capacity of oil producing countries to spend their increased revenues is now much greater than it was in the 70s. this helps to explain why consensus forecasts for world gdp growth next year have remained remarkably steady. but there is a very high level of uncertainty about future oil prices. judging by the oil futures curve, the central view is that prices are likely to remain high, at around $ 60 per barrel for the next few years at least. this is in contrast to 2000, when the oil futures curve was downward sloping. but the range of current consensus forecasts is very wide – from around $ 45 and $ 75 per barrel. and oil option prices – admittedly a very imperfect measure – suggest that there is a 15 % probability of oil prices rising above $ 80 a barrel and a 5 % probability of them falling below $ 40 in six months time. if oil prices rise no further their impact on headline inflation should be temporary. but a series of positive oil shocks might have the effect of pushing up headline inflation for an uncomfortably long period. in contrast to the 1970s and 1980s, inflation expectations in major oil consuming nations have been well anchored for the best part of a decade. but there ’ s no room for complacency. the unfamiliar experience of higher inflation might well dislodge those expectations, if there was any wavering incentral banks ’ perceived commitment to keep inflation low. this could also prove damaging to consumer and business confidence. 2 / 3 i claim no special insight into the oil market, and especially into its likely short term movements. but it is hard to miss the longer term challenges which the rapid economic development of china – and india – pose for resource markets, and especially energy markets. china is now the world ’ s second largest oil importing country after the us, and last year alone it accounted for nearly a third of the net increase in world oil demand. in per capita terms, its own oil resources account for less than 10 % of the world average. yet its oil demand is set to grow strongly in the longer term. oil supply is traditionally slow to respond to changing prices – lead times for developing new fields are often around