Will cheap oil provide relief for hard-pressed households?

Over the course of 2015, energy prices dropped a stone bringing huge short-term benefits, in the process, to the Irish economy. Over the past few months, however, this trend has gone into reverse.

Could we be about to experience the sort of rebound in energy prices that causes consumers here to shed the economic gains that we have started to take for granted?

Last February, the price of crude oil touched $25 a barrel down from a peak of around $150 in the middle of 2014.

In recent days, however, the price touched almost $50 on the back of news of disruptions in supply and with the release of data showing that global oil stocks had diminished.

London analysts have tended to focus on the impact of falling commodity prices on the banking sector given their exposure to over borrowed producer countries. Exploration companies are also an important component in the FTSE Index.

As a result, the financial markets have adopted a different perspective to that of people on this island.

In truth, the softness in energy prices has been welcome in the short term, transferring wealth to ordinary consumers and away from once cash-rich authoritarian governments, many of which are now floundering.

Given that we in Ireland have to meet just over 90% of our energy requirement through imports, any significant downward shift in the price of such imports represents a real transfer of wealth to the economy as a whole and to businesses and households, individually.

In late 2012, the price of petrol at the pumps stood at €1.70 a litre. The average price for the year as a whole was €1.63 a litre. It fell to around €1.25 earlier this year, having averaged €1.37 during 2015.

According to one reliable estimate, the average household consumes 1,200 litres of petrol or diesel in the course of the year.

The decline in motor fuel prices between 2012 and 2015 was worth around €300 a year to each household. If prices were to average €1.30 for 2016 as a whole, the savings would amount to €400.

That’s a nice extra dollop of after-tax income for a household with average earnings of €40,000.

Moreover, the benefits have tended to be greatest for car-dependent young families, living in the outer suburbs and dormitory towns.

People in such households are typically heavily financially stretched with heavy borrowings, rental outgoings, and commitments for childcare and education.

A person with a typical variable rate mortgage of €250,000 benefits to the tune of €15 a month for every quarter point cut in the interest rate.

Of course, many of these benefits have been offset by adverse trends including rocketing rents and dramatic increases in the cost of insurance cover due to weather events and an upsurge in the cost of motor and health claims.

The question for some service suppliers is whether they have used the slightly better times to hike prices.

Austin Hughes, chief economist at KBC Bank, estimates the reduction in the oil and gas bill was worth €1.3bn to the economy last year, the equivalent of a 0.5% boost to GNP. And as we have seen those benefits are spread widely.

Falling energy prices do not always provide a boost to economies — even those as dependent on imported fossil fuels. In 2008, the oil price peaked at a four-year high of $145 in July, two months before the collapse of Lehman Brothers.

It had fallen back to less than $40 by February 2009. However, the oil price collapse became a sideshow because of the scale of the global financial crisis.

To date, the rebound in the price since the start of the year has had little negative impact. As an issue, energy prices rank well down the scale of concerns.

Mr Hughes believes that the impact would only really begin if the price were to break through $70. The general view is that this is unlikely.

It has to be pointed out, however, that many experts have been getting their calls on the industry wrong.

Goldman Sachs for one seems to have changed its tune. Having been very bearish about the industry’s prospects, it has begun to emphasise its view that the glut of oil supply has now “evaporated”.

An altogether different perspective is provided by Dan Steffens, president of the Texas-based Energy Prospectus Group.

He predicts that crude oil will sky-rocket by the end of the year. “The Wall Street analysts who say that we will never see oil again at $100 a barrel will be eating their words,” he said.

Mr Steffens may be a Texan talking up his own book, but history suggests that we should think twice before ignoring its lessons.

Much will depend on the speed of any supply response to a further price surge in regions such as the US.

The falling price of solar energy, in particular, is another factor along with ongoing reductions in the energy intensity of developed economies.

In this regard, Ireland is a bit of a curate’s egg.

The energy intensity of our increasingly services-driven economy is now the lowest in the EU. Consumption has dropped by almost 20% since 2012.

At the same time, we are the most dependent on energy imports, apart from Cyprus, Malta and Luxembourg.

Between 1990 and 2006, our reliance on imports jumped from 69% to 91%. Imports of gas soared to almost 30% of our fuel requirements.

Much of this natural gas will increasingly have to be sourced from suppliers such as Russia and Algeria.

Ambitious targets for energy diversification have been set out in the White Paper published late last year by the former energy minister Alex White.

The concern is that a mix of complacency and political reality may be driving the priorities set out in the White Paper to the margins of the new Cabinet’s agenda.

However, any Government that ignores the warning signals when it comes to energy policy could be in for an unpleasant surprise. The challenge of managing climate change shows no signs of abating.

The voters, many who are still in the financial recovery ward, can be forgiven for basking in the recent energy price respite.

Soon, whatever happens with the global price of oil, they may have to get ready for a period of serious readjustment.


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