13 October 2004

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Runaway oil prices to have a “large weighting on economic prospects”

As oil prices continued to soar higher yesterday, marking a sixth consecutive day of all-time peaks, market analysts speaking to The Malta Financial and Business Times warned that prospects for economic growth could be wiped out as the country’s energy bill soars.
A spokesperson for Globe Fund Advisors, a member of the Global Group, said current oil price developments ought to have a large weighting on Malta’s economic prospects.
Higher oil prices have a direct impact on Enemalta’s expenditure, which is expected to increase by Lm7 million more than had been budgeted for this year.

The cost induced by purchasing fuel for vehicles is mitigated by the three-monthly adjustment in the consumer price for petrol and diesel.
A spokesperson for the Investments Ministry yesterday quashed rumours that another fuel price adjustment was in the offing, so soon after the last adjustment two weeks ago. “The system of revising fuel prices every three months appears at the moment to satisfy the financial needs of Enemalta.
“One should point out that the increases in the international prices of crude oil have a delayed impact on the prices of processed, refined oil. Naturally, Enemalta purchases refined oils that would have been impacted by rises in the cost of crude oil occurring some time earlier than we actually pay for it,” the ministry spokesperson told this newspaper.
Motorists have felt the pinch, seeing fuel costs jumping up significantly. Globe Fund Advisors said the hike in fuel prices was “inevitable after the international price of oil reached record highs”. They also pointed out that this surge in energy prices “could hamper economic growth”.
“Energy costs typically act as a tax on disposable income, resulting in lower consumer spending and modest economic growth,” the fund advisors said.
However, a substantial cost carried by Enemalta is the price for fuel purchased to fire up the power stations.
The spokesman for Globe Fund Advisors said that if Enemalta is constrained to maintain current electricity prices, the increased fuel oil cost would result in a direct and proportional decline in the company’s overall profit.
“The main problem for several electricity generation companies, including Enemalta, is that electricity consumer prices are fixed at ‘social’ levels and are difficult to change on a regular basis,” Globe Fund Advisors said.
Only two weeks ago, Parliamentary Secretary Tonio Fenech told this newspaper that government was monitoring the situation and would have to take the necessary decisions if the price of oil continued rising. Without saying that government was considering raising the price of utilities, Fenech urged consumers to use energy prudently. However, the higher oil goes, the more the inevitable becomes apparent.
Oil prices have leapt 65 per cent this year as the strongest demand growth in over two decades caught producers by surprise, leaving the already stretched global oil supply system little leeway to increase output.
US crude oil surged 81 cents to a record $54.45 a barrel yesterday, marking a sixth consecutive day of all-time peaks. In London, Brent crude rallied 84 cents to $51.50 a barrel after crossing the $50 line for the first time on Monday.
Globe Fund Advisors said the market is currently reacting to supply concerns of crude oil following news from the International Energy Agency (IEA) of higher global demand forecast for 2004.
“This has been forecasted at 82 million barrels a day as a result of higher than expected demand mostly emanating from China.”
But increased demand is just one facet of the argument. “Production impediments have haunted the world market all year, with US Gulf of Mexico oilfields still running low after last month’s Hurricane Ivan, a total of one third of their plants still need repairs and they are currently operating at 28 per cent below capacity. On the other hand, Nigeria and Norway are grappling with labour disputes,” Globe Fund Advisors told this newspaper.
More worries are in the pipeline as winter approaches and higher domestic demand may put more pressure on heating oil inventories. “The fact that major markets are moving into the winter season puts further pressure on demand. The fear is that there will not be enough heating oil and we are already seeing colder weather in the US. In London, gas oil futures yesterday broke the $550 a tonne barrier for the first time. In the United States, weekly distillate stockpile data, out on Thursday, is expected to record a fall this week of one million barrels,” market analysts warned.
“From a global perspective, the global economy expanded by 3.9 per cent in 2003. In its twice-yearly World Economic Outlook, the IMF downgraded 2005's global growth forecast to 4.3 per cent from 4.4 per cent, citing oil prices as a concern. At the end of the day, oil is a natural and thereby limited resource, which will one day run dry.
“If you add to this, the fear of any major oil disruption, which is currently haunting the markets, then one has to expect that the ‘terror’ premium for world oil prices, together with increased demand pressures will ensure that a certain level of high prices and volatility is here to stay,” the analysts said.

kurt@newsworksltd.com



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