Conflicts keep cost of energy high despite weaker dollar and oil price

The cost of energy fell over the last month but remains higher than at this time last year due to the unrest in the Middle East and North Africa

The Bord Gáis Energy Index fell by 2% in December as eurozone oil buyers benefited from a combination of a weaker US dollar and marginally lower Brent crude oil prices. Lower wholesale Irish electricity prices in December also contributed to a fall in the index. As a result, the Bord Gáis Energy Index now stands at 149, an increase of 4% on Dec 2011.

John Heffernan, power trader at Bord Gáis Energy, said oil had maintained a record high price throughout 2012, but that the controversial practice of hydraulic fracking could drive prices down.

“In 2012, Brent crude recorded its highest ever annual average price at $111.68 a barrel as sanctions against Iran and conflict in the Middle East and North Africa region resulted in the loss of 1.7 million barrels per day of crude production,” said Mr Heffernan.

“However, as we move into 2013, increases in US oil production due to hydraulic fracturing has the potential to ease the oil supply anxieties experienced in 2012. Growing US oil production has been described as a potential ‘game changer’ that could reduce the world’s reliance on oil from the Middle East and North Africa region.”

Looking ahead, Mr Heffernan said changes in the price of crude will be driven by large economies, with a rise in economic activity driving the price up.

“In 2013, oil prices will continue to be dominated by developments in both demand and supply,” he said. “With oil demand being largely a function of Gross Domestic Product growth, developments in the global macro-economy will play an important role in determining the price of a barrel of oil.”

The high prices recorded in 2012 were not as a result of surging economic growth, but as a result of fear over supply due to the Iranian developments. Mr Heffernan said that until this is resolved, there will continue to be a ‘fera premium’ on energy.

“Record oil prices in 2012 were heavily influenced by fears of global supply disruptions and the loss of Iranian oil due to EU and US sanctions,” said Mr Heffernan. “In 2013, we could see the subsiding of these fears, and potentially prices, if US oil production results in the expansion of OPEC’s spare capacity.

“However, the ongoing impasse with Iran and civil war in Syria remains a cause of concern and until these are resolved, oil may continue to carry the $20 ‘fear premium’.”