The Malta Independent
Unless you have blanked yourself out of all news media these last two weeks you must be aware that government is preparing a substantial hike in energy and utilities prices.
Such measures will cut through the standard of living of most of the population, including the large swath of middle class that politicians are most sensitive to. In order to shape public opinion for their acceptance we have been bombarded with news about consequences oil prices are leaving on Enemalta`s and Air Malta`s commercial fortunes. We have been told in no uncertain manner that other countries have had to pass price increases down the line to consumer and that Malta will unavoidably have to do the same.
A laughable suggestion was made from high government sources.` It argued that the envisaged price increases are meant to strengthen the economy.` Now I can understand claims that price increases could be unavoidable (though one could argue that they need not necessarily be so).` But to be expected to believe that price increases that cut our standard living whilst feeding inflation and making us less competitive globally will be for the good of the economy, is stretching it to the point of insulting our intelligence.
This country went through oil price shocks before. In particular the oil price shock of 1973/1974 and the replica of 1979 were as painful as they were sudden. The current record nominal price of oil of US$ 55 per barrel is in real terms much lower than the real record price of 1979 which in current money terms would be equivalent to US$ 88 per barrel.
Furthermore the oil price shocks of the seventies were different in nature form the current price surge. The seventies shocks were mostly supply driven as political reasons drove OPEC to restrict oil output in order to organise a strategic, not just cyclical, terms of trade adjustment transferring wealth from consumers to producers. The seventies oil price shocks were irreversible for as long as the eye could see.
The current oil price surge is different. It is mostly demand driven as world economy surges ahead at a sustained rate and as China registers high growth rate creating demand pressures for most commodities. Furthermore Iraq war instability is forcing many countries to increase their strategic reserves due to risk of the instability spreading to Saudi Arabia, the world major oil exporter. This adds a further artificial layer of oil demand on top of the economic cyclical upswing consumption patterns which then attracts a further additional layer of demand from speculative commodity dealers. Producers are pumping oil to full capacity and have a declared policy to drive down the price to a target range of between US$ 22 - 28 per barrel if the demand could recede to permit price stability.
Clearly such happenings are outside our sphere of influence but we should not just hope for the best.` The first thing our economic managers have to do, before taking the easy way out and just pass the prices down the line to the consumer, is form an opinion as to whether the current oil price surge is cyclical or strategic. Our response thereto will have to be different depending on our assessment. If the current surge is considered strategic than price adjustments down the line to the consumer are inevitable as long-term subsidies lead to wasteful practices that we can ill-afford. Furthermore such increases would not negatively affect our global competitiveness as our competitors are subjected to similar pressures.
However, if as I believe, the current price surge is cyclical and we can reasonably expect a price of oil, post-winter, and hopefully post-Bush, at under USD 40 per barrel at dollar rate of exchange which is expected to worsen even further than current low level, than government`s response could be different from simply passing on price increases to the consumer. If we had a comfortable fiscal position, as some of our competitors do, then we could take counter-cyclical measures like reducing energy consumption taxes to mitigate the imported price increases. Clearly our fiscal position does not allow such latitudes but these circumstances underline the need for sound fiscal policies to allow room for manoeuvrability to cushion cyclical downturns.
Furthermore cyclical price increases cannot be charged down the line without taking account of its impact on global competitiveness and social consequences.` One should therefore protect sensitive areas like industry, tourism, public transport and domestic water and electricity consumption up to reasonable non-wastage level. Such protection should focus on the non-discretionary spending on energy prices.
Obviously the cost of such protection will have to borne elsewhere and the most evident outlet for this would be prices of fuel at the pump and the cost of household utilities beyond the non-discretionary element. Such measures will also help to instigate more environmentally friendly energy consumption patterns through more diffused use of public transport and installation of domestic solar heating systems. Nothing influences consumption habits better than the price.
Government ought to use its energy to protect social structure and economic competitiveness from cyclical oil price surges rather than simply manage the news about it.
