Irish petrol prices under downward pressure

Spending on energy accounts for over 10% of the average Irish household budget and the volatility of energy costs is often a significant factor in the swings evident in the  overall inflation rate. The past year has seen a much more stable picture,  however, and in September energy prices were 1.7% below the same month in 2013.  Spending on petrol  and diesel accounts for over half the total energy spend and prices there have also fallen , by some 4% over the past year. The price of petrol at the pump has also eased over the past few months and currently averages around €1.50 a litre, from  €1.57 in July. Further falls are likely in the near term  in the absence of a significant fall in the euro, to perhaps  around €1.47,  given the events unfolding in the oil and gasoline markets.

Tax accounts for around 55% of Irish petrol prices but the recent Budget left fuel alone, following a series of tax increases since 2009, amounting to over 20 cent per litre. Apart from the Exchequer, the price of petrol is largely determined by three factors; the price of crude oil, the value of the euro against the dollar and refinery margins. The global demand for crude is rising but at a slower pace than most expected  -the International Energy Agency has just revised down its forecast for this year and next-reflecting sluggish world growth and a steady decline in the amount of oil required to produce a given unit of output;oil provided 46% of world energy needs in 1973 but only 31% today..The biggest recent  change in the global oil market has come from the supply side, however, with a large increase in non-OPEC production; in the past year non-OPEC supply has increased by over 2 million barrels per day  and in the near term increased production from that source is expected to more than offset any likely increase in overall  global demand. A big factor in that change is the increase in output from the US (in part reflecting the impact of oil from Shale sands) with production there currently challenging Saudi Arabia for the title of largest world producer.

The price of Brent Blend, the European crude benchmark, has fallen by 22% over the past three months, to around $85 a barrel in the face of these demand and supply changes. The euro has also fallen against the dollar over the same period but the decline there has been much  less pronounced, at around 7%, so in euro terms crude oil is now some 15% cheaper than it was in mid-July. In the medium term the price of crude will determine the price of refined products, including petrol, but in the shorter term the margin that a refinery can make  by ‘Cracking’ the barrel of crude (the ‘Crack spread’) can vary, depending on local demand conditions and the degree of excess capacity in the industry. Crack spreads in Europe have been higher in recent months than they were a year ago  but the wholesale price of gasoline has fallen sharply of late and now broadly reflects that of the fall in crude.

A 15% fall in the wholesale price of petrol  over recent months would therefore imply a 7% fall in prices at the pump from the mid July level  (given  over half the price is tax) which would leave average prices around €1.47 a litre. Price will vary around this, of, course, given local supply and demand conditions but most areas should see some price declines, although the demand for petrol is now rising again nationally, which may also influence retail margins. The main risk to that outcome relates to the euro, which has regained some ground of late but still looks vulnerable given the economic backdrop .



Irish Budget could now add up to €1bn in stimulus to economy

In April, the Irish Government expected that another round of tax increases and spending reductions would be required to get the 2015 Budget deficit below the 3% target set by the EU, with €2bn seen as the adjustment figure. That would have taken the cumulative adjustment to €32bn since the initial retrenchment started in 2008 but in the event it now appears that such is the transformed economic outlook that the 2015 Budget ( to be delivered on Tuesday Oct 14) will now provide a stimulus to the economy, which may amount to up to €1bn, depending on how much leeway the Minister for Finance chooses relative to the 3% target.

A key factor behind this remarkable change in the budgetary position is the performance of the economy over the first half of 2014. That has prompted the Department of Finance to revise up its real growth forecast for this year and next; 4.7% growth is now envisaged in 2014, from an initial 2%, with the economy forecast to expand by 3.6% in 2015. Nominal GDP is also now seen as being much higher than originally  projected, with  a figure  of €193bn  forecast by the Department , an extraordinary  €19bn above that forecast six months ago. A stronger economy implies a lower cash deficit, via reduced welfare spending and higher tax receipts, with a higher nominal GDP figure also helping to lower the fiscal and debt ratios.

It has been apparent for some time that this year’s deficit would be much lower than initially forecast and the Government’s ‘Estimates of Receipts and Expenditure’, published last night, predicts a 2014 General Government deficit (GGD) of  €6.9bn, which is €1.2bn below that envisaged in April. The deficit ratio is also much lower, at 3.7% of GDP instead of 4.8%. In fact that outturn, if it materializes, would be a little worse than some had expected; revenue is projected to come in €1.8bn ahead of the April forecast, including a €1bn overshoot in tax receipts, but spending is now forecast to be €800mn above the initial target, including over €500mn in voted expenditure, perhaps indicating that the current Health overspend will not be corrected.

Voted  current spending is projected to fall in 2015, by €1.3bn from the 2014 outturn, but again this hides a significant change in plan, as next year’s figure is almost €1bn above that envisaged last April . As a consequence the GGD  in 2015 is only €0.5bn below that projected in April, coming in at €4.7bn. This is 2.4% of forecast GDP and hence well below the 3% target, although had the initial spending plans been adhered to the deficit would be substantially  below 2%.

The figures are on an unchanged policy basis and so the Minister has significant leeway now to raise spending and give some tax relief, with the scale of any largess dependent on his final target. In addition, he may announce some ‘savings’, so increasing the scope for a potential stimulus, including lower debt interest on foot of some repayment of the IMF loan, refinanced at cheaper market rates. That might amount to say €300mn. so reducing the pre-Budget deficit further, to €4.4bn. Consequently a final target of say, , €5.4bn,, or 2.8% of GDP, would imply a spending and tax package of around €1bn, not counting any tax buoyancy on foot of the stimulus  or positive impact on GDP.

The global economic outlook looks cloudier than it did a few months ago , with the euro area particularly weak, which adds a greater degree of uncertainty than usual to any fiscal forecast. The Minister may  err on the side of caution and go for a lower forecast deficit but the difference now is that he has far more options than envisaged earlier in the year and certainly far more than in recent budgets. A deficit of 2.8% would also mean a strong primary surplus (the budget balance less interest payments).