Scrapping fuel subsidies could cut carbon emissions and oil prices

Last week in an effort to get on top of its surging budget deficit the Egyptian government decided to cut its $20 billion fuel subsidies, resulting in fuel prices rising by almost 80% overnight. For countries from Egypt to Indonesia rising oil prices have made costs balloon but in the face of precarious government finances also provide an incentive for change. The cost of fossil fuel consumption subsidies rose from around $300 billion in 2009 to almost $550 billion in 2012. Meanwhile the recent volatility in many emerging market currencies which saw their value decline versus the US dollar also had the effect of raising the cost of importing fuel.

Although energy subsidies tend to be introduced with the intention of alleviating poverty, promoting economic development and in the case of oil producers providing a visible benefit of the country’s oil wealth. However, cheap fuel has a number of side effects including encouraging over-consumption, discouraging investment in energy infrastructure, threatening security by increasing the reliance on imported fuel and disproportionately benefiting the middle class and rich. On a global basis the effects are also damaging. All this over-consumption also results in increased carbon emissions. According to the International Energy Agency, eliminating fossil-fuel subsidies would reduce global carbon emissions by 6% by 2020.

Energy subsidies also dampen the global demand responsiveness to high fuel prices. Eliminating fuel subsidies will result in lower oil consumption overall (as over-consumption is discouraged) and will mean that the oil market will balance more rapidly as demand will be quicker to respond in the face of surging demand or supply cuts. All of which should mean that the outlook for long-term oil prices will be lower. Any progress is likely to be gradual however with politicians loath to antagonise their urban elite while fearing the angry reaction of ordinary citizens who rarely believe they will be compensated.

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Iraqi oil price premium disappears…but for how long?

Brent crude prices fell below £109 per barrel on Tuesday erasing all gains seen since the militant group known as The Islamic State (previously known as ISIS) seized Mosul on 10th June. Fears over potential disruption to oil production from the OPEC producer sent Brent crude prices to a high of $115.71 per barrel over a week later. Since then no oil production in the south of Iraq has been affected while the Kurdish are increasing exports of crude from the north. It hasn’t all been about Iraq however. Oil prices have also dropped on speculation that Libya will be able to restore exports after rebel groups returned two oil terminals back to government control. Although the direct risk of disruption to oil facilities in Iraq appears to have diminished political uncertainty remains rife. The current situation in Iraq represents part of a broader trend towards geopolitical related outages in the oil market. It won’t be long before the oil market has a new supply concern to focus on.

Related article: Oil supply outages are becoming more common and difficult to predict

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Related article: Oil market sanguine about Iraqi insurgent advance

Why have platinum prices increased?

One week ago a 5-month strike by platinum miners was declared over with miners returning to work after accepting a wage deal. During that 5-month period platinum prices ended level at $1,457 per oz. The muted response to the loss of output due to high global stockpiles as producers and consumers stocked up prior to the beginning of the strike. Now platinum prices, far from falling with market participants relieved that the strike has finished hit a 10-month high yesterday (Tuesday 1 July) of $1,511 per oz, up almost 4% over the past week. What’s going on?

Related article: Global stockpile weighs on platinum prices despite strike

Despite the end of the strike there are concerns that the endemic problems highlighted by the platinum strike are not going to go away and that consolidation among the South Africa producers was “inevitable”  - the likely result being more labour unrest. These fears resurfaced with a vengeance after members of South Africa’s largest union NUMSA said members could down tools in a wildcat strike at state-power utility Eskom, while more than 220,000 South African engineering and metal workers launched a strike. An unexpected increase in US car sales in June also bolstered investor interest in platinum. The metal widely used in catalytic converters accounts for 38% of platinum demand.

Another factor behind the rise in the platinum price has been renewed conflict between Ukraine and pro-Russian separatists. The fighting renewed concerns that Russia’s exports of platinum could be disrupted. The European Union has threatened to impose a third round of sanctions against Moscow unless Russia uses its influence to end the violence. Russia is the world’s second-largest producer of platinum.

Finally, with gold prices at a 3-month high on geopolitical concerns platinum has also seen increased demand as a safe haven and hedge against uncertainty.

Related article: Platinum prices to average $1,850 per oz in 2015 – HSBC