High oil prices likely to remain drag on economy | Business| Economy and finance news from a German perspective | DW | 03.03.2012
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High oil prices likely to remain drag on economy

The oil price has climbed to a record high. And an easing of the situation is not in sight, experts say. It's particularly global concerns about the Strait of Hormuz that's been pushing the price up.

barrels of oil piled up

Ölfässer

Never before did German car owners have to pay more to fill up their cars with petrol than throughout February, North Americans are also complaining about soaring gas prices. Germany's flagship airline, Deutsche Lufthansa, was forced to increase its fuel surcharge.

The reason is plain to see. Crude oil cost European suppliers more last year than ever before, largely because of an unfavorable euro-dollar exchange rate. And the situation looks unlikely to get better this year. Throughout 2011, German companies had to pay 583 euros ($712) on average per ton. That's considerably more than the previous peak of 506 euros a ton back in 2008, the Federal Statistics Office reported.

"In 2011, the Arab Spring pushed up the oil price right at the start of the year," said Arnoud van der Slot from a partner organization of Roland Berger Strategy Consultants. Compared to 2010, there was a 20-percent price hike.

Forecasts by the oil-exporting nations of Saudi Arabia, Russia and Mexico suggest that oil prices will increase even further in the course of this year. And their estimates have often been fairly accurate. The three nations expect the average barrel price for crude oil to rise to 111 euros, which would mean a 15-percent increase on 2011 levels.

Strait to become impassable?

What's sent the oil price going up has been the ongoing row over Iran's nuclear program, particularly Tehran's threat to close the Strait of Hormuz. It's situated between Iran and Oman and constitutes the very bottleneck that all tankers headed for the oil terminals in Iran, Iraq, Kuwait, the United Arab Emirates and Saudi Arabia have to pass.

The European Union imposed an oil embargo on Iran which will come into force in July. Iran, for its part, reacted by announcing it would cut off supplies earlier -which it did as far as oil deliveries to France and Britain are concerned.

"Since France and Britain have only imported negligible amounts of oil from there, the stop of supplies hasn't had a big impact on Iran," Germany's Commerzbank maintained. However, the announced measure to cut off supplies had been enough to make oil prices rise, the bank argued. "And that was Tehran's real intention, notably to punish all EU member countries for the bloc's boycott decision," Commerzbank said.

With the embargo in place in the summer, lacking oil supplies from Iran can in theory be replaced by deliveries from Saudi Arabia. But the oil would still have to be transported through the Strait of Hormuz. And so, it's the nervousness on global markets that's making the oil price go up, says Kirsten Westphal from the German Institute for International and Security Affairs (SWP).

Speculators reinforce trend

But it's not just political uncertainties that drive up prices. Speculation on financial markets has also gone up dramatically, claims economic expert Steffen Bukold from Hamburg.

Central banks in Europe, the United States of America and Japan have been flooding markets with cheap money that lenders seek to put in investment projects. That's why stocks are going up, and raw materials are once again inhigh demand. And crude oil the most important natural resource worldwide.

How big exactly the impact of financial markets is on the oil price cannot be expressed in figures, but they certainly have a share in the recent price hike.

What it means for Europe

There was a time when demand for oil would go down, if the economies in industrialized nations slumped. As a consequence, the oil price would decrease, too. But now, it's the emerging economies such as China which consume the biggest amount of oil.

That way, demand stays stable, and the soaring oil price weighs down heavily on the economies in Europe. If the price were to rise to $120 per barrel later this year, the German economy alone would face additional costs totaling five billion euros, according to calculations by the Association of the German Chambers of Industry and Commerce (DIHK).

Author: Insa Wrede / hg
Editor: Nicole Goebel

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