Tõnis Oja: times of falling fuel costs

Photo: Liis Treimann

As it happens, never in post-Soviet Estonia’s more than 20 years of market economy have we experienced a time of falling fuel prices. True, there have been some brief interludes, most prominently during the financial crisis when motor fuel retail prices dropped by 40 per cent in less than 6 months (oil price, at the same time, falling by more than 75 per cent). But this was short-lived, and in the very difficult economic circumstances of the time most people hardly even noticed the easing.

The impact of the end-of-century decline in world oil prices completely missed us, and our subconscious expectation is that prices of resources like oil and gold will keep rising forever. But that is not the case: as with all financial assets, raw materials included, prices both rise and fall.

Not having a market economy at the time, we didn’t feel the oil price fall of the ‘80s and ‘90s. And afterwards, the timing coincided with our transition from one economic system to another which was accompanied by overall price synchronisations and a steep increase in excise. So the fact that the price of oil fell to less than $10 per barrel at the end of the ‘90s quietly passed us by. Instead, we experienced a slight price rise.

Now, hopes have risen of oil prices entering a renewed downhill trend, and possibly this time our consumers will share the benefits. Currently gasoline prices have fallen to their lowest level since last summer. Some upward corrections are surely expected, but I tend to agree with economists who think that the decade-long price rise cycle of resources is about to go into reverse.

If this happens our consumers and companies will have some reason to rejoice, as the money saved from motor fuels can be more usefully applied to something else, like investments. A 10 per cent price drop in motor fuels should save consumers and enterprises over €70m, which is close to 0.5 per cent of GDP.

But there is a down side. Falling oil prices will play on the nerves of Viru Keemia Grupp, Eesti Energia and other companies involved in shale-derived oil production. The lower the oil price, the greater the risk of losses in the shale oil industry. Domestic projects will not be impacted heavily, as refining from Estonia’s high quality oil shale deposits is profitable as long as oil is over $60 a barrel. Foreign projects, however, are more vulnerable. Shale deposits in the rest of the world are of poorer quality, and the break-even point in oil production there is dozens of dollars higher.