Cost and price indices

Abstract

An earlier article [ 1 ] in this series dealt with prices paid by industrial users for electricity, gas and heavy fuel oil. The period covered was from 1977 to 1982 inclusive and was, in retrospect, an important time for the oil industry. World-wide consumption, according to one publication [ 21 reached a peak in 1979 at 3,125 million tonnes and fell in succeeding years to 2,809 million tonnes in 1985. Despite this drop, consumption of primary energy, i.e. all commercially traded fuels, expressed in tonnes oil equivalent, increased steadily from 6,947 million tonnes in 1979 to 7,4 14 million tonnes in 1985. Consumption of natural gas, coal, nuclear energy and hydroelectricity all increased in this period. Consumption in the non-Communist world of oil products under four main heads; gasoline, middle distillates, fuel oil and ‘othtrs’ (LPG, lubricants, bitumens, etc.) all showed reductions from 1979 to 1985, the largest being in fuel oil which fell from 1,398 million in 1979 to 863 million tonnes in 1985. Various reasons may be suggested for the fall in oil consumption in the 1980’s but probably the most important was the escalation in prices in the last two decades. In the 1970’s crude oil prices increased by a factor of about 10. In the Rotterdam market prices of heavy fuel oil rose from under US $20 per tonne in 1970 to around $70 in early 1974 and stayed around that level until late 1978. Throughout 1979 prices rose to $180 per tonne in December, then, after a slight fall, continued to rise through most of 1980, peaking at $235 per tonne in the fourth quarter. Prices fell again within a few months to around $170-180 at which level it remained fairly constant until late 1984. In early 1985 the price rose to $190 per tonne and then fell sharply to $128 by the middle of the year. After another brief recovery the fall continued through the first half of 1986 to well below $100 per tonne. The problems arising from rapidly changing dollar prices for crude oil and oil products were accentuated at times by fluctuations in the value of the U.S. dollar relative to other currencies. Most of the European currencies were gaining strength vis-a-vis the U.S. dollar in the early 1970’s, and this helped these countries to offset in part the increases in dollar prices. Around 1979 most European currencies started to weaken and the effective prices of oil products in Europe rose although dollar prices of some products actually fell. This situation persisted until mid1985 when the dollar started to weaken. As a result of the improving currency exchange rates combined with the fall in dollar prices, heavy fuel oil in Germany and Netherlands in mid1986 cost about one-third of what it had cost two years earlier. It is not surprising that OPEC, the Organisation of Petroleum Exporting Countries, is now reported to be considering changing from the U.S. dollar to the Japanese yen as the currency to be used for pricing. It was OPEC which, after its formation in 1960, adopted the dollar to replace the pound sterling at a time when the latter currency was losing strength. Natural gas prices are affected by changes in oil prices since they are tied in most countries to prices of crude oil or to one or several oil products. However gas prices are much steadier than are those of crude oil and its products. One reason for this is that most suppliers of gas have a virtual monopoly and have con-