Fuel to the fire
But economists say that the short-term pain caused by the price hike could lead to more efficient use of valuable resources in the future.
The decision by Poland's Energy Regulatory Office (URE) to allow the country's natural gas monopoly to raise prices has fuelled worries that Poland's economy could lose momentum, spurring its already alarming inflation rate and curtailing domestic consumption. It is anticipated that the cost of natural gas will rise an average of 14.3 percent for end users - and the price hike could happen as early as this week.
URE's decision came after five months of protracted negotiations with the Polish Oil and Gas Company (PGNiG), which had requested permission to raise its prices by a controversial 33.7 percent. The firm claimed it had been hemorrhaging funds, with around zł.400 million lost since the beginning of the year.
PGNiG later lowered its price-hike request to 29 percent and URE approved a much lower hike of 15.34 percent. Wholesalers will bear the full brunt of that increase, but URE's simultaneous decision to lower distribution fees means that end users will see a slightly lower rise.
Essential increase
"The price rise was essential, especially in light of the fact that the last time URE allowed a price rise was in mid-December, 2006," URE said in a statement. "One reason [this move was necessary] is the rising price of natural gas imports. The current prices were implemented at the start of 2007 and were based on 2006 analyses. Since then, the price of imported natural gas, which is directly linked to the price of oil, has risen by 40 percent. This increase was not compensated for by the depreciation of the dollar."
PGNiG cited the rise in global oil prices as the main factor in their request. "The price for a barrel of oil was $60 when prices were last set. Now, it is $110 - so it is nearly twice as expensive," said Barbara Kluza, a spokesperson at PGNiG. Since the firm pays market prices for the gas it imports, oil prices have had a strong impact on its bottom line. The company claimed it was losing some zł.5-6 million every day.
But URE contended that PGNiG's initial request would have overcompensated the firm for those losses. "The initial price hike that PGNiG applied for was excessive because it also set higher prices for domestic gas, not only imported gas," said Tomasz Kowalak, the head of price-setting department at URE. "We could not allow that."
In its application for the price increase, PGNiG added that it could soon ask for further rises if global energy prices continue to soar. It seems unlikely, however, that such a request would be granted in the near future. URE president Mariusz Swora said that he didn't expect any further increases this year.
End-users' loss
The customers who will see the biggest rise in prices are those use only use natural gas for cooking. These users could see prices rise between 16 and 21.9 percent, depending on the region in which they reside. That could lead to an increase of zł.3.87-5.01 per month on average, according to PGNiG analyses.
Those who use gas to heat their water and homes as well as to cook will see less of a hike, but not lower than 12.8 percent. Despite seeing a lower rise in prices, however, these people will be hit the hardest, because they use more gas overall.
"Those most exposed to the negative results of the price increase will be people who use gas for heating," Ryszard Petru, Bank BPH's chief economist, told WBJ. They will pay around zł.37.49-48.43 more per month, according to PGNiG. "Among companies, the chemical industry will be the hardest hit, mainly companies producing chemical fertilizers," Petru said.
However, Maciej Krzak, the head of the macroeconomic division at the Center for Social and Economic Research (CASE), pointed out that the arrival of summer would cushion the blow to those with gas heating, and that they would feel the pinch of the gas hikes at the start of 2009 at the earliest.
BPH's Petru said the regulator had kept end users firmly in mind when making its decision. "That URE did not increase prices as much as PGNiG wanted means that social conditions were taken into consideration."
PGNiG's plans
The rise in prices has been long in coming. PGNiG submitted its request to URE back in November 2007, but the regulator was waiting for the Ministry of Economy to reveal significant changes planned for the gas distribution sector. The firm had wanted to increase prices on January 1 of this year, but the ministry's decisions weren't issued until February 6, delaying the entire process. PGNiG claimed that the delay cost it hundreds of millions of złoty.
"If energy prices rise, there needs to be a readjustment so that the system comes back into balance," said CASE's Krzak. "Even if a company is state controlled, it still has to preserve its profitability," he added.
PGNiG said it also needed the price increase in order to cover the cost of major planned investments - increasing domestic natural gas extraction, enlarging gas storage facilities, development of a liquefied natural gas (LNG) terminal in Świnoujście and the construction of a pipeline from Denmark to Poland.
However, PGNiG's Kluza assured, "The scale of investments did not have any influence on the requested size of the price increase."
All of these investments are key for Poland if it wants to diversify its gas supply, especially since it is currently dependent on Russia's Gazprom. Poland imports six billion cubic meters of natural gas from Russia per year - nearly half of total domestic demand. PGNiG said that it is reducing its dependence on Russian gas every year, but refused to give any concrete figures. "This information is a trade secret," said PGNiG's Kluza.
Economic worries
The most widely predicted effect of the rise in gas prices is further inflation. Poland is already struggling with inflationary pressure - CPI hit an annual rate of 4.1 percent in March, slightly down from the previous month but still far above the National Bank of Poland's 2.5 percent target. However, economists contacted by WBJ downplayed fears that the gas hike would trigger higher inflation.
"Gas has a small share in the CPI basket - only 2.2 percent - so if the increase in prices is around 15 percent, inflation will increase by 0.3 percentage points over the whole year. Moreover, this increase will only be in effect for eight months of 2008, so at the end of the day it will boost inflation by 0.2 percentage points this year," CASE's Krzak explained.
Bank BPH's Petru agreed. "It is difficult not to understand PGNiG when gas prices are rising throughout the world, the company is losing money and the costs to end users are not so large," he said. "Inflation will rise only by 0.2 percentage points - that is not a lot. Fortunately, wages are rising by over 10 percent, and this will compensate for both general inflation and increases in energy prices."
Economists added that gas and electricity price increases would create cost-push inflation, which is considered less dangerous for the economy. On the other hand, they also pointed out that such inflation is more difficult to deal with. "The fiscal policy of the Monetary Policy Council [Poland's interest-rate-setting body] will not help in this case," Krzak said.
The increase in production costs was also seen as a minor problem. "This will not kill the economy," Petru said. "It should not be tragic for society either," added Krzak. However, the price rise "will certainly lead to a decrease in demand," Krzak continued. Lower demand will lead to a weaker economy, but will also cause inflation to fall. In the short term, the economy will slow and inflation will rise, but in the long term, the economy will find a balance, the economists posited.
Finally, experts predicted that the price rises could lead to greater energy-consciousness in the long term, bringing about many positive effects, such as a restructuring of the way Poland uses its resources or an increase in the popularity of gas-efficient appliances.
"Also, people will think twice before leaving the kettle on a bit longer just because the phone is ringing," concluded Krzak.
