High oil prices a double edged sword

Drivers hate it, but expensive oil is best for both the Danish economy and the government purse

High oil prices are bad news for drivers, but for both the government and the country's businesses they mean handsome profits.

But as oil prices drop, the government’s income for North Sea oil has shrunk, while businesses in the energy sector also suffer.

“Since the start of the financial crisis there has been a reduction in economic growth across the globe, which also reduced the demand for oil. That has lowered prices. OPEC also managed to reduce the price further, which is not good news for the economy,” Michael Stæhr, a Sydbank analyst, said.  “We will soon run out of oil in the North Sea and so it is important to draw out as much money from the underground as possible.”

Just before the economic crisis, North Sea Oil cost about $145 a barrel. The price then collapsed during 2008 as the financial crisis took hold, before rising again to $127 a barrel in March this year. The price has since dropped again with a barrel now costing about $96.

Part of the explanation for the drop in prices is that the European debt crisis has also suppressed growth in other global markets. The other part of the explanation lies on the other side of the Atlantic, where a new drilling technique known as fracking has lead to incereased output.

“The price is affected by what is happening in the US where they have discovered how to extract both gas and oil through underground fracking. This has brought gas prices to their lowest level in 25 years,” Arne Lohmann Rasmussen, chief analyst at Danske Bank and oil market specialist, said.

BP is expecting that North and South America will be able to supply all of its own oil and gas by 2030, which many analysts believe will suppress prices in the long term

But lower oil prices not only reduces the government’s income, it also affects Danish businesses, according to Klaus Rasmussen, chief economist with  Dansk Industru (DI), a business lobby organisation.

“Firstly, many Danish businesses produce products that are in high demand when oil prices are high, such as alternative energy and energy saving products. Secondly, Danish businesses are very energy efficient compared with foreign businesses, so the higher the energy price, the greater our competitiveness.”

Among the companies that benefit from high oil prices are Vestas, Velux, Rockwool, Grundfoss, Danfoss and Novozymes. Many of them have signed contracts with Chinese businesses that are interested in sustainable energy solutions.

Rasmussen, from Danske Bank, however, does not think that increased oil and gas production in the Americas are likely to bring energy prices down even further

“OPEC will continue to be powerful and it’s worth remembering that while the American output rises, output from traditional sources will fall. That’s why we don’t think there will be much lower oil prices.”

For the time being, however, the varying energy prices do little to benefit Danish businesses.

“When prices vary so much, businesses don’t have time to change the price on their products. This can cost both income and customers.”

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