Oil prices and their impact on inflation
Oil prices are an important inflation factor in a small economy strongly dependent on oil imports. There are two ways in which oil prices pass through into domestic inflation. They are reflected directly - with a short time lag - in fuel prices, where they represent a dominant cost factor. This price effect is fairly significant. Given the share of fuel items in the consumer baskets for overall inflation (about 4%) and net inflation (about 5%), a sizeable change in oil prices, followed by a change in fuel prices, has quite a strong impact on price indices (e.g. a 10% rise in fuel prices implies a 0.5 percentage point rise in the net inflation index).
Chart 1 Contribution of fuel price changes to net inflation
Oil prices pass through much more slowly - with a longer time lag - into prices of other products, where oil does not represent a key raw material or where it goes through several stages of processing. In this case, the impact of oil price changes on the prices of related products is difficult to monitor, as it is modified significantly by numerous other factors, e.g. the phase of the business cycle, competition on the markets for individual products, and the capacity of companies to absorb costs. It is very difficult to quantify these indirect effects when forecasting the future inflation profile.
Chart 2 Prices in oil processing and in other industries
(y-o-y change in %)
A similarly important complication in forecasting the effect of oil prices on inflation is their high volatility. From the historical point of view, the high volatility of oil prices on world markets over the last two years has in no way been exceptional, as is confirmed by the long-term time series. The volatility is the result of numerous economic and non-economic factors. Among the economic factors, the most important are global cyclical fluctuations, the seasons of the year, the opening of new raw materials beds and, last but not least, speculation about future price developments. The non-economic factors primarily include OPEC agreements on extraction quotas and military conflicts. These factors also affect the price of Ural crude, which accounts for most of the oil supplied into the Czech economy and whose prices follow essentially the same trend as the prices of oil from OPEC countries (e.g. Brent crude).
Chart 3 Price of Ural crude (1993 - June 2000)
The accuracy of forecasts of the impact of oil prices on inflation is moreover affected by the CZK/USD exchange rate. The exchange rate level can either multiply or, conversely, offset the impact of global oil price changes on domestic cost and price levels. For example, an increase in the current price of Ural crude from USD 28.08/barrel to USD 33.6/barrel for a period of six months - amid a concurrent depreciation of the CZK/USD rate of, for example, 10% (i.e. 3-4 CZK/USD) - would generate a 0.5 percentage point change in year-on-year net inflation in December 2000.
Fuel prices are strongly affected by indirect taxes. Excise tax on fuels (tax on hydrocarbon fuels and lubricants) is constant per unit volume of fuel. This decreases the price volatility with respect to changes in costs. As of 30 June 2000, the excise tax on all types of petrol stood at CZK 10.84.
Chart 4 Price structure of 1 litre of two-star petrol in June 2000 (CZK 30.08)
In addition to its own costs, the price at which the Česká rafinérská oil-refining company sells its fuels to final sellers is strongly affected by import arbitrage (Česká rafinérská's share in the volume of fuels sold is at present estimated to be around 54%; foreign refineries also have a major share in the domestic fuel market).