German Gas Prices Near Record Level | Business| Economy and finance news from a German perspective | DW | 05.04.2004
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German Gas Prices Near Record Level

Gas prices in Germany could rise to an all-time high over the coming Easter weekend, according to experts. It's the delayed arrival of a global trend that threatens economic recovery.


Soon a luxury item?

The previous oil price record in Germany was set in February of 2003, when gas cost €1.14 ($1.36) per liter (0.264 gallons) in the weeks leading up to the war in Iraq. Prices are back up to €1.12 already and are likely to climb even further, Rainer Wiek of the energy information service (EID) that monitors German and European energy markets told Bild am Sonntag.

The global threat of terror is partly to blame for the price increase: As soon as rumors about a possible al Qaeda connection to the March 11 Madrid bombings began to surface, the price for a barrel of Brent, the most important kind of crude oil, rose to new heights of $36 (€30) -- significantly more than during the war in Iraq.

OPEC Flagge

OPEC flag

"The market is extremely sensitive at the moment and reacts to the smallest news or changes," Wiek told DW-WORLD. But terror threats are not solely responsible for the price hike. Another reason is the announcement by the Organization of the Petroleum Exporting Countries (OPEC) to produce less oil starting in April, thereby limiting the supply.

OPEC curbs production as demand rises

"OPEC's aggressive policies are the main reason for rising oil prices," Eugen Weinberg, an analyst with BW Bank, told DW-WORLD. He added that rising demand in China and the U.S., where reservoirs dipped to a 28-year low in January, was also responsible, along with the global terror threat.

Benzinpreis in den USA gestiegen

Gas prices in California have climbed even higher than the U.S. average

Drivers in the U.S. have already been noticing the increase at the gas pump. The average price for a gallon of gas rose to $1.77 -- the highest level since May 2001. The U.S. economy in particular and the world economy as a whole has been hit by this price hike at an inconvenient time as most signs point to economic recovery.

"The high oil prices naturally dampen economic growth in the U.S., but it's hard to say exactly how big the impact is," Weinberg said. A speedy drop in prices is unlikely, as the U.S. is about the enter its "driving season," where gas prices traditionally are higher than in colder months, said Wiek of the EID.

Strong euro serves as buffer

Unlike their U.S. counterparts, European consumers have not felt the rise in prices as much because of the strong euro. As crude oil is traded in U.S. dollars, current exchange rates have created a kind of buffer that's protected Europe's economies from the oil price increase so far, Weinberg said.

Straßenverkehr in Russland

Traffic jam in Russia

But that's no reason to celebrate as a budding economic recovery in Germany and Europe could soon be over should the U.S. economy begin to falter. Experts like Weinberg also don't believe oil prices will sink in the near future, saying that the price will remain above $25 per barrel in the long term. "$50 isn't utopian," he added, pointing to rising demand in China and Eastern Europe in the coming years.

An uncertain future

While such a price level is hard to imagine right now and would have grave effects on the global economy, it's definitely a possibility. For the past 70 trading days, the oil prices have hovered above OPEC's goal of $22 to $28 per barrel. The average price has been rising dramatically over the last few years.

Prices do tend to reach new plateaus, however. "During the 1980s, we saw that there's a price level at which people change their habits and consumption declines," Weinberg said, adding that it could provoke a reaction like the one during the oil crisis in the 1970s.

Back then people already debated the finiteness of this most important of natural resources for the global economy. But until now oil producing countries have always been able to keep up with demand. It's unclear how long they'll be able to do so, however. "There's no reliable prognosis on how long global oil resources will last," Weinberg said.

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