Leave your gas guzzler in the garage if political tension remains high
The prices of petrol at the pump in the US are approaching the psychologically important USD 4/gallon (in some areas and for some grades the petrol price has already exceeded this level), with national average pump prices at USD 3.78/gallon this week (EIA). Petrol prices have risen by around 14% this year, and this is clearly a headache for President Obama in an election year as he strives to ensure that the US economy continues to expand.
The impact has been most pronounced in the UK and the EU because of the weakening of the euro and sterling against the US dollar. Record oil prices in euro and sterling are aggravating the distress for many firms and households already suffering as a result of the region’s debt crisis and faltering growth.
Oil prices measured in euros reached an all-time high last Friday at EUR 93.26/barrel, just surpassing the previous record from 2008 at EUR 93.06/barrel when Brent oil prices denominated in US dollars reached USD 146.08/barrel. Oil prices measured in dollars are still around 16% lower than the peak from 2008.
Although petrol prices have surged with the recent peak in crude prices and are heading for the highs of July 2008 and April/May 2001, the rise started from a significantly higher base this time at which European and American car owners have adjusted their spending. When petrol prices peaked in 2008 at USD 4.165/gallon, petrol prices had increased by 46 % from the base or average petrol price in 2007 at USD 2.84/gallon. At last year’s high of USD 4.02/gallon, petrol prices had moved up by 42% from the base (average 2010) at USD 2.84/gallon. This year, by contrast, US pump prices have increased by 6% to average USD 3.78/gallon compared to the base (average 2011) at USD 3.58/gallon. For European consumers the story is very similar. European petrol prices (measured in EUR) this year have increased by 12% from the base, compared to 59% in 2011 and 69% in 2008.
Rising crude prices have less impact on the total cost of fuel paid by retail customers and businesses in the EU than in the US because Europe’s energy taxes are higher. Taxes accounted for 60-66% of the retail cost of a litre of fuel in the UK, France, Italy, Germany and the Scandinavian countries compared to 16% in the US in 2010 (OPEC).
If we exclude the effect of exchange rate changes, rising crude prices thus have a much bigger proportionate impact in the US than in the EU. But once the currency effect is taken into consideration, it is the European car owners who have been left facing record prices of petrol.
We do not expect the situation will improve very much for European car owners in the near future. We see the euro continuing to weaken against the US dollar and oil prices will remain high at an average of USD 118/barrel in Q2, with a risk of much higher prices if the tension between Iran and the West escalates. In addition, we expect the petrol balances to tighten going forward as refinery closures in the Atlantic Basin will outweigh net additions.
Brent oil prices today compared to all-time-high in various currencies:
USD 123.40/barrel versus USD 146.08/barrel July 2008 (18% below high)
EUR 92.85/barrel versus EUR 93.45/barrel Last week (0.6% below high)
NOK 690.04/barrel versus NOK 743.98/barrel July 2008 (7% below high)
SEK 819.94/barrel versus SEK 875.26/barrel July 2008 (7% below high)
DKK 690.69/barrel versus DKK 693.86/barrel July 2008 (0.5% below high)