January 19, 2012 / 2:05 PM / 8 years ago

Fuel costs, weak euro compound Europe's troubles

* Euro prices for gasoline, diesel reach record high

* Costs are changing consumer behaviour

* Utilities, transport companies among hardest hit

By Simon Falush and Zaida Espana

LONDON, Jan 19 (Reuters) - Jorge Malo won’t get in his car to deliver medical equipment if the drive is longer than 50 kilometres, wary of the eye-watering cost of filling the tank.

His dilemma, like that of drivers all over the euro zone, shows that the pressure of record euro gasoline and diesel prices is likely to help tip a continent already ravaged by a debilitating debt crisis back into recession.

“What I try to do now is to visit more clients in one day, to make more of one trip,” said Malo, a sales manager for an independent medical supplies firm in the northern Spanish city of Zaragoza.

“In fact, we have stopped supplying some companies precisely because they’re far away - 50 kilometres. If it’s an important order you consider it, but if it’s something not too big, it’s not worth it”.

Brent crude has gained over 4 percent so far this year in dollars after rising by 4.5 percent in the fourth quarter, while the euro is down 1 percent so far this year after a 3.3 percent fall in the final quarter of 2011.

As a result, gasoline and diesel prices hit record highs during the first week of January in euro terms, surpassing the peaks seen in July 2008 when the price of Brent crude topped $147 per barrel, data from Eurostat shows.

This is acting as a drag on growth by increasing pressure on governments to cut spending, raising costs for companies and changing the behaviour of consumers.

Some drivers in Zaragoza are filling up their car by just 5 euros ($6.41) at a time as they watch the pennies, Malo said.

High fuel costs are expected to hit utilities, logistics companies and transport and travel companies, which will find it hard to pass on higher costs as consumers tighten their belts.

“If it continues it will have an impact on activity because with slow demand, there’s a difficulty in passing on costs so companies will need to cut margins to maintain market share,” said Clemente Lucia, an economist at BNP Paribas in Paris.

The high cost of gasoil, widely used to heat houses in Germany, deterred home users from filling up their tanks at the start of the winter as they hoped prices would slip later in the season.

Sluggish demand for gasoil and other oil products has hit refining margins hard, contributing to pressure on Swiss-based refiner Petroplus to close three refineries around Europe and run two at half-capacity after lenders cut access to credit in late December.


Europe relies heavily on energy imports, making it particularly vulnerable to price rises when the euro slides. Fears that some euro zone states would go bankrupt have caused the single currency to lose around a tenth of its value since the middle of last year.

Data from the World Bank shows that the euro zone imports 61 percent of its net energy needs, while the United States imports just 22 percent.

“Most European countries are net importers of energy, so it’s a current account issue, and a weaker current account can contribute to a weaker currency, making the situation worse,” said Philip Poole, global head of macro investment strategy at HSBC Global Asset Management.

Utilities will be among the hardest hit by higher energy prices, and that could hit stock markets in the struggling south of Europe where they make up a relatively large share of equity indexes, said Ad van Tiggelen, a senior strategist at ING Investment Managemen, in The Hague.

The exception will be exporters, more predominant in northern Europe, who benefit from a cheaper euro.

Airlines and other transport companies are also particularly exposed to fuel costs.

“There is a price war going on, they have higher input costs and it’s hard to pass on prices, so it’s a net negative for them,” he said.

As energy costs contribute to speed up inflation, consumers are suffering.

“In this environment where wages are not increasing, it’s almost like a tax on consumers and has more impact than if there were less unemployment and spare capacity in the system,” Poole at HSBC said.

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