Crude awakening

From mid-2014, specifically from June 19, when a barrel of oil was worth $116, oil prices have been systematically decreasing. Cheap oil is not only good news for Poland and its citizens. It also constitutes a warning light for the budget By Sergiusz Prokurat For the last couple of months, oil prices on global markets have dropped to $45 per barrel, ultimately stabilising around $50. This is the lowest level in 6 years. We are seeing a dangerous trend of oil prices coming close to 2008/2009 levels. Because oil as a resource is absolutely key in producing energy, it is a strategic element of any economy. The reason for the drop is, according to many analysts, due to the fact that the supply is too large and maladjusted to demand. As a result of an economic downturn, economic growth in several key countries has flagged. Meanwhile both the OPEC countries and the US, which is producing over 9 million barrels per day for the first time in 30 years thanks to shale, don’t want to reduce their production. The traditional OPEC strategy, aimed at maintaining high prices by reducing production, was suddenly replaced by a new course, whose aim is to maximise the market share of the cartel and not of its profits. US oil production increased by 1.1 million (in barrels per day) in the past 12 months alone, according to federal data, and is now over 9.1 million barrels produced every day. So who’s playing poker here? Maybe it’s the US, convincing their strategic partner Saudi Arabia, while simultaneously finding an ideal way of fighting their political enemy Russia, even at the expense of its own infrastructure investment in shale oil exploitation. Oil production costs in Russia are about 45 dollars. At the current prices, extraction is no longer profitable. The OPEC cartel is a very different story, having the lowest production costs in the world, with Saudi Arabia claiming the top spot, boasting production costs at around 25 dollars. If the US has struck a deal with the Saudis the world might have to wait some time to see a 100 dollar barrel again. For citizens of countries which depend on oil imports, such as Poland, the global rivalry of its producers is very beneficial. In Poland, cheap oil means slight price cuts at petrol stations. Only slight, because intermediaries cannot follow the market seamlessly, as they take on the risk of currency fluctuations. And these have been quite large in recent weeks. Ultimately, the average Kowalski will save more when filling his tank and companies will make more on services, as their costs such as logistics, transport will turn out to be lower. Interestingly, if the oil price will fall too low the country may be prone to deflation. On the other hand, low oil prices on global markets are a worry for the Finance Minister. This means less money in state coffers. These funds will have to be raised from somewhere else. In 2010, when oil prices were slightly higher, they made up one fifth of the budget revenue amounting to PLN 250 billion. Currently, the income planned for 2014 is PLN 300 billion. The price of oil is merely 40 percent of the entire petrol cost at a Polish gas station. A further 6-8 percent is processing, transport and sales margin, and a staggering 52-54 percent is made up of a variety of taxes including VAT tax (23 percent of sales of all products and services). [caption id="attachment_86184" align="aligncenter" width="300"] Image: shutterstock[/caption] Meanwhile petrol prices in neighboring countries that lie outside the EU, like Ukraine or Belarus, continue to shock. They are more than 40 percent lower than in Poland. High petrol prices in Poland were a temptation for inhabitants of border zones to smuggle it through the frontier and sell it in Poland. With lower prices these practices are no longer as profitable as before. What is more, the petrol in the east is of much lower quality than in the European Union. Reputable chains struggle with it, not to mention smaller stations. Quality studies – both official or conducted by journalists – show that the problem is huge, both in smaller and reputable stations. An important fact is that as of January 1, 2015 Poland has introduced the so-called reserve payment, which will raise prices from PLN 0.03 to 0.08 per liter. This will be especially true for LPG. Why was this additional payment introduced? According to European law, Poland has to have oil and processed petrol reserves for at least 90 days of use, to cope with the effects of a potential fuel crisis. The reason behind establishing this new law is last year’s implementation of one of the EU directives from 2009 which changed the setting of the petrol and LPG mandatory reserves. The government decided to radically change the rules governing their stockpiling from 2015 on, in order to help entrepreneurs and reduce budget spending dedicated to maintaining oil reserves. However, Poles saw this as a new tax aimed at maintaining a higher petrol price. Low oil prices may be the death knell for the development of the shale industry in Poland. In theory, companies engaged in shale gas prospecting are investing with long-term profits in mind. However, each company prospecting in our country is assuming a certain price. When oil and gas prices are low, it may arise that what had been profitable up to now will cease to make economic sense, even after successful findings. As a consequence of this situation, investments may be halted, slowed down or companies may even back out. This may be a very difficult year for the shale industry in Poland. Current prices at petrol stations are at the lowest level in four years. Alas, world price decreases do not automatically translate into lower retail prices. A strong US dollar is an impediment for Poland. A rising dollar and falling oil price, with a very volatile euro, will be setting the pace for the Polish economy this year. This means more expensive imported products in retail, albeit excluding petrol.