08 May 2016 Higher oil prices will affect your pocket

Statistics released on Thursday showed that Cyprus recorded its 34th month of deflation in April. According to the national consumer price index (CPI), prices fell by 2.5% over the year earlier, the same pace of decline as in March.

The last time prices actually increased compared with the same month of the previous year was June 2013, when a tiny increase of 0.1% was recorded.

If you are a consumer and your income remains the same, then deflation is good for your pocket. It means that every €10 you earn buys just that little bit more.

It is not so good if you are a seller, or if you are a government heavily dependent on VAT receipts as the latest public finances show.

While retail sales have been rising in terms of volume (units), they have been falling in terms of value.

Overall, consumer prices dropped by a cumulative 6.3% between mid-2013 and April 2016.

Within the different categories, the most dramatic fall was in housing, water, electricity and gas, where prices tumbled by 20.7%.

The cost of transport has also dropped fairly steeply, by about 8% between mid-2013 and April 2016.
The heavy influence of oil

There is one thing that these two categories have in common, namely that these products are heavily influenced by international oil prices.

The price of Brent crude (the European benchmark) dropped from a high of $125.5 per barrel in March 2012 to a low of $30.7/barrel in January 2016 – marking a drop of 76% in this period.

Falling oil prices is a large reason why your electricity bills do not look anywhere near as painful as they did back in 2011 when we had extra tariffs on stop of sky-high international oil prices.

However, it looks like the days of lower electricity and transport prices are over. Since January this year oil prices have started to climb, reaching $45.3 in early May, so in just four months, prices have risen by 48%. Some analysts expect prices to rise to around $50 by the end of the year and $70 by the end of 2017.

What will that mean for the Cypriot consumer?

First, notice that a 76% drop in oil prices converted into only a 21% fall in local electricity prices according to the consumer price index.

This is largely because the Electricity Authority of Cyprus (EAC), with a monopoly on household supply, has no incentive to pass on savings to consumers. Equally, the EAC has every reason to pass on its increases in costs to customers.

With no competitor to threaten its business, it can take its costs, add a premium to pay for its generous pensions, and then pass it all onto you. So, no doubt, we shall see our electricity bills rising just as we start to use the air conditioning heavily.

An increase in electricity (and car petrol) prices will have a wider impact on demand in Cyprus generally.
Most Cypriots have felt the squeeze since the financial crisis. Across the public and private sector wages have been cut and average earnings were still falling year on year in the fourth quarter.

So, if electricity bills are suddenly hitting €200 a month instead of less than €100, we are going to spend less on other things. Meanwhile, hoteliers could jack up their drinks prices and scare off all those new tourists we have this year.

As long as successive governments fail to replace oil and diesel with cleaner and (most of the time) cheaper gas, economic growth will always be beholden to oil prices.