Oil price and final gas price in Italy – What’s missing in the equation?

A few days ago BRS Resources Ltd, an international oil and gas exploration and production company headquartered in Texas, promised to answer to a question I posted over the last Christmas holidays.

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Who can explain why, independently from oil prices, gas in Italy is always 1.8 €? Of course that “always” was rhetorical. I know that the price of gas is not always 1.8euros. On the other hand the relationship between crude oil prices and the final price at a gas station seemed to me not directly proportionate.

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For instance, you can see how the fluctuation of crude oil prices (in red) between August and October 2012 does not correspond to the fluctuations of the final price to consumers (in blue for Diesel and yellow for Super). On the other hand, while crude oil prices between mid October and mid November seem stable, final gas prices dropped.

In 2012, Italy was the country with the most expensive gas in the world, in an economy in recession, where jobs are fading away and fiscal pressure is the highest in Europe. Still, how come an essential tradable good like gas remains so high?

Video: Adjustment in the euro area

The think tank Bruegel recently released the policy contribution entitled “Arithmetic is absolute: euro area adjustment”. This publication suggests that less inflation in Italy and more inflation in Germany are urgently needed to achieve rebalancing in the euro area.

I was happy to interview the author of this policy contribution Guntram Wolff, deputy director of Bruegel.

Below you will find the video and the transcript.

Interviewer: Guntram Wolff, You are the author of the policy contribution “Arithmetic is absolute: euro area adjustment”. What is your assessment of relative price adjustment in the euro area?

There is a big discussion whether relative price adjustment is happening just in one part of the euro area and not in the other. Namely, that prices move in some countries but I others they don’t. Therefore I looked at price adjustment, price data, consumer price inflation and I found that actually consumer price inflation is not adjusting in most countries of the euro zone. We have some countries where we see adjustment, especially in Ireland where there has been a significant drop in inflation rate but in most other countries there is no significant adjustment visible at the moment.

Interviewer:  So, is the European Central Bank achieving symmetric adjustment?

GW: Well, when looking at the data it is clear that some countries have very significant recessions but we also see that these recessions do not lead to price drops. So we see changes in unit labour costs but we don’t see changes in inflation and that makes it very difficult for the ECB to actually react to the recessions because if inflation rates were to fall then monetary policy would be forced to ease its conditions and thereby trigger a boom in the northern countries of Europe beyond what it does at the moment. The worrying thing here is that the ECB’s scope for action is limited because of the broken link between unit labour cost and consumer price inflation.

Interviewer: What does the outlook look like for adjustment in the euro area for the years to come?

GW: I looked at the forecast of the European Commission and the outlook actually is not very encouraging. We see that consumer price inflation in Italy remains above the euro zone average whereas consumer price inflation in Germany remains at the euro zone average. In fact, to achieve the rebalancing we need in Europe we need higher inflation rates in Germany and lower inflation rates in Italy and that we don’t see in the forecast yet.