Saturday 25 February 2017

Surging cost of crude oil a threat to economic recovery

Thomas Molloy

Thomas Molloy

THE domestic economy is at risk from surging crude oil prices which are skirting the $100 (€75) a barrel level, economists and employers warned yesterday.

"It's clearly a concern, especially for transport companies," said IBEC's Fergal O'Brien. Oil prices have risen 15pc in the last few months in dollar terms but gained 25pc when prices are translated into euros. An increase of 2c per litre of diesel has made matters worse for business and consumers.

The price of diesel at the pumps in now 20pc higher than this time last year and has risen by around 9pc in the past six weeks.

Most manufacturers are also seeing price rises, which can cut profit margins even if energy costs are only a small part of overall input costs, Mr O'Brien added.

The higher costs of everything from heating oil to the myriad products that have an oil component is a tax on growth at a time when prospects for the recovery of the Irish economy remain fragile, Bloxham Stockbrokers said in a note to clients as prices advanced.

Rising oil prices could also fuel inflation and force the European Central Bank to hike interest rates -- something that would be especially damaging to Ireland where 350,000 families have tracker mortgages and a further 250,000 have variable rate mortgages.

"Higher energy prices and mortgage costs will only dampen Irish domestic demand further at a time when households are already suffering with lower disposable income," Bloxham added.

John FitzGerald, an economist at the Economic and Social Research Institute with a special interest in energy, said rising oil prices "will have some impact" but he believes "Ireland could do with a little inflation". The real problem will come if the ECB decides to hike rates to tame inflation across the currency zone, he added.

Fears about oil were stoked on Monday after the International Energy Agency said prices were approaching the "danger zone", but OPEC members are resisting calls for an emergency meeting or output increase.

Iran, Venezuela and Libya have indicated they are comfortable with $100 while even the more moderate Saudi Arabia seems unwilling to try to restrain prices by upping production despite reaffirming its commitment to a notional price target of $70-80 per barrel.

"Whenever the size of the energy sector in the global economy reached 9pc, we went into a major crisis," Sabine Schels, a commodity analyst at Merrill Lynch, told Reuters yesterday. "It was in the 1980s and it was the same in 2008. Right now we are at about 7.8pc and if you go above $100 per barrel to $120 per barrel, you get to that 9pc level."

By contrast, Switzerland and some east-European nations will be able to sustain the pressures due to strong currencies which alleviate the effects of dollar-denominated oil prices rises.

Julian Callow, chief European economist at Barclay's Capital, said the eurozone's GDP growth could contract by 0.2 percentage points should oil prices stay at current levels.

"However, we are not likely to see the end of price increases since they tend to first come to an end when there is either recession or significant monetary policy tightening; neither of which is in sight," he said.

Hedged

Rising oil prices are likely to hurt smaller firms hardest. Large companies which are heavily dependent on fuel often hedge. Aer Lingus has hedged about 50pc of its jet-fuel needs for this year, chief financial officer Andrew Macfarlane said recently.

Not everybody suffers when fuel costs rise. Irish companies, such as DCC, which distribute oil, tend to do well while exploration companies producing significant amounts of oil such as Dragon Oil and Providence Resources make more money. All three companies have seen their share prices rise this year.

Irish Independent

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