Comments on the Most Recent Oil Price Developments

Oil market speculation, the market power of OPEC, and the reaction patterns of non-OPEC suppliers can be identified as the essential factors affecting the development of oil prices. Acting in the manner of a monopolist, OPEC is trying to implement a revenue-maximising strategy, with due consideration given to the policy of its competitors. With a view to medium-term developments, the volume of reserves also has to be taken into account. Given the most recent price movements, the crude oil price for Brent (Austria) will average around 28.7 $ per barrel in 2000. On a medium-term basis, OPEC will presumably succeed in assessing the behaviour of its competitors correctly and, hence, adopt a monopolist strategy. This will probably result in a price level of between 25 $ and 30 $ per barrel, the decisive factor being the short-term minimum price level for investments in additional oil exploration by non-OPEC producers. According to the IEA, OPEC will reach a market share of 50 percent after 2010, with non-OPEC suppliers operating at their maximum production levels. Higher oil prices have a direct impact on the Austrian economy by pushing up the prices of other sources of energy. These price increases are due, on the one hand, to the reaction of world-market energy prices to the oil price and, on the other hand, to changing prices (in ATS) for imports into Austria. In 2000, ATS prices for Brent increased by approximately 83 percent. This development triggers price increases for oil products (fuel oil) of around 40 percent. The prices of coal and gas, up by 2.2 percent and 4.4 percent, respectively, are less strongly affected. The impact on gas prices is likely to persist in the coming year, while coal may be "decoupled" from oil price developments. Electricity prices have even declined in 2000 in the wake of market liberalisation. Premium petrol and diesel prices increased by 18 percent and 23 percent, respectively. According to WIFO's current assessment, the direct effect of oil price increases in 2000 (given the weight of energy) in Austria on the consumer price index is about 1 percentage point. Well-founded statements on the macroeconomic effects of a high-oil-price scenario (40 $ per barrel at constant 1990 prices) can be derived from model simulations based on E3ME for 19 European regions. Across the 19 regions replicated in E3ME, a GDP effect of –2.5 percent and a reduction of employment by 4.1 percent can be observed in 2010. The overall effect of –2.1 percent against baseline for all regions compares with an effect of –1.6 percent for Austria. The drop in demand for energy is associated with substantial reductions in greenhouse gas emissions (mainly CO2). If the expected reduction of emissions is related to the Kyoto targets of the individual countries in percent of 1990 emissions agreed upon within the framework of European "burden sharing", it appears that a substantial part of these reductions would occur automatically under a high-oil-price scenario.