The reason may be the global economic slowdown, the duel between Saudi Arabia and the US, or a combination of both, but oil prices are now at their lowest level since 2010. While the international media have been busy in recent day analyzing the reasons for the drop in oil prices, the Israeli consumer must settle for a NIS 0.30 per liter cut in gasoline prices at the beginning of next month, provided that oil prices remain at the current level until then.
The price of a barrel of Brent crude fell by at least another $3 to less than $85.50 last Tuesday. Following a slight correction, the price currently stands at $86.16, compared with $115 at the end of June. The price of a barrel of West Texas Intermediate (WTI)l, which was $105 in June, has plummeted to $82.92. The fall in prices is perceived as good news for consumers: an average US family is estimated to save $120 a year for every ten cent fall in the price of oil. According to a Citigroup estimate, the global effect of the drop in oil prices is equivalent to a $1.1 trillion package of incentives.
The macroeconomic explanation for the steep drop in prices is surplus supply, combined with dwindling demand, plus impressive strengthening of the dollar, because of expectations of an interest rate hike in the US.
The $3 drop in the price of oil occurred after the International Energy Agency revised its forecasts, reducing the expected growth in global oil consumption in 2014 by 200,000 barrels a day. The IEA believes that global consumption, which amounted to 92 million barrels at the beginning of 2014, will grow by only 700,000 barrels a day, not 900,000 barrels a day, as first predicted. In addition, the rapid growth in US oil production continues, based on technologies that make it possible to increase the number of barrels produced from each field and to cut the cost of production. Furthermore, despite the chaos in Libya and Iraq, the supply of oil from those two countries has not been reduced.
The plunge in the price of oil has drawn mixed responses from the countries in the OPEC oil cartel. The countries dependent on high prices in order to balance their budgets, such as Iran, Russia, and Venezuela, are anxiously following the drop in prices, and demanding cuts in the production quotas for OPEC members. Other OPEC countries, however, headed by Saudi Arabia and Kuwait, are responding to the drop in prices with aplomb. IEA therefore expects the OPEC countries to fail to agree on a production cut at their November 27 meeting.
There is, of course, a connection between the global price of a barrel of oil and the price of gasoline in Israel, but it is not a 1 to 1 correlation, because the price of gasoline in Israel is the result of several factors.
The first factor determining the price of gasoline is the international price, which is set in the last four days of each month at the Lavera fuel exchange in France. The international gasoline price component accounts for only 35% of the final price at the gas stations. The second component is the excise tax, a tax set by the Ministry of Finance, and levied on diesel and other fuels, in addition to gasoline. Excise tax, the rate of which is linked to the Consumer Price Index, accounts for 41% of the price of gasoline. Another component is the sales margin of the gas stations, which is also fixed (9% of the gasoline price). In addition, 15% VAT is imposed on these three components on each gasoline purchase. We therefore also pay VAT on the price of gasoline, including the excise tax. In other words, we pay a tax on the tax. The bottom line is that the lower oil prices are expected to reduce the price of gasoline In Israel in November by NIS 0.30 - provided that oil prices remain at the current level until the end of the month.
Published by Globes [online], Israel business news - www.globes-online.com - on October 19, 2014
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