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Greek Government stays cool as oil prices soar October 17, 2007

Posted by grhomeboy in Business & Economy, Energy.
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In euro terms, the average price of oil declined in January-September, compared with 2006

The performance of the economy and the execution of the present and the 2008 budget are under a new threat due to the soaring prices of international oil.

The government so far has been keeping its cool, as the rise of the euro against the dollar works as a protective shield for the Greek economy. In the year’s first nine months, the average price of oil per barrel was at $67.10, against $67 in the same period in 2006. Yet the average rate of the euro against the dollar was $1.34 in January-September this year against just $1.24 last year. This results in a 7.4 percent annual decline of the actual price per barrel from 53.80 per barrel in 2006 to 49.80 per barrel.

The 2007 budget was drafted on the assumption of an average price of $68.50 per barrel. In this sense and provided that the current high oil rates will not continue for long, the calculations of the government for the main elements of the economy will not be overturned.

For 2008, the Economy Ministry is working with the estimate of the European Central Bank (ECB), which expects the average price per barrel to reach $71.90. In fact, next year’s budget was drafted taking $75 per barrel as the average price.

If these calculations are not undone by developments, Ministry officials believe that the impact on the economy will be limited and manageable. After all, the economy has shown remarkable resistance over the last three years when global oil prices soared from 25.52 per barrel in 2003 to 51.91 per barrel in 2006.

Of course the impact of the four-year oil hike on the economy is tangible. According to the ECB, the permanent increase of oil prices by $10 weighs on the inflation by 0.2 percentage points. Therefore the rise of the average oil price from 30.70 in 2004 to 43.90 in 2005 resulted in the increase of adjusted inflation by half a percentage point. On the contrary, core inflation, which does not incorporate changes in fuel and fresh vegetable prices, declined from 3.3 percent in 2004 to 3.1 percent in 2005.

In 2006 with the increase of oil by 8 euros to 51.90 per barrel, the adjusted index declined by 0.2 percent to 3.3 percent, while core inflation fell by 0.4 percent. In 2007 the average price in euros remains lower than that of last year, so it should have a positive impact on inflation. The ECB also suggests that a permanent $10 rise per barrel of oil reduces growth by 0.3 percent, but its low impact on Greek growth in 2005 and 2006 when the economy maintained its momentum shows that growth will remain above 4 percent. The current account balance should also be unaffected.

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