effects of the decline in the us dollar, the average oil price in the second half of 2004 was about 50 per cent higher than the average over the period 2001 - 2003. assessing the implications of this change requires us first to ask why it occurred. the oil shocks of the mid and late 1970s resulted from opec actions to drive up the price by restricting supply. in such a scenario, costs of production for industrial users of energy are raised, which means some combination of higher prices and lower profits ensues. possibly some of the capital stock is rendered uneconomic. for households, the rise in oil prices reduces purchasing power, so imparting a contractionary impact on other areas of demand. 2 the situation when the disturbance emanates on the demand side is different. the initiating shock here is expansionary in nature : somewhere in the world, there is unexpected strength in energy - intensive production of goods and services. prices rise, but so does output. admittedly, output would have risen even further had the supply of oil been perfectly elastic, but a demand - driven rise in oil prices is a sign of global growth strength, not weakness. graph 2 click to view larger that is the bulk of the story in the past few years. with global gdp having grown by about 12 per cent over the past three years, oil demand is estimated to have increased by about 6½ per cent over the same period. granted, there have been periods of pressure on prices driven by uncertainty over current or future supply, but the main story is one of demand. a key assumption of this analysis is that there is only limited short - term scope to substitute towards other sources of energy or to otherwise use oil more efficiently, which is reasonable for the short term though not the long term. it also assumes that the income gain accruing to oil exporters does not lead to demand expansion in those countries sufficient to offset the contractionary impact in the oil - importing countries. 2 / 7 there is, of course, an important compositional element too. much of the additional growth in demand is coming from the asian region. this means that traditional big users of oil in the developed countries are competing for resources in a way they had not been accustomed to doing in the past. a rise in the oil price could well seem to them quite like the supply shock scenario - higher prices and lower output. hence, if oil prices were to remain quite high, economic prospects for some of the western industrial countries,

glenn stevens : economic and financial conditions december 2004 address by mr glenn stevens, deputy governor of the reserve bank of australia, to the australian business economists and the economic society of australia ( nsw branch ), annual forecasting conference dinner, sydney, 14 december 2004. * * * 2004 turned out to be a year of considerably stronger output in the global economy. according to the international panel of private forecasters recently polled by consensus economics inc, global gdp1 will have risen by 5 per cent in 2004. this does not include the recent round of data revisions in japan, and so may be adjusted down a little. even so, it is hard to see how the outcome will not be at least a full percentage point above the long - run average and as strong as any year in the past thirty. graph 1 click to view larger as always, there were short - term departures from the established trend. the us “ soft patch ” in mid year followed a brief period when price statistics in the us had people worried about inflation. the number one topic of discussion the previous year, of course, had been deflation. there were also periodic concerns that the attempts to engineer a slowdown in china might over - achieve, resulting in a slump of global significance. the various short - term concerns were overdone, as is so often the case, but were to be expected given that an innumerable army of analysts, commentators and financial market players extensively debate every twist and turn of the economic data, many of which turn out to be statistical noise. a more genuine reason for some discomfort is perhaps that, despite vigorous global growth in total, there is a feeling that it is a little lop - sided, with some areas participating less than fully. the euro area, for example, has struggled to “ gain traction ”. as measured by the imf's ppp - weighted approach. 1 / 7 in 2005, some slowing is envisaged but forecasters apparently expect growth still to be better than average. it might be revised down a bit in the near term reflecting some softer recent data. but even a noticeable downgrade would leave growth at about average, which would be quite a reasonable outcome. in the course of expansions lasting a number of years, it is quite common for there to be the odd slower year ; they can ’ t all be above average. one factor affecting people ’ s expectations will presumably be energy prices. measured against the sdr, so as to avoid valuation