Brace yourself for the knock-on effect of higher oil prices

RISING PRICES:Rising oil prices don't just cause havoc at the pumps. We can also expect to be paying more for travel, heating, electricity and food

MUCH AS WE hate to be the bearers of bad news, consumers need to brace themselves for the effects of rising oil prices. Political tensions in North Africa and the Middle East have sent oil prices shooting up to levels not seen since 2008, and if this unrest spreads to other major oil-producing nations, most notably Saudi Arabia, then prices will spiral even higher.

It is not just on the nation’s petrol forecourts that the impact of volatility on global markets is being felt. As a small, open economy, Ireland is at the mercy of international energy prices, which will filter right down to many aspects of our daily lives, from airline fares and home heating costs to the cost of groceries. So, what do you have to look forward to?

HOLIDAYS

The only way to escape the rain and recession talk is to head for sunnier climes. But the problem with living on an island is that unless you’ve got your own private sail-boat, you’re reliant on oil-guzzling airlines and ferries to whisk you away. British Airways recently increased its fuel surcharge for long-haul flights, while travel agency Thomas Cook is now applying an extra charge to flights from the UK and Northern Ireland.

Fortunately, none of Thomas Cook’s travel businesses in Ireland have imposed a surcharge on their flights from Dublin, Cork, Shannon or Knock.

Meanwhile, Ryanair has reiterated the “no fuel surcharge ever” guarantee it initially issued back in 2005 when other airlines began introducing charges to compensate for higher fuel costs. However, Aer Lingus is a different matter. Last month Aer Lingus chief executive Christoph Mueller said the airline was reviewing whether or not to impose a fuel surcharge on its routes.

Simon Nugent, chief executive of the Irish Travel Agents’ Association, says he would be “slow to assume that we’re set for another long period of fuel surcharges” as it’s not yet clear if there will be a sustained surge in oil prices. However, he advises people who know they have to take a long-haul trip later this year to book their flights early to protect themselves from the possibility of fuel surcharges being introduced in the meantime.

Irish Ferries, which sails between Ireland, Britain and France, has already factored current oil prices into its passenger fares. “Ferry companies in general are very much impacted by changes in oil prices, and Irish Ferries is no exception to that rule,” a spokesman for the company said. Its passenger fares are adjusted upwards and downwards as oil prices change.

“The current fares reflect the current situation,” he said.

HEATING

There is normally a lag of about two weeks before an increase in oil prices for suppliers filters down to the price charged to householders. However, far from stockpiling oil supplies in case of further price increases, consumer demand is depressed. According to a spokesman for Maxol, homeowners are either putting off filling their tank, or are just ordering the amount they had already budgeted for.

Also, some homeowners now prefer to order just half a tank of oil in case they are targeted by thieves. The siphoning of home heating oil has become quite common, and is likely to become even more prevalent if oil prices continue to rise. Dermott Jewell of the Consumers’ Association of Ireland has come across cases where people have had their oil stolen within 24 hours of their tanks being refilled, which suggests that the perpetrators may be following oil delivery trucks around.

The Maxol spokesman says people should be as cautious with their oil storage as they would be with the contents of their house. “Just because an oil tanker is outside a front door doesn’t mean it’s necessarily doing a delivery,” he adds.

“It could be doing an extraction. Therefore if you want to be a good neighbour, be a little bit vigilant.”

Most standard home insurance policies will cover oil theft. However, even though a full tank of oil costs an average of about €800, making a claim may not be worth your while.

First of all the policy excess – which could be several hundred euro – will kick in, and also it could have an impact on the cost of renewing your policy in the future. Prevention is definitely the best policy. There are all sorts of devices you can get to try to protect your oil tank, such as locks and alarms, but one of the most effective steps is to build some kind of secure structure around the tank, though of course this is more expensive.

ELECTRICITY AND GAS PRICES

Consumers will be hoping to feel the benefit of deregulation in the electricity market once the ESB is allowed to match or even undercut its competitors from April 4th onwards.

Although this should put downward pressure on electricity prices, rising oil prices will act in the opposite direction. Larry Donald of Bord Gáis Energy explains that although the vast bulk of electricity in Ireland is generated from natural gas, oil is a “reference fuel”, which means that its price ultimately has a knock-on effect on the price of gas over time.

So far gas has proved resilient, but if oil continues to trade at high levels, gas prices are likely to increase significantly later this year. This will affect both the price of electricity and retail gas for home heating and cooking.

GROCERIES

Food prices have fallen by over eight per cent in Ireland since the middle of 2008, but the intersection of spiralling commodity and oil prices could herald the return of food inflation. Hauliers have been very vocal of late about the pressure that higher diesel prices is putting on the transport industry, but Torlach Denihan of Retail Ireland explains that oil hikes affect much more than just delivery costs.

Energy price increases feed in at every stage in the food chain, from the primary producer to the retailer, and ultimately feed into the final price that the consumer pays.

Combine all of this with rising commodity prices, and the case for self-sufficiency – or at least having a stab at growing your own – begins to look pretty compelling.

CONSUMER SENTIMENT

Perhaps one of the less tangible effects of the elevated cost of oil is that it reduces consumer confidence which, let’s face it, is already pretty low. On top of rising interest rates, consumers could also be facing higher home heating, petrol, food and travel bills if oil prices remain persistently high.

Though the household sector has a significant amount of money on deposit, disposable income has shrunk, and people are likely to cut their spending even further if these living costs increase. In this way, dampened confidence could act as a drag on economic recovery.

“It’s something we could do without here,” says Bloxham chief economist Alan McQuaid. “It’s an added pressure on the household sector.”

However, there is a glimmer of hope. McQuaid says there is a chance that consumer confidence may improve with a new Government in place.

“People might be a bit more upbeat if they deliver some sort of measure, in the short-term at least, which would suggest they want to help consumers,” he said.