Energy, Oil and Gas  - Inflation fears as war drums beat

Warsaw Business Journal www.wbj.pl 24th Feb 2003

As war drums beat louder in the potential Iraqi war zone, analysts and budget watchers began to worry over the potential impact of further hikes in oil prices on the national economy. When the last serious price rises hit the country in 2000, the increase of 30% sent inflation soaring. Urszula CieÊlak, petroleum market analyst at Biuro Maklerskie Reflex, said prices are rising only because of the possible conflict. Despite the fact that the market had calmed down as war seemed to be postponed, prices refused to respond by falling. “If there will be corrections of prices, it will depend on if there will be the permission to start military action or not,” she said. “The tension will continue. There are no chances of a long-term trend in falling prices. At present, we have fluctuations of prices, and it is the general mood which prevails. If the war begins, there will be a sharp increase in prices; if the war is short, the prices will drop faster; if it develops for a longer period, the prices will stay at higher levels longer and then will go down slowly.” The country’s oil supplies for industry, transport and motorists mostly originate in non-OPEC Russia where supplies are plentiful, so shortages are very unlikely. However, Russia does hitch prices closely to OPEC and other reference levels.

Raimo Valo, president of Svenska Handelsbanken’s operations in Poland, is on record in the Business Journal as warning that the country is acutely exposed to oil price increases, and the danger point would be reached at $35 a barrel. On February 14, the price per barrel touched $34.40. Over 12 months, the price had gone up by $12 a barrel. CieÊlak added: “The price contains a war bonus, and it should drop to around $24. However, in that case, oil producers like OPEC may try to keep the price between $25-$28 by limiting output.” Lars Christensen, senior analyst at Danske Bank Polska, said: “As a rule of thumb, 10% reduces GDP growth by around half a percentage point year-on-year. The implication of that is that if oil prices stay at the present level for the rest of the year, then it would take a percentage point off growth.” He added it was a “risk that could be ignored, although prices ought to drop once the conflict is resolved.” Taking into account the oil situation and the continuing sluggish performance of the German economy, Danske Bank has revised its predictions for economic growth this year to 2.7%, well short of the finance ministry’s projected 3.5%, and 3.8% for 2004. “We are fairly optimistic that we will see a recovery this year, but it will be a struggling recovery and somewhat weaker than (finance minister) Grzegorz Ko©©odko expects,” Christensen said. “Higher oil prices always act as a drag on a country’s economy.”

Magdalena Kandefar, BP Polska’s spokeswoman, said that in addition to the higher costs of petrol at garage pumps, there was also the problem of the shrinking of the retail margin where forecourt profits are made. “Such a situation is unfavourable for our clients and for producers,” she said. “We can expect a decrease in petrol prices only when the cost of production will diminish.” BP Polska followed a strategy of adapting to market tendencies and not being an initiator of changes. “Therefore, if the market will calm down provoking a drop in prices, then BP will go immediately after market changes,” she said Pump prices at the weekend were z©© 3.72 per litre for petrol and z©© 2.87 for diesel. A year ago, the prices were z©©. 3.24 for unleaded petrol and z©©. 2.49 for diesel. “The increase of petroleum prices in the world always means an increase of detailed prices of petrol in Poland,” said William Kozik, the sales director of Shell Produkty Polska. “This has a direct effect on the demand. Additionally, the increase in oil prices provokes the decrease of retail margins of petrol, and we do not want to transfer the rise in oil prices worldwide on our clients.” With eyes on developments in Iraq, Kozik says that undoubtedly any change in the situation there would impact oil prices here, but that his company “will do everything possible to make another increase in oil prices the least difficult for our clients in Poland.” Arkadiusz Majzner, petroleum market analyst in the oil and fuel trade office at PKN Orlen agreed, but pointed out that oil workers’ strikes in Venezuela as well as the cold weather in the United States caused US oil reserves to drop and prices to increase. Nevertheless, he stressed that the possibility of military action in Iraq influences the high level of oil prices the most with the uncertainty of the situation keeping prices high.