Motor fuel price increase threatening inflation

Although Spain has had considerable success in reducing inflation, there is a fear that things are set to change once again, making life increasingly difficult for families and individuals already paying higher prices for pretty much everything, as the increase in the cost of motor fuel might increase inflation once again, according to expert analysis.

Everyone who owns a motor vehicle will be all too aware that prices have been increasing for two and a half months, which have already reached 1,751 and 1,668 euro per litre for diesel and petrol, respectively. Fuels are immersed in a new price increase – this time, without Government bonuses at the pumps – shared with their raw materials. Oil is approaching $100 per barrel on an upward path that overwhelms all economic sectors and threatens to cause new increases in inflation.

The price of a barrel of Brent, which is the reference for oil in Europe, has exceeded $94, a mark it has not reached since November of last year. Since the end of June, the price of crude oil has increased by 30% and forecasts suggest that it will reach $100 per barrel before the end of the year. From the energy consulting firm Tempos Energía, they even calculate that it could reach $110 this winter.

Two factors are behind the price increase: the reduction in production by exporting countries and the increase in demand. “Right now, the most important factor is the cuts that the producing countries are applying,” says Antonio Turiel, an expert in the oil market and researcher at the CSIC, who recalls that exporters have been turning off the tap for months with the aim of raising the price of oil.

The Organisation of Petroleum Exporting Countries (OPEC) agreed almost a year ago, in October 2022, to reduce its oil production by 2 million barrels per day, a restriction that in April they raised to 3.6 million, due to the resistance of the crude oil to rise in price. In June, exporters decided to extend this cut until the end of 2024, one year longer than initially planned. There is also an additional cut in oil production of 1.3 million barrels per day by Saudi Arabia and Russia until the end of the year.

By reducing production, exporting countries pursue an increase in the price of crude oil. “They have long considered that the price of oil is inadequate and they want it to rise,” explains Turiel. OPEC justifies the manoeuvre as an attempt to achieve greater investment, although the researcher points out that the reduction in oil production is inevitable, given its scarcity, beyond the restrictions voluntarily imposed by exporting countries. “There is an inevitable rate of decline, which, no matter how much investment is made, will not be able to be prevented,” warns the researcher.

Despite the cutback strategy designed by the producing countries, an excessive rise in the price of oil can be counterproductive. “If the price is allowed to rise too much, a recession will be forced. A contraction in economic activity causes demand to fall and, with it, also the price,” warns Turiel, pointing out that the barrel could still reach 110 Dollars. “The equilibrium price they are looking for is a high price, but not too high, although it is increasingly difficult to obtain,” says the physicist. “We are entering a very delicate situation,” he adds.

The risk lies in the high dependence that exists in practically all productive sectors on ‘black gold’. In fact, at the same time that OPEC has reduced production, world demand for oil has grown, mainly due to the reactivation of China after the pandemic, the increase in flights during the summer and the needs of the petrochemical industry, explain the Spanish Association of Petroleum Products Operators (AOP). The International Energy Agency (IEA) recorded a record in global oil demand of 103 million barrels per day in June and suggests that consumption will continue to increase in the coming years.

The rise in the price of crude oil is also pushing up fuel prices, although the price of the latter is also influenced by other factors such as their specific prices in international markets – independent of those of oil -, taxes, the cost of logistics and gross margins. Petrol and diesel have accumulated eleven consecutive weeks of growth. Since they began their particular upward spiral at the end of June, they have risen by 10% and 16% respectively, reaching 1,751 euro per litre for super 95 and 1,668 euro per litre for diesel, according to data from the latest Petroleum Bulletin of the European Union.

“Right now what is most alarming is diesel,” says Turiel, who does not rule out that diesel will once again approach two euro, also affected by Russia’s veto on the import of petroleum products. “Diesel is the lifeblood of our system: it is transportation, it is mining and it is agriculture,” he explains. The increase in diesel prices in the last eleven weeks has been more pronounced than that of petrol.

Although both fuels currently remain far from the maximums recorded in the summer of 2022, the super 95 has set a new record so far this year. It has recorded its highest figure since the end of November of last year, although at that time the aid of 20 cents per litre of fuel introduced by the Government in April was in force, after the price of oil in March would exceed $110 per barrel.

Petrol and diesel were paid at the pump at the end of the third quarter of 2022—after the Russian invasion of Ukraine—at more than 1.8 euro per litre, levels that have not been reached for the moment. From January 1, 2023, the fuel discount – which is currently 10 cents per litre – remains only for professionals and will be reduced to 5 cents from October, with no expectation that the bonus will be recovered for all drivers.

“If the fuel prices we have now remain the same for several more months, they will end up transferring to the rest of the prices, because they make logistics more expensive. and that makes the entire chain more expensive,” explains economist Antoni Cunyat, professor at the Universitat Oberta de Catalunya (UOC) and the Universitat de València, regarding the risk that the rise in fuel prices will have repercussions on new generalised price increases. According to the expert, the current situation is not comparable to that experienced after the start of the war in Ukraine. “We have not reached the maximum levels reached then and we are starting from higher price levels, which means that the increase quantitatively is not as high, but the key is how long these petrol and diesel prices last,” he clarifies.

According to data from the National Institute of Statistics (INE), the rise in inflation in the last two months has already been largely due to the rise in fuel prices. In August the CPI grew by three tenths of a percentage point year-on-year to 2.6% and did so for the second consecutive month, after having already increased four tenths in July. Forecasts indicate that inflation will continue on this upward path until the end of the year. In fact, the Bank of Spain has revised its forecast for the Spanish economy this week and has increased its inflation forecasts for 2023 and 2024 to 3.6% and 4.3% respectively, due to the rise in energy prices and, in particular, of oil.

The banking supervisor has, however, maintained its forecast for underlying inflation, which is what discounts the price of energy and unprocessed food due to its high volatility, for 2023 at an interannual rate of 4.1%, although it has increased two tenths, to 2.3%, its estimate for 2024. This indicator, which in August moderated to 6.1%, attracts even more attention than general inflation when determining the impact of the rise in the price of energy. “This is what we have to observe in the coming months. That will be the key to seeing the impact of fuel prices. If in a couple of months we see that the underlying price rises again, it will be indicating that the increase in fuel prices is spreading to the entire economy,” concludes Cunyat.

The post Motor fuel price increase threatening inflation appeared first on Spain Today – Breaking Spanish News, Sport, and Information.