Rising oil prices may hit Irish consumers on many fronts

AA calls for fuel taxes review as petrol and diesel prices soar to highest levels since 2015

The AA’s most recent fuel price index shows  the average price of a litre of petrol rose by 4.9 cent and diesel by 5 cent in just one month. Photograph: Anthony Devlin/AFP/Getty Images

The AA’s most recent fuel price index shows the average price of a litre of petrol rose by 4.9 cent and diesel by 5 cent in just one month. Photograph: Anthony Devlin/AFP/Getty Images

 

This time last year things were looking up for Irish consumers. The austerity policies of the preceding eight years had been somewhat relaxed as we headed into a general election. Interest rates remained at historic lows, Brexit was looking increasingly unlikely and oil prices were lower than they have been for nearly a decade. And Donald Trump was nowhere near the White House.

Today, we have to contend with a hard Brexit, at least four years of Trump, a shaky minority Government at home and oil prices on the rise overseas. The only positive we have left is low interest rates courtesy of the European Central Bank. And that is most likely keeping tens of thousands of Irish homeowners with lucrative trackers out of the poorhouse. For now.

But as the last year has shown, the picture can darken suddenly.

The rise of oil prices is likely to have the most immediate impact on our pockets. Motorists are now paying more for fuel than at any point since autumn 2015, according to the AA. Its most recent fuel price index, published last week, shows that the average price of a litre of petrol rose by 4.9 cent and diesel by 5 cent in just one month. The average price of a litre of petrol now is 136.3 cent, whereas a litre of diesel averages 126.9 cent.

This time last year a litre of petrol cost about €1.20. If a car does 19,000km a year and has a fuel consumption rate of 9.5 litres per 100km, it will use roughly 150 litres of fuel per month. If each litre of that fuel costs 17 cent more now than it did last year, the typical motorist can expect to spend €25.50 more on fuel this month compared with the same month last year.

Foolhardy assumption

Spread out over a year, that motorist will spend an additional €306 just to keep their car running. And that is assuming oil prices do not climb any more. And that would be a somewhat foolhardy assumption.

While only a fool – or a hedge fund manager – would make any serious predictions about the price of oil in the medium to long term, the short-term omens are not looking good.

“While it’s impossible to know what the long-term future holds when it comes to fuel prices, currently all the factors which inform prices are trending into the wrong direction for motorists,” says the AA’s director of consumer affairs Conor Faughnan. “While motorists were perhaps bracing themselves for an increase in fuel costs early in 2017 as oil prices have steadily risen in recent months, the latest price rise [of almost five cent in a month] represents the largest single month increase in prices since March 2015.”

In the middle of last week Brent crude – the type of crude oil that benchmarks prices across the board – was about $56 a barrel. This time last year the cost of a barrel was hovering just above $30. Some “experts” were predicting prices could fall as low as $10 a barrel. That did happen and last autumn prices started to inch higher.

Last week, ministers from Opec and big producers outside that group – including Russia – unveiled plans to cut supply to bolster prices.

The reduction in supply will be offset by an increase in US production as prices rise and fracking becomes more attractive for American rigs. That country’s oil production has risen by more than 6 per cent since mid-2016, though it remains 7 per cent below the 2015 peak. It is back to levels seen in late 2014, when strong US crude output contributed to a crash in oil prices.

Excessive

The two competing factors make it hard to say what is going to happen next.

According to Faughnan, the latest escalation in petrol and diesel prices highlights the need for fuel taxes introduced in response to the economic recession to be reviewed by the Government.

“We have little no influence over the international events that affect fuel prices. But we do control Irish taxation and that is actually where the real damage is done,” Faughnan says, pointing out that 63 per cent of the price of petrol is tax, and 58 per cent for diesel.

“That’s excessive. It has been excessive since the emergency budget of October 2008 and despite the end of the crisis period the taxes remain. As motorists contemplate empty wallets at the end of the month we should remember that it is the Irish Government much more than global oil prices that sees us paying so much.”

Over the course of 2016 there was an increase in traffic on Irish roads, which is normally a good indicator for an increase in the number of people working on a regular basis. “Continuing to tax what is a necessity for people trying to get to work, particularly for those in rural areas, at such high levels represents an anti-stimulus measure which disproportionately impacts those without viable alternative travel options,” argues Faughnan.

Emergency era

It is not the first time he has made such an argument. And he has the numbers to back up his case. Over 85c of the per litre petrol price is made up of taxes, with tax accounting for 73c of diesel pump prices. However, approximately 20c and 18c of the taxes on petrol and diesel respectively consists of five separate tax increases introduced between 2008 and 2012 as an emergency measure.

The emergency era has come to an end but the taxes which were once deemed a short-term measure have lived on.

Motoring costs aside, if we are to enter an era of higher oil prices that will hit us in other ways too and the most profound impact of rising oil prices will be on the overall economy. While the Government – both this one and the last one – were always anxious to take ownership of economic recovery, lower oil prices made a massive contribution. Ireland is an oil importer and lower prices cut costs for consumers and businesses.

Higher oil prices on the other hand will mean higher manufacturing costs and it will see the cost of farming, which is very energy-intensive climb. Home energy prices have been falling over recent months and if oil prices climb you can expect that to be reversed.

We might also see a reversal in the slight reductions in the cost of flights that have been recorded in recent months, although advocates of the aviation industry always claim that airlines buy their fuel years in advance, it would be reasonable to hope for a significant time lapse before current price climbs affect us.

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