Consumers feel pinch of record oil prices

The rise in oil prices is also expected to affect the CPI, a measure of a country's inflation level.

By MATTHEW KRIEGER
November 6, 2007 07:07
3 minute read.
The Jerusalem Post

oil biz 88 224. (photo credit: Bloomberg)

As the price of oil races toward the $100-a-barrel mark, analysts are divided over the impact the rapid increase will have on the local economy, yet are confident that it will hit consumers where it hurts the most: at the cash register. "This is a country that is driven by the strength of its hi-tech market, a sector that does not rely so much on energy consumption as it does on human resources," said Jonathan Katz, a macro-strategist at HSBC. "I don't see a major impact on the GDP, but I do think that consumers will feel the pinch as costs rise." The rise in oil prices is also expected to affect the Consumer Price Index (CPI), a measure of a country's inflation level. "A 25 percent increase in oil prices contributes a 0.7% rise in inflation," said Ayelet Nir, the chief economist at IBI. "We expect that the oil surge will positively affect the CPI for October and November and will contribute to a higher CPI." Nir added, however, that while oil was a factor in calculating the CPI, the strength of the shekel against the dollar, the most prominent factor in calculating the CPI, will more than offset the rise in inflation stemming from higher oil prices. Over the last year, global oil prices have risen more than 50%, and in the last few weeks, crude has gone on a history-making run amid reports of falling energy supplies, global political tensions, especially in the Middle East, and weakness in the US dollar. As a result of the jump in oil, the Manufacturers Association of Israel reported on Sunday that prices on thousands of items produced by companies with a heavy reliance on oil - such as chemicals, plastics, metals and manufactured food items - will increase by some 10% to 20%. It also warned that the government must act quickly to increase the amount of cheaper natural gas available to the country's industrialists to reduce ballooning costs. "The government must speed up the process of allocating natural gas resources to manufacturers across the country," said Moshe Cohen, chairman of the Manufacturers Association's Energy Committee. "In addition, the government really needs to be constructing a long-term plan as to how we will effectively reduce our dependence on oil." Cohen said manufacturing companies have had to pay some NIS 700 million extra in oil purchases over the year, as crude oil has surged to its highest levels ever at around $96 a barrel. Comparatively, a barrel of crude at this time last year was under $60, while gas prices are quite similar to where they were last January. Despite the concern of the Manufacturers Association, analysts are split about the affect rallying oil prices will have on local manufacturers. "I don't see the rising oil prices as having an affect on any local companies in terms of their profitability because the higher price of oil will be offset by the companies charging higher prices to their customers," said Shlomo Maoz, chief economist at Excellence Nessuah. "The price of oil is not something that is only affecting Israel - everyone around the world is paying more for oil, forcing everyone to charge more for their products - and I don't see any big damages coming out of this." But others are taking a more guarded approach, cautioning that the effects of the global oil rush will not be fully felt for at least three or four quarters. "What we are dealing with is essentially a rise in prices of raw materials and in shipping, and what companies such as Makhteshim Agan and Israel Chemicals have to understand is how quickly this rise in oil will flow through their prices, and are they able to fully transfer this rise onto their customers," Joseph Wolf, an analyst at Lehman Brothers, told The Jerusalem Post. "So far, it has not been so significant and corporate results have shown up to now that pricing increases can offset the rise in oil," he said. "But again, we won't know the full picture for a couple more quarters." At least when it comes to shipping costs, Wolf said, Israeli companies have an advantage. "It takes 10 days less for a boat to go from here to India [a major market for Israeli chemical exports] than it does for a boat from Vancouver, making it much cheaper," he said.


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