ECONOMY

Greece is entirely unprepared for a prolonged period of high oil prices

Oil prices rose last week to new record highs, reaching over $50 per barrel on the international market. In London’s IPE, the price of Brent crude reached $46.30 per barrel, while on the NYMEX the price for the barrel of the West Texas Intermediate crude rose to $50.47. Taking into consideration the slow yet steady rise in oil prices during the last 10 months – albeit with brief correction periods – many analysts had projected that the psychologically important $50 barrier would be broken by the end of October or in mid-November, owing to the traditional increases in demand as the northern hemisphere heads toward winter. Yet dramatic international events have led to such increases much sooner, starting in mid-September. However, objective factors, the so-called fundamentals, have not changed recently and they are not expected to change in the next 12 months either. The basic, steady factor leading to price increases is global demand, which has risen to historic heights. This is due to the fact that besides the expected demand from developed markets in Europe and North America, there is also high demand in China and India, which is putting additional upward pressure on prices. Oil prices are rising mainly for the following reasons: – The high demand for energy, especially during the last 18 months, resulting from the continued recovery of the global economy. According to the World Bank, average global growth rates are at an historic high of 5 percent. – The high global demand for oil during the third quarter, 2004, amounting to a daily average of 81.4 million barrels per day (bpd), projected to increase to 83.9 million bpd during the fourth quarter, a rise of 2.5 percent on a year-to-year basis. – Extremely low spare capacity, on a global level, estimated at between 1 to 1.5 million bpd. – Saudi Arabia’s inability to persuade consumer countries that its productivity capacity may exceed 10.5 million bpd. – The inability of oil majors, such as Shell, BP, Exxon, etc., to discover large new reserves. – The continuing and ever-worsening geopolitical uncertainty in the Middle East (Iraq, Palestine, etc.) and in other areas of the world (Nigeria, Sudan, Chechnya, etc.). – The increasing role of financial markets and of price-making mechanisms through oil futures. Fund money activity in the market is estimated to be adding an average of $8 to $10 per barrel to the price of oil. – Low oil and oil byproduct strategic reserves in the USA. – Problems concerning the refining of as well as the bottlenecks in high standard oil byproducts on their way to North American markets. – The low refining capacity of European refineries (sometimes a result of maintenance work) as well as in the southeastern areas of the US after they were recently hit by hurricanes. International analysts believe that regarding supply, the situation will not improve in the coming months. They project more difficult times ahead, while demand is expected to increase due to the upcoming winter in the northern hemisphere. Many analysts already speak of the price of a barrel reaching $60 or higher by the end of the year. The rise in oil prices seems unstoppable, as they have increased by 55 percent since the beginning of the year. «With such a high degree of geopolitical uncertainty, fast-rising demand and limited production capacity, we should surprised not by the price of oil reaching 50 dollars per barrel, but by the fact that it is not already selling at 70 dollars,» says Robert Mumbro, president of the Oxford Energy Studies Institute. He adds that never before had so many negative factors weighed in at the same time. As noted by a Merrill Lynch study, the price of oil in real terms remains today much lower than the levels seen after the 1979 Iranian Revolution, when it reached $80 per barrel, in today’s prices. «In fact, oil may still be inexpensive. If, since 1980, the rise in the price of crude had simply shadowed the rise of the Consumer Price Index – excluding the energy factor – the price of the barrel of oil would be 95 dollars,» the study says. Greece and the oil factor Greece seems totally unprepared to face the upcoming crisis. In contrast to most other member states of the EU, during the last 15 years, when the prices of oil remained relatively low, instead of reducing the contribution by imported energy to its production process, Greece increased it. During the late 1970s, the country’s energy intensity may have amounted to 137 percent in comparison with the 15 members of the EU. Since then, Greece has increased its dependence on imported oil, leading to the country’s energy balance being dominated by oil, 98.7 percent of which is imported. During the last 20 years, the percentage of hydrocarbons used in the energy sector in the rest of the EU has decreased impressively, and today comes to less than 50 percent in most countries, while remaining at more than 65 percent for Greece. Foreign specialists note that consumers in Greece are allowed to import and use, as they choose, all kinds of electrical devices or vehicles, without taking into consideration the capacity of the country’s energy infrastructure. Without rules, without incentives or disincentives, and with extremely «low» energy prices for oil and electricity – always in comparison with other European countries – Greece’s per capita energy consumption is steadily rising, although it remains lower relative to consumption in other countries. The country should develop its energy production capability by taking into consideration the environment, by aiming to conserve energy and by focusing on the possibilities offered by renewable energy sources. Instead, there are massive disincentives for renewable energy, in a country so favored by nature as to be able to utilize them fully. The money exchange factor, the «strong» euro, which has shielded Greek consumers to a large degree from the ill-effects of the rise in the international price of oil (as quoted in dollars) will not protect the local market for ever. When the price of oil stabilizes at $50 per barrel for a long period of time, a most serious situation will arise, as the price rise will be passed on to other products. The situation will worsen if the price of oil does reach $60 or $70, as experts predict. Apart from the truly brave prediction by Economy and Finance Minister Giorgos Alogoskoufis, whose draft budget for 2005 rests on the assumption that the average price of oil next year will be $40 per barrel, the government has taken no other precautions to prepare for the upcoming crisis. On the contrary, everyone is acting in a business-as-usual manner. No one seems to be thinking of the need to persuade consumers to reduce fuel consumption. Indeed, Minister for Development Dimitris Sioufas seeks to increase it, since he applied to the European Union for permission to lower the energy consumption tax in order to «introduce an automated mechanism for the stabilization of income from taxes applied to oil products.» Such an initiative obviously aims to lessen the impact of high oil prices on the consumer price index and – at the end of the day – to enhance competitiveness, which is constantly declining in Greece. This could have positive results if Greece did have a regular European energy consumption pattern, which it does not. At the same time, international circumstances favor neither low energy consumption taxes nor subsidization of energy prices. Rodrigo Rato, the director-general of the International Monetary Fund, stated last week: «The high prices of oil reflect high global demand and the low levels of reserves, as well as fears relating to terrorist attacks and geopolitical dangers. It is important for oil-importing countries to maintain sound (that is, high) taxes, in order to limit oil consumption and to promote the utilization of alternative energy sources.» (1) Costis Stambolis contributed this piece to Kathimerini.