Monday 17 December 2018

Over a barrel: oil hikes will push up more than just fuel prices

Heating has rocketed 50pc and you'll pay 20pc more at the pumps, but other goods and inflation may be on the way up too

In There Will Be Blood Daniel Day-Lewis played an oilman out to strike it rich during California’s oil boom — prices are once again on the rise
In There Will Be Blood Daniel Day-Lewis played an oilman out to strike it rich during California’s oil boom — prices are once again on the rise
Louise McBride

Louise McBride

Higher oil prices have hit home. For me, it's come in the form of a 50pc jump in the cost of heating my home over the last two years. In February 2016, it cost me €343 to get 750 litres of kerosene home heating oil. Today, it costs €523 - almost €200 more - to buy the same amount.

Oil prices have more than doubled over the last two years. In January and February 2016, the price of a barrel of oil was just under $30 a barrel. Oil prices hit a three-year high of $70 a barrel last month - and have hovered around that mark since. Since last June alone, the price of a barrel of oil has increased by more than 50pc.

These higher oil prices have hit consumers on a number of fronts. Drivers are finding it more expensive to fill their tanks. The price of a litre of diesel has jumped by about a fifth since February 2016. (The average price of a litre of diesel was €1.27 last month, up from €1.05 two years ago.) The price of a litre of petrol has risen by about an eighth over the last two years. (Last month, the average price of a litre of petrol was €1.38, up from €1.22 in February 2016.)

Public transport operators are also heavy users of fuel - and a raft of bus and rail fares increased before Christmas.

Oil price rises have made it more expensive for many families to heat up their homes or use electricity. Seven energy companies have increased their prices since last November - with Electric Ireland's 4pc electricity hike the latest of these increases. Suppliers say that the price increases are due to the rising wholesale cost of energy. Oil prices are just one of a number of things which influence wholesale energy costs - but they play their part. Most of the fuel used to generate electricity is gas, but gas and oil prices are tightly linked so rises in crude oil prices usually lead to higher gas prices - and in turn pricier electricity.

For users of home heating oil, the impact of rising oil prices tends to be felt quickly. Kerosene is a crude oil product so if the price of global crude oil is rising, heating oil prices normally follow.

Should oil prices continue to rise, consumers will be hit even more. In January 2013, when the price of a barrel of oil was almost $113, it cost me €678 to buy 750 litres of home heating oil - almost twice what I paid in February 2016 and about a third more than it costs me to buy that amount of oil today.

How high the price?

Oil prices are difficult to predict, but some economists believe that the ongoing pick-up in the world economy will push prices higher this year - because it will lead to a greater demand for oil.

Oil prices could stand at between $75 and $80 a barrel by the end of this year, according to independent economist Jim Power. "Looking ahead to 2018, global growth prospects look very positive, and extreme weather conditions will continue to be a feature of the landscape," said Power. "This will propel demand [for oil] higher. On the other hand, alternative energy will continue to displace oil, and it appears thatOpec (the Organisation of the Petroleum Exporting Countries) will hold its resolve in limiting supply - but not so for non-Opec members."

Goodbody expects the price of a barrel of oil to average at between $65 and $75 a barrel in 2018. It believes that any deals struck between Opec and Russia will influence the price of oil next year. Last November, Opec and Russia agreed to extend their oil production cuts until the end of 2018. That deal boosted oil prices.

"If Opec and Russia extended their deal again, we could see oil prices in the $80-plus range in 2019," said Brian Flavin, senior equity research analyst with Goodbody. "Otherwise the US shale response should see [oil] prices a bit lower in 2019." (Oil shale is an alternative to conventional crude oil. Growth in the production of US shale has been described by some experts as one of the biggest challenges to the recent oil price rally.)

Alan McQuaid, chief economist with Merrion Capital, expects oil prices to hold at between $60 and $70 a barrel over the next one to three years. "The price might fluctuate back and forth over that time but it won't fall back as low as $30 a barrel. It won't move up as high as $100 a barrel either - unless there's a big conflict which puts the supply of oil at serious risk, as that would push up prices. The biggest risk to oil prices are geopolitical events - such as a Middle East conflict."

Power believes that oil prices could fall back to around $60 a barrel by the end of 2019.

Many believe it unlikely that oil prices will return to the peak levels of 2008, when the price soared to almost $150 a barrel. "Never say never," said Flavin. "However, it seems unlikely. Much of 2008's price rise was driven by speculation in the paper market [where oil futures contracts are traded]. Also, faster, more-efficient ways to extract oil have evolved over the last decade or so, and so today, better technology means that we can get a much faster supply response when prices rise, keeping a lid on things."

How wide is impact?

The impact of higher oil prices is felt more widely than fuel and heating costs - particularly if prices continue to tick upwards for some time.

The rising cost of fuel pushes up transportation costs, which makes it more expensive to get certain goods to retailers - and pushes up the price of those goods as a result. "Coffee could become more expensive with higher oil prices as coffee beans are transported across the world," said McQuaid.

Bottles of water could also become pricier as oil is used to make plastic bottles. "Higher oil prices could make paint, cosmetics, pesticides, and many soaps more expensive as there's petroleum in these products," said McQuaid. "If the price of oil goes up, air fares will often go up too. You can also expect taxi and bus fares to go up. Eventually, the price of common household appliances should get higher on the back of rising oil prices. Plastics are petroleum-based and petroleum is a product of crude oil. Your refrigerator, iron, microwave, toaster, washing machine and clothes dryer are very likely made with a number of plastic parts."

Inflation has been low in Ireland but this could change if oil prices escalate.

"Rising oil prices would push up wider inflation in the economy," said Alan Gray, managing partner of the economists, Indecon. "Higher oil prices would also by increasing the cost of living, put pressure on wage demands and would push up the costs of wages. In general inflation is a complex issue for an economy but for a small open economy like Ireland, the problem would be that higher inflation would damage competitiveness and in an uncertain world with Brexit, the outcome would generally be bad."

Interest rates could also increase, according to Alan Ahearne, director of the Whitaker Institute in NUI Galway, and a former special adviser to the late Finance Minister Brian Lenihan. "If higher oil prices led to big overall increases in inflation, the ECB would have to raise interest rates - and that would be a big issue for consumers," said Ahearne. "But we're not in that space yet."

Ahearne believes the Irish economy is somewhat insulated from higher oil prices because it does not use as much energy as other countries. "Ireland's economy is very much high-tech or service-based and so it doesn't use a lot of oil," said McQuaid. "In the 70s and 80s, there were huge increases in oil prices and this drove inflation, but that's not where we are now. Yes, oil prices have risen a lot but they're not a threat to global growth - or the world economy. Today's oil prices won't force another recession, like they did in the 70s and 80s."

Let's hope oil prices won't spike to such an extent that a recession is triggered. Not just for the sake of the many consumers (including myself) already grappling with oil-related price increases, but for the sake of the economy too.

Sunday Indo Business

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