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Global oil prices plunging

Oil and petrol prices have fallen steeply since the beginning of June, although retail petrol prices soared more than 30% over the first seven months of the year. A potential decline in prices in coming months could ease inflationary pressures in the coming term.

The global market price of crude oil and related products has plummeted in the past few weeks, on the heels of a surge in the first half of the year. The per-barrel price of Brent crude is down nearly 12% in August to date, and more than 20% since the beginning of June. Prices are now broadly at the level seen just before Russia invaded Ukraine, triggering a spike in late February. Foreign analysts attribute this most recent dip to three factors:

Although the price of crude has fluctuated widely, the price of various products made from it has been even more volatile. This includes gasoline and diesel fuel, both of which surged in price this spring, when rising input costs were compounded by production bottlenecks. As an example, the reference price for unleaded petrol in the European market skyrocketed nearly 60% from mid-February through the beginning of June. But as with crude oil prices, the price of gasoline and diesel has tanked since mid-June, and unleaded petrol has fallen more than one-third in US dollar terms.

Icelanders have not been spared the impact of the past few months’ mushrooming fossil fuel prices. In 2022 to date, retail petrol prices have risen 30%, according to measurements from Statistics Iceland (SI). It is worth remembering, though, that a fair share of the price Icelanders pay at the pump reflects public levies, which are determined on a unit basis and do not change when wholesale prices rise. On the other hand, it should also be noted that the US dollar appreciated by 4% against the ISK in the first seven months of this year.

Commodity market experts forecast that global crude oil prices will be somewhat below the H1/2022 level in the coming term. Such forecasts are always highly uncertain, of course, particularly after the volatility of the past few months, but they do support our expectation that domestic petrol prices will ultimately be lower than they have been in the recent past.

If the price of crude oil and related products does not rise again to any marked degree – not to mention if it falls further – we think it likely that the price paid by Icelandic consumers at the pump will ultimately decline. Retail petrol prices accounted for 1.2 percentage points of SI’s 9.9% headline inflation figure for July, and the price of fuel affects a host of other CPI subcomponents as well, from airfares to imported food prices. That being the case, a return to somewhere near the price level seen just before the Ukraine war broke out could make a real difference in the inflation outlook for H2 – which would be a welcome turn of events, to put it mildly.


Jón Bjarki Bentsson

Chief economist