WRITTEN QUESTION P-2972/00

by Rolf Linkohr (PSE) to the Commission

(13 September 2000)

Subject: The high price of oil

1. Can the Commission say how this year's rise in the price of oil is impacting on the EU's balance of payments on current account?

2. Will gas prices go the way of the price of oil, and does the Commission regard that development as justified?

Answer given by Mr Solbes Mira on behalf of the Commission

(17 October 2000)

Oil prices have, so far for 2000 (up to 12 October 2000), reached an average price of USD 28,1 per barrel (bl) (for Brent light crude oil). Present prices (12 October 2000) are at around USD 32. This compares to average prices for 1998 of USD 13,4 per barrel, and for 1999 of USD 18 per barrel.

1. The last, semi-annual, Commission forecast was finalized on the basis of data up to 21 March 2000. It predicted for the Community for 2000 a current account surplus of 5 100 million. That forecast was made assuming an average oil price of USD 24,2 per barrel for the year 2000. The assumptions underlying this forecast are not in line with the actual development in recent months, and therefore the forecast will have to be adjusted.

Higher oil prices affect mainly and directly the balance of trade. Secondary effects on other components of the balance of current account (in particular on services or income) are relatively small and delayed. For the first half of 2000, the energy trade deficit (customs basis) amounted to 52 000 million, as compared to 61 000 million for the whole year of 1999. The energy trade deficit and the oil price (in euro) have shown a relatively closely correlated development over the recent years (see chart no 1 sent direct to the Honourable Member and to Parliament's Secretariat).

Assuming that Brent oil prices in will remain for the rest of 2000 at the levels of 12 October (USD 32,26 per barrel or 37,3 per barrel) would point to an estimated deficit in the energy trade balance for the Community for 2000 of around 114 000 million, or 1,4 % of gross domestic product (GDP). Hence, the deficit would be higher by 52 000 million, or 0,6 % of GDP, than in 1999. Applying this swing arithmetically to the Community current account balance would point to a deficit in that balance of around 57 000 million in 2000. Preliminary figures for the Community current account deficit for the first half of 2000, which is of course influenced also by other factors than the oil price, show a deficit of 38 000 million.

2. Natural gas prices worldwide have also started to rise. The (market) value of gas in the Community is based on the costs which consumers would incur if they were to use a different fuel (principle of substitutability). This relation is reflected in most of the supply contracts concluded between the European gas industry and producers. Gas is therefore in most cases priced on the basis of oil products, the price of which on the world market is expressed in dollars. This means that the value of the dollar is also a factor in the price ultimately paid by the consumer for each cubic metre. As a consequence, rising oil prices push up prices of gas prices as well. The gas pricing calculation formula applied by the European gas industry takes into account the average oil price over the preceding two quarters, which explains the delay of around half a year before gas prices are adjusted (see chart no 2 sent direct to the Honourable Member and to Parliament's Secretariat), but also makes the increase less pronounced than that of oil prices. It should be noted, however, that in the context of gas market liberalisation, gas prices may due to increased supply competition in the market place become less influenced by oil prices.

Rising world market prices for gas have started to translate into higher end user prices for gas in the Community. In July and August 2000, consumer prices for gas were nearly 11 % higher than a year earlier, after a steady rise starting in mid 1999 (see chart No 3 sent direct to the Honourable Member and to Parliament's Secretariat). Yet, this inflation rate for gas is considerably lower than for petroleum.