An era of cheap oil in Central Europe

Low oil prices are a long‐term phenomenon that may have a positive impact on Central European economies, albeit not a very big one overall….

Oil prices have slumped to five‐year lows and are close to US$60 a barrel. In addition, the era of low oil prices is unlikely to peter out soon. In 2015 we expect that the price of Brent crude to remain at around US$65 a barrel on average. Thus low oil prices are a long‐term phenomenon rather than a temporary affair. Central Europe is one of the regions that may benefit most from the low oil prices. The region is a net oil importer, as is its largest trading partner – the euro area countries (see Graph 1).

Lower oil prices may primarily encourage household consumption and real income. However, the extent to which lower oil prices will influence petrol prices partly depends on the specificities of local markets, the share of taxes in the total price, and the effect of the exchange rate. The price of oil influences petrol prices in all Central European countries with approximately a two‐week delay, i.e. a week later than in Germany. Usually half of a change in the dollar price of oil is reflected in the dollar petrol prices at fuel stations in Poland and Hungary. In the Czech Republic the effect is slightly smaller (see the box).

Naturally the price for the consumer is also finally influenced by the exchange rate. This year all Central European currencies have depreciated against the dollar, having curbed the effect of cheap oil. Next year we anticipate an average price of oil of US$65 a barrel (i.e. down by 35%) while Central European currencies should be approximately 8% weaker on average against the USD. With this scenario, the final effects on household budgets should be greatest in Hungary In 2015 we predict that cheaper oil will increase household purchasing power in Hungary most (by 0.6% y/y), because of the stronger impact of oil prices on petrol prices and a greater weight of petrol expenditure in Hungary’s consumer basket. We predict a contribution of +0.2% (see Box 2) in the Czech Republic.

Another beneficial impact of cheap oil is the direct positive effect on the production capacity of industry. However, the effects are not quite clear here. Historically, only declines in oil prices triggered by supply shocks – i.e. higher oil extraction – have had positive effects on Central Europe. There have not been many shocks like this – in the past most oil market volatility has been based on a combination of demand shocks and speculation. However, if we believe that at least part of today’s oil prices slump is due to higher supply, Central European industry may easily benefit from this, with Hungary being relatively the greatest beneficiary once again (see the following Box 3). By and large, however, this effect should not exceed tenths of a percent. Therefore, just in the case of the direct affect on household budgets, the lower price of oil is nice, but no revolutionary phenomenon.