Unless you have blanked yourself out of all news media these last two weeks you must be aware that government is preparing a substantial hike in energy and utilities prices.
Such measures will cut through the standard of living of most of the population, including the large swath of middle class that politicians are most sensitive to. In order to shape public opinion for their acceptance we have been bombarded with news about consequences oil prices are leaving on Enemalta`s and Air Malta`s commercial fortunes. We have been told in no uncertain manner that other countries have had to pass price increases down the line to consumer and that Malta will unavoidably have to do the same.
A laughable suggestion was made from high government sources.` It argued that the envisaged price increases are meant to strengthen the economy.` Now I can understand claims that price increases could be unavoidable (though one could argue that they need not necessarily be so).` But to be expected to believe that price increases that cut our standard living whilst feeding inflation and making us less competitive globally will be for the good of the economy, is stretching it to the point of insulting our intelligence.
This country went through oil price shocks before. In particular the oil price shock of 1973/1974 and the replica of 1979 were as painful as they were sudden. The current record nominal price of oil of US$ 55 per barrel is in real terms much lower than the real record price of 1979 which in current money terms would be equivalent to US$ 88 per barrel.
Furthermore the oil price shocks of the seventies were different in nature form the current price surge. The seventies shocks were mostly supply driven as political reasons drove OPEC to restrict oil output in order to organise a strategic, not just cyclical, terms of trade adjustment transferring wealth from consumers to producers. The seventies oil price shocks were irreversible for as long as the eye could see.
The current oil price surge is different. It is mostly demand driven as world economy surges ahead at a sustained rate and as China registers high growth rate creating demand pressures for most commodities. Furthermore Iraq war instability is forcing many countries to increase their strategic reserves due to risk of the instability spreading to Saudi Arabia, the world major oil exporter. This adds a further artificial layer of oil demand on top of the economic cyclical upswing consumption patterns which then attracts a further additional layer of demand from speculative commodity dealers. Producers are pumping oil to full capacity and have a declared policy to drive down the price to a target range of between US$ 22 - 28 per barrel if the demand could recede to permit price stability.
Clearly such happenings are outside our sphere of influence but we should not just hope for the best.` The first thing our economic managers have to do, before taking the easy way out and just pass the prices down the line to the consumer, is form an opinion as to whether the current oil price surge is cyclical or strategic. Our response thereto will have to be different depending on our assessment. If the current surge is considered strategic than price adjustments down the line to the consumer are inevitable as long-term subsidies lead to wasteful practices that we can ill-afford. Furthermore such increases would not negatively affect our global competitiveness as our competitors are subjected to similar pressures.
However, if as I believe, the current price surge is cyclical and we can reasonably expect a price of oil, post-winter, and hopefully post-Bush, at under USD 40 per barrel at dollar rate of exchange which is expected to worsen even further than current low level, than government`s response could be different from simply passing on price increases to the consumer. If we had a comfortable fiscal position, as some of our competitors do, then we could take counter-cyclical measures like reducing energy consumption taxes to mitigate the imported price increases. Clearly our fiscal position does not allow such latitudes but these circumstances underline the need for sound fiscal policies to allow room for manoeuvrability to cushion cyclical downturns.
Furthermore cyclical price increases cannot be charged down the line without taking account of its impact on global competitiveness and social consequences.` One should therefore protect sensitive areas like industry, tourism, public transport and domestic water and electricity consumption up to reasonable non-wastage level. Such protection should focus on the non-discretionary spending on energy prices.
Obviously the cost of such protection will have to borne elsewhere and the most evident outlet for this would be prices of fuel at the pump and the cost of household utilities beyond the non-discretionary element. Such measures will also help to instigate more environmentally friendly energy consumption patterns through more diffused use of public transport and installation of domestic solar heating systems. Nothing influences consumption habits better than the price.
Government ought to use its energy to protect social structure and economic competitiveness from cyclical oil price surges rather than simply manage the news about it.
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