Oil prices are eroding incomes and growth

The continuing rise in oil prices – now touching $78 per barrel – poses an increasing danger for the budget, inflation and the country’s economic growth. According to government and Bank of Greece (BoG) estimates, oil price rises have added one percentage point to the inflation rate over the last three years. This year so far, Greek consumers have been burdened by an additional 0.6 percent rise in the price index, while the growth rate has slowed down by half a percentage point. BoG estimates that a 10 percent rise in the price of crude could lead to a direct increase of up to 0.19 percent in the Consumer Price Index (CPI), all other factors, such as refining costs or profit margins, being equal. This is because fuels have a weighting of about 5 percent in the CPI «basket,» and a 3.8 percent rise in their retail prices (following a 10 percent rise in the euro price of crude) means a 0.19 percent increase in the CPI. BoG has therefore arrived at the following conclusions: First, domestic fuel prices for the consumer change by less than the international price of crude. Second, the changes in retail prices for the end consumer are asymmetrical to the changes in the international price of crude; in fact consumer prices prove much stickier when the price of crude declines. This implies that the increases in international oil prices are passed on to the end consumer to a greater degree than the decreases, and are related to wider profit margins for refiners and retailers. Third, Greek refiners’ prices for heating fuel and gasoline in general follow developments in the prices of crude, both on the downside and the upside. Finally, the divergence between changes in the price of crude on the world market and changes in retail or wholesale prices of petroleum products on the domestic market reflect developments regarding the other components of prices, such as costs of refining, distribution and marketing, profits and taxes.