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The Impact of the Current Increase in Oil Prices to Montenegrin Economy
Three following factors are affecting the world market oil prices: supply, demand and naked fear.
1.
Oil supply at the world market is
limited with the production capacities of the
production counties, as well as with the
130.0
sudden and unanticipated halts in supply due
to instability and war conflicts in these
120.0
countries or in the neighbouring countries.
110.0
The escalation of conflict in the North Africa
and the Middle East, had frightened the oil
100.0
traders, fearing that they will be left without
90.0
the oil sources of Libya, imports of which
amounts to 1.4 million barrels per day or 2%
80.0
of world’s needs. In February, the crude oil
70.0
price reached the level of around US Dollars
120 a barrel, and at the moment of the
60.0
interventions in Libya, it reached the level of
IV V VI VII VIII IX X XI XII I II III IV V
US Dollars 126 a barrel. The North Africa
generates the total of 5% of the oil
2010
2011
production, while the Middle East is producing
the total of 30%, thus the oil traders are observing with the fear the situation in Bahrain, being too close to
Saudi Arabia. Saudi Arabia is important, not only because of its great production, but for its significant
reserves capacities. The announcement made by Saudi Arabia that it will cover its possible lack in oil, among
other things, has generated the prices stabilization.
Brent crude oil
2. Oil demand is under the influence of the economic activity in the most developed countries and the new
economic giants (China, India, Brazil, and South Africa). Here we have two factors: on the one hand, the
economic activity is triggering the demand, while on the other hand, the productivity strengthening and the
introduction of the new technologies is decreasing the fuel consumption per product unit. We can use US as
an example: US GDP, in comparison to 1980, is twice higher, yet the consumption is practically the same
(17.7 mill barrels a day).
3. Why is the psychological factor (fear) so important? At turbulent times, such as a crisis in the North Africa,
the market response is always disproportionately strong, due to the panics arising in these situations. We
have already mentioned that the North Africa makes 5% of the world’s oil exports, but the price went up by
65% in the period from April 2011 – April 2010.
ADIL Cost Price $/T
Fuel Oil
Euro Diesel
RP €/L
BMB 95
Fuel Oil
In which way the oil price trend is affecting
1.4.2010
1.4.2011 promjena
Montenegrin economy? It is certain that the oil
Nabavna cijena $/T
price factor is affecting the retail prices, through
BMB 95
800.5
1050
31.2% the cost price of oil products at the world’s
Loz ulje
698.5
1002.75
43.6% market, as well as through the currency
exchange ration US Dollar vs. Euro.
Eurodizel
714.75
1032
44.4%
The prices of oil products in Montenegro, are
determined pursuant to the Decree on
BMB 95
1.19
1.34
12.6% calculation of the maximum oil products retail
Loz ulje
0.76
0.97
27.6% prices. Concerning the fact that the fuel excise
amount is fixed, it is at the same time being
Eurodizel
1.07
1.3
21.5%
considered the price stabilizer. The Table to the
left indicates the comparison of the oil products retail and cost prices. It is evident that the oil products prices
are not proportionate to the cost prices, due to the aforementioned factors that we have explained. The
comparison of the data on oil products imports is indicating that, for the first four moths of this year, imports
were committed of around EUR 79 million, compared to EUR 54.7 million for the same period of last year,
which is by 44% above.
MPC €/L
The aforementioned increase in expenditures is affecting the deterioration of the account balance. By
applying the simple extrapolation, the result is that the additional annual cost should amount to of around
EUR 70 million. If we know, based on the consumption method, that the exports are left out from GDP
calculation, than the negative impact is evident and clear. The second side of the increase in the oil products
prices is the attack on households’ consumption. Oil products represent of around 6% of the consumer
basket, which means that the increase in fuels of around 20% (average increase April 2011 - April 2010) is
affecting the purchasing power by of around 1,2%. Households consumption represents 84% of GDP by
consumption, thus this decline is affecting GDP decline of around 1%. Transportation costs represent of
around 14% of the consumer basket, thus the increase in transportation prices by 1% is affecting the decline
in the real purchasing power by 0.14%, generating impact on inflation. The increase in oil products is
triggering the increase in the food production costs, which means further food prices increase, both from
the domestic and the foreign sources. If we take into account the fact that the food costs amount to 30% of
the consumer basket, then any increase in price by 1% triggers the reducing in the real purchasing power by
0.3%. Households’ fuel consumption of households is subjected to the resiliency ratio, which can be seen
from the Table on the consumption of oil products, therefore this loss must be compensated by the reduction
in the consumption of other products from the consumer basket.
It is evident from the following Table, that the alignment and the decline in fuel consumption was 12% in the
period January – May, whereas eco – diesel consumption percentage is lower than B95 fuel consumption.
These estimates are accurate, not taking into account the gray economy.
OPIS
Collected excises , in mill €
Jan –
Jan-May
2010
May
2010
2011
Fuel consumption, in mill L
Jan –
Jan 2010
May
May
2010
2011
Change
Excise on lead fuel super 98 –
excise warehouse
9.48
4.69
0.79
20.4
10.1
1.7
83.1%
Excise on unleaded fuel 95 –
excise warehouse
22.39
8.41
9.75
48.8
18.3
21.3
16.0
%
Excise on diesel D2 and eco –
diesel – excise warehouse
54.64
17.75
16.17
147.7
48.0
43.7
-8.9%
86.52
30.86
26.71
216.9
76.4
66.7
12.8%
UKUPNO
The increase in oil prices represents a negative economic input, since it realistically decreases demand, and
subsequently the economic activity. Higher fuel prices through the transportation costs are additionally
triggering the increase in companies’ costs, which have the option either charge the end users or to account
them as business costs. However, considering the weak demand in this year and trend projections in a mid
run, the second option is far more realistic.
Pursuant to the aforementioned conclusions, the inflation impact is clear. It is clear that a nonrecurring
increase in fuel prices may not significantly affect the inflation expectations. However, pursuant to the IMF’s
economists research, the increase in the oil prices to US Dollars 150 a barrel, would affect the increase in
inflation by of around 2% in the first year, and by 2% in the second year. Some simple calculations are
indicating that the increase in fuel prices in Montenegro, by additional EUR 0,10 cents would result in the
decrease in GDP of 0,6 – 0,7%. Inflation increase is for sure affecting the interest rates, being aligned based
on inflation expectations, and thus directly and additionally triggering the aggravated business conditions.
Considering the impact of the fuel prices on the economic activity, the Government of Montenegro, by
amending regulations, has introduced the increase in the obligation of lodging the mineral fuels excise in
certain economic activity areas. These amendments are envisaging the decline in the obligation of covering
the excise in the amount of EUR 0. 20 cents for eco-diesel. It is clear that this measure will result in the
decline in budgetary revenues on the basis of eco-diesel excise.
Conclusion
It is realistic to expect the increase in oil prices in the forthcoming period, being dictated by the increase in
the world economy demand, especially by new economic giants, as well as by the limited resources. Any
instability may only additionally affect the future price shocks. These trends will require ongoing adjustments
and the increase in the efficient use of these resources in Montenegro.
Mr. Radovan Živković
Ms. Iva Radovanović
Sector for Economic Policy and Development