Surging oil price threatens Swiss economic growth

Switzerland could see its oil reserves dry up Keystone

Oil prices are at their highest level in 13 years and edging close to $40 (SFr51) a barrel.

In Switzerland, as in other countries, consumers and businesses are having to fork out more for fuel. But the rising oil price could also slow Switzerland’s nascent economic recovery.

Hardest hit are likely to be energy-sensitive businesses such as the national carrier, Swiss, which recently sold hedges it purchased to protect itself against rising oil prices.

Many energy experts are warning that high fuel prices could remain a feature of the global economy for the foreseeable future.

The Organization of Petroleum Exporting Countries (Opec), which pumps one-third of the world’s oil, blames the price rise on speculators and political tensions in the Middle East.

The International Energy Agency has warned that high prices could “dampen the current cyclical upturn” in the global economy.

As the biggest oil consumer in the world, the United States stands to suffer most from the rising prices. But Europe is more dependent on supplies from the volatile Middle East, which is home to two-thirds of global reserves.

Swiss economic recovery

Economists believe Switzerland’s economic recovery could be affected if the price of oil continues to rise.

“If oil prices remain at their current levels, or even go higher, I see a slowing influence on the economic cycle,” said Alois Bischofberger, chief economist at Credit Suisse.

Bernd Schips, head of the Swiss Institute for Business Cycle Research (KOF), recently warned that it would not take long for oil prices to hurt the economy.

“If the price of oil remains consistently high, I estimate an economic slowdown of 0.5 per cent,” Schips said.

But the Swiss government does not expect to have to revise its economic forecasts.

Government economists are sticking to their forecasts of 1.8 per cent growth for this year and 2.3 per cent for next year.

“The petroleum price would have to rise dramatically to halt economic growth completely,” said Aymo Brunetti, chief economist at the State Secretariat for Economic Affairs (Seco).

Hedging bets

For Switzerland’s national airline, which is hoping to break even this year and avoid collapse, a prolonged rise in oil prices could be financially disastrous.

On Thursday, the airline reported that it had cut its losses in the first quarter, recording a net loss of SFr78 million ($61.1 million) – an improvement on the SFr200 million loss in the same period last year.

Swiss netted some SFr20 million ($15.7 million) when it sold its oil hedges in March, but the troubled carrier could now be left vulnerable if oil