France protected against oil price surge:analysts

4th August 2004, Comments 0 comments

PARIS, Aug 4 (AFP) - France has better defences than many countries against the relentless rise of the price of oil and its likely effects on growth, analysts said on Wednesday, some of which it shares with European neighbours.

PARIS, Aug 4 (AFP) - France has better defences than many countries against the relentless rise of the price of oil and its likely effects on growth, analysts said on Wednesday, some of which it shares with European neighbours.

First, along with other euro zone countries, France uses the euro which is presently strong against the dollar, the currency used for international trade in oil and most other commodities.

Secondly, more than 80 percent of French electricity is generated by nuclear power, the highest level of any country in Western Europe and high by any standards.

And thirdly, domestic consumption is strong, providing a cushion at the moment against the slowdown effect of rising prices for oil products.

Many in the oil market are concerned that shortages might arise as demand is driven on by consumption in China and the general recovery of the world economy.

Risks of political or civil instability are also fuelling higher oil prices.

Now there is concern that high prices might kindle inflation and cause central banks to accelerate a tendency to increase interest rates.

But in France there is a degree of confidence.

Finance Minister Nicolas Sarkozy has commented that the oil price "is a matter of concern but so far the prices of raw materials have not impeded the recovery of growth".

At Societe General bank, economist Olivier Gasnier takes the same line: the effect of high prices will be at most "rather more than was thought two months ago because there was a belief that prices were more likely to fall".

The effect would not be huge, he judged, putting any likely reduction of gross domestic product at 0.3-0.4 percentage points shaved from expected growth of about 2.4 percent this year, even though the government has held cautiously to an official forecast of 1.7 percent.

France, in common with other euro zone countries, has reduced its dependence on oil sharply since the oil price shocks of the 1970s and is being given further protection by the strength of the euro against the dollar.

This is a big factor in attenuating the rise of the price of a barrel of oil in dollars, conversely to the situation in 2000 when the price of oil rose sharply and the euro fell heavily.

Then "the price of a barrel in euros changed by USD 14 from one year to the next, which worked out to an increase of 80 percent", Gasnier noted.

This year, with the help of the stronger euro "the change is no higher than 20 percent".

Rising oil prices have not had much affect on consumption in France, a main driver of growth, he noted, referring to strong data for June in the wake of sales promotions.

At the French oil institute, chairman Olivier Appert commented that high rates of tax on petrol in Europe, amounting to about 80 percent of the retail price, acted as a kind of cushion.

"When the price of oil doubles, it amounts to an increase for the customer of about 10 percent," he explained. This contrasted to the situation in the United States where tax amounted to about 25 percent of the retail price of gasoline.

Furthermore, after adjustment for inflation, in Europe petrol is about half the price it was at the beginning of the 1980s, he remarked.

Nevertheless businesses face difficulties in coping with the price rise because, in view of uncertainty about the economic climate, they are reluctant to pass increases in raw materials prices on to their customers, Gasnier said.

"This is certainly weighing on the employment outlook because it means that margins remain under pressure."

© AFP

Subject: French news

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