Oil dependency hurts

The great increase in oil prices is a big headache for the government. Since the start of the year, oil prices have risen about 17 percent, or more than $10 per barrel. This rise puts the brakes on growth, fuels an already too-high inflation rate, reduces income with adverse consequences on consumption and significantly slows down employment growth. And this at a time when the government is trying to tame inflation while gradually trying to raise the special consumption tax on fuel (17 percent by 2008) and deal with the consequences of a further upward revision of the budget deficit by Eurostat. Estimates by Bank of Greece officials show how the Greek economy remains dependent on oil prices and vulnerable to any violent upswings. The rise in global oil prices is slowing economic growth by up to three-tenths of a percent. That is, the estimated GDP growth rate may slow down from 3.7 percent to 3.4 percent, just from the rise in oil prices. The effect on growth is expected to be minimal in 2007 and 2008. However, if prices continue to rise, the negative effect on growth could reach half a percentage point. In more understandable terms, GDP will be reduced by about a billion euros, or more than twice the extra 2005 deficit calculated by Eurostat. Rising inflation Also, an oil price rise by $10 per barrel is fueling the inflation rate by about 0.4 percent. That means average inflation could rise to 3.7 percent in 2006, up from an earlier 3.3 percent estimate. For a wage earner, this means an extra 300-350 euros to spend over a year. In the eurozone, the effect is halved, to 0.2 percent, because of lower dependency on oil and higher efficiency. The Bank of Greece estimates that energy consumption per unit of real GDP is 30 percent higher in Greece than in the old 15 EU member states (that is, not counting the 10 newcomers who joined in May 2004). Slower growth and higher inflation create the conditions for higher unemployment. According to the Bank of Greece experts, the unemployment rate could rise to 9.9 percent at the end of the year from the current 9.7 percent. On the positive side, domestic fuel prices have been rising at a slower rate than the international prices of crude oil. This is happening because about 19 percent of the retail price of gasoline and 16 percent of the heating oil retail price reflect processing and distribution costs, as well as profit margins. The price of the raw material represents 26 percent of the gasoline price and 30 percent of the heating oil price. The rise in the retail price is not as steep because indirect taxes are low, at the EU minimum. This, however, will soon change: The special tax on fuel consumption must increase 17 percent by 2008. The price of unleaded gasoline in Greece – which averaged 1.016 euros per liter on April 19 – is 19.74 percent lower than the EU average. Since January 1, 2004, it has risen 38.99 percent, while the price of a barrel of oil (Brent) has risen 134.68 percent. In the past two years, measures have been taken to lessen the country’s dependency on liquid fuel and promote alternative sources and natural gas. «Despite the adverse effect of oil prices, our country has abundant reserves, above the minimum levels imposed by international organizations,» said Development Minister Dimitris Sioufas.

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