Spiralling costs mean Irish consumers will pay more for petrol and energy, writes Arthur Beesley.
The oil spike is the stuff of bad dreams for consumers and business people. Combined with rising interest rates, it seems more like a nightmare. Worse still, no one says the situation is going to end any time soon.
Events far away in Iran, China and the US lie behind the relentless rise in the price of crude oil to an all-time high of more than $74 (€60) per barrel yesterday. If its impact can already be seen in higher prices at Irish petrol pumps, the rise is likely to feed into higher prices for electricity, heating and travel with inevitable consequences for the already-high inflation rate.
On the plus side, the domestic economy is a bigger beneficiary than most of global economic buoyancy. Yet just as nothing here happens independently of the international economy, there is no insulation at home from record oil prices.
Unlike the fabled crises of the 1970s, which were supply-led, the current situation is driven to a large extent by rising demand. The price pressure is all the worse given fears that the stuff is about to run out altogether.
Thus the current spike looks more and more like a race to the top. A barrel of crude could be bought for only $25 in 2002. At current prices, even the $59 per barrel that prevailed at the start of this year seems like bargain.
For consumers, the impact is already clear. Citing figures from the Automobile Association, Goodbody Stockbrokers chief economist Dermot O'Leary says the average price of a litre of unleaded petrol was 98.7 cent a year ago. This rose to €1.07 per litre last month and has risen this month to a national average of €1.10-€1.15.
"It's probably going to €1.20 in the short term and could well be at that level in some places," says O'Leary. "If the price persists in excess of $74, it could go over €1.20."
It doesn't not stop there. While the price of domestic electricity has risen by some 40 per cent since 2002 and the price of gas by some 45 per cent, the latest rise in crude oil prices will inevitably feed into electricity and gas bills.
Such prices are now reviewed annually by the energy regulator and they reflect conditions in the international energy markets. "Obviously, if these high oil prices are sustained, it will have an input into higher electricity prices," said one industry figure.
In addition, the cost of public travel could rise. "There won't be an immediate impact, but without a doubt if this rise continues, given that we're probably one of the biggest fuel users after the airlines, there may be an impact on customers," said a spokeswoman for Dublin Bus.
It is also uncertain when the rise will hit air fares in a dogged market in which price is all. With airlines in Britain imposing surcharges, Ryanair made much this week of its refusal to impose surcharges. Still, its hedging at $49 per barrel ran out at the end of its financial year last month. The airline says it cannot offer guidance as to the impact on its profitability in the current year because it is in a close period.
Aer Lingus has 51 per cent of its fuel requirement this year hedged at an unspecified price. While the price rise is likely to affect profitability this year, it is unclear by how much. The question naturally arises as to whether potential investors in its flotation will have an appetite for aviation stocks when no long-term respite on fuel is in sight.
So how high can prices go? Bank of Ireland's head of energy and emissions trading, Paul Harris, says the likelihood of further price rises looks strong. A technical analysis of current trading patterns point to a "swift advance" to some $82.30 in the near term, he says.
"I think that oil prices will continue to be at high levels. We've been trending higher in oil prices since 2002 and it hasn't unduly affected global growth. Certainly, the oil price has basically doubled in the last year and global growth is still at 5 per cent."
O'Leary is reluctant to project the level that prices will reach but he is concerned about increasing political tension between the US and the fourth-largest oil exporter, Iran, over its nuclear programme. "I don't think its the level prices reach that's the problem; it's the level they settle at," he says.
"I don't think it's totally based on fundamentals, but there are reasons to be fearful in the short term for the persistence of high oil prices. The big issue is of tension in Iran - and it doesn't look like there's an end in sight.
"If you go back to the last spike in early September, it was sharp and swift. In this instance, petrol prices started rising in mid-February and they had gone up by 50 per cent up to a couple of days ago."
All of that will be within the ambit of the inflation rate, which rose to a 33-month high of 3.5 per cent in March vis-a-vis the same month last year. According to Harris, the most recent increases have the potential to increase the annual inflation rate by 0.2 of a percentage point to 3.7 per cent. Nevertheless, O'Leary points out that figures released last week showed retail sales growth at over a five-year high in February.
If that's good for business, oil hikes are not. "If [the price of oil] persists at these levels its major consequence will be for Ireland's balance of payments, where resources from Irish industry and Irish consumers will be divested towards oil producing nations," says Ibec director of economic policy, Danny McCoy.
"In this regard, compounding the problem by chancing higher inflation through higher wage demands would be the ultimate folly."
Still, the International Monetary Fund published a bullish report this week which projected that the global economy will expand some 4.9 per cent. While O'Leary says projection is close to a 30-year high, he says real income growth in the Republic would be eroded by the impact of higher prices generally.
"If energy is going to affect Ireland it's going to affect it through an indirect channel. If it has an affect of slowing down, say the US, I don't think Ireland will be immune of a slowdown."
Last week, the Central Bank expressed similar concerns in its quarterly bulletin. "Major uncertainties continue to be present in regard to the price of oil," it said. "These high prices . . . are likely to represent a continuing drag on growth in oil-consuming countries for some time, together with a potential inflationary threat through second-round effects."
In the coming weeks and months, no one can afford to ignore the oil markets.
SUPPLY DISRUPTED AS DEMAND SOARS
Iran may be the political focus of the energy debate, but the rapid rise in the price of oil can be traced to the insatiable appetite for fuel from China.
Two years ago, China became the second-highest consumer of oil after the US and triggered a 25-year high in demand for fuel. In the interim, worries about supply disruption in major Organisation of Petroleum Exporting Countries (Opec) producers have surfaced as a big factor in the current spike.
Buying gathered momentum this year after rebel attacks in Nigeria forced the closure of around 500,000 barrels per day of high-quality oil, favoured by refiners for making gasoline. Oil consumers also fear supply disruption from Iran, which is locked in a dispute with the West over its nuclear programme.
Meanwhile, Iraq is struggling to get its oil industry back on its feet after the US invasion of 2003 and a decade of sanctions. Output remains below pre-invasion levels.
Fears about supply disruption are so marked because Opec's spare capacity has been squeezed to 1-2 million barrels a day of poor quality crude that is of no use to refiners for transport fuels.
Adding to concerns about tight supplies of crude is a global shortage of refining capacity for transport fuels, exacerbated by new fuel regulations in the US. Traders worry that refineries will not be able to produce enough petrol of the right quality for this year's peak US summer driving season, beginning in May.
Refining capacity is already tight after years of underinvestment and after the US industry took a battering in last year's hurricane season. Meteorologists are warning there could be another heavy hurricane season this summer.
- (Reuters)
