Local manufacturers concerned about record oil prices

Analysts are divided over the effects the continued rise will have on Israel's economy.

By SHARON WROBEL
April 21, 2006 05:09
2 minute read.
Local manufacturers concerned about record oil prices

oil barrels 88. (photo credit: )

Analysts are divided over the effects the continued rise in global crude oil prices will have on Israel's economy, but the Manufacturers' Association of Israel has serious concerns about the potential closure of factories if the surge gains momentum. Global oil prices have set new records over the past few days amid reports of shrinking US supplies and the threat of nuclear tensions between Iran, the world's fourth largest oil producer, and the international community. "Over the past year, we have seen a dramatic rise in crude oil prices, which has negatively affected manufacturers, in particular within the heavy industry sector, and those sectors which rely on crude oil such as paper, plastics, glass and electricity companies," said Nir Kantor, director of the energy committee at the Manufacturers' Association. Kantor added that he expected electricity and water prices to continue to surge, mainly because Israel has not yet made the transition to natural gas, a cheaper and more environmentally friendly substitute for crude oil, to the extent that other countries have. "The lack of competition and high prices are preventing industrial companies from making the switch to natural gas as an energy source," Kantor noted. He warned that if we do not see a swift transition to natural gas, with oil prices rising, factories could collapse and close down completely. "In the transition period, we would like to see the government cut the high taxation levied on crude oil to let the industry breathe," he said. Despite these concerns from manufacturers, some analysts were less concerned about the effect of the rallying oil prices on the growth of the country's economy. "I don't think we will see a significant impact on GDP growth as the major growth engines [in Israel] are not the traditional industries, but the hi-tech industry, which is not as much affected by higher energy costs," said Jonathan Katz, analyst at Leader & Co. Katz added that, previously, a 0.5% slowdown in world economic GDP growth was expected in the case of a $10 surge in oil prices. "But we haven't seen that." Instead, Katz maintains that the strengthening of the shekel to NIS 4.56 against the weakening US dollar is bound to offset higher electricity and gasoline prices, which, in turn, is expected to have a dampening effect on inflation. "As such, there is less pressure for the Bank of Israel to raise interest rates. However, I expect the central bank to raise interest rates by 0.25 basis points by the end of this month to maintain the interest rate gap with the US." Shlomo Maoz, chief economist at Excellence Nessuah, disagrees. "A stronger shekel is not likely to offset inflationary effects. The surge in oil prices will cause inflation to rise higher than expected to about 2.8%." According to Maoz, higher energy prices are bound to affect flight occupancy, tourism and wages leading to a slowdown in the economy. "However, once the worries of Iran are washed away, we will see oil prices moving back [down]," said Maoz.


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