LONDON -European consumers have become so hardened to high taxation on gasoline and diesel that increases at the pump may be less noticeable because they comprise a smaller fraction of the overall cost than tax.
But the longer crude oil prices remain around $100 a barrel the more likely they will start to eat into economic growth in Europe, economists and analysts say, and eventually into oil demand as people buy more fuel efficient cars or drive less where public transport is available.
In its most recent monthly oil market report, the International Energy Agency says it sees signs that high crude prices are depressing global oil demand as consumers in the world's industrialized nations started to feel the pain of $100 oil. The report added that the prices were contributing to a slowdown in transportation fuel demand in the U.S.
Although a drop in oil demand hasn't yet been seen in Europe, where energy use is more efficient than in the U.S., the higher oil prices are already starting to take a toll on economic growth, inflation and consumer spending. Eventually that will also impact oil demand, say economists. "In the short term these higher prices will increase the CPI (consumer price index) and have a short-term impact on inflation," said Thorsten Fischer, Royal Bank of Scotland's senior economic adviser.
"In the long term, the key point will be how businesses pass on the higher costs to consumers and that depends on the state of the economy," Fischer said, adding that companies and consumers in developed economies had already found ways to reduce consumption.
Unlike the U.S., where transport fuels are very lightly taxed or China and India where government fuel subsidies are high, duties on gasoline and diesel in Europe are the highest in the world comprising roughly 70% of the retail price. Only Japan is on a par with Europe in terms of taxes.
Even though crude oil prices have doubled since the beginning of this year, refiners in Europe have yet to pass on all of the recent sharp increases in crude oil prices to consumers. This is partly because of a natural time lag before crude prices affect products' prices and partly because retail markets in France and the U.K. are so highly competitive that there is little room for significantly higher pump prices.
However, since benchmark U.S. oil prices have been trading above $90 a barrel since October, drivers in the U.K. have faced significant landmarks.
Diesel in October and then gasoline in November breached GBP1 a liter for the first time ever. The average gasoline price in the U.K. is now equivalent to around$7.70 for a U.S. gallon - around double what a driver in the U.S. would typically pay.
As an indication of how unusual the high U.K. prices are, boards indicating the price at many U.K. gasoline stations aren't designed for the current price levels and don't have the space to record a gasoline or diesel price of more than 99 pence a liter.
Since the beginning of the year, drivers across the European Union-25 have seen a 13% increase in gasoline prices and a 16% increase in diesel prices, according to E.U statistics.
Higher Prices Denting Europe Forecasts
The higher oil prices, along with financial market turmoil and the weakening U.S. economy, have already started to dent forecasts for economic growth in the E.U. next year. According to the most recent forecast from the European Commission, the E.U.'s executive arm, economic growth is expected to fall to 2.4% in 2008 and 2009, down from this year's rate of 2.9%. The commission's new forecast compares with 2.7% it had predicted in May.
In Germany, where retail prices for gasoline and diesel have increased 15% and 22% respectively, economists say it will act as a brake on consumer spending and drive inflation.
"Should gasoline and diesel prices remain at current levels, this could mean an additional 0.2 percentage points added to inflation over the next three years," said Sintje Diek, analyst at Bayerische Landesbank.
In Italy, the effects of this year's 11% increase in gasoline and 13% increase in diesel prices are already starting to be seen in the country's economy.
In October, the country's consumer price index hit a 13-month high - a 2.1% increase on the year, according to a recent report from Italy's statistical office Istat. Economists there are predicting gross domestic growth to slow from the fourth quarter as a result of the high oil price and a strong euro.
In the U.K. around 96% of all retail goods consumers buy are at least part-shipped by road, which means high oil prices are expected to have an impact.
"The high prices are bad news for U.K. PLC and they will ultimately feed through into inflation figures," said Ray Holloway, director of the U.K. Petrol Retailers Association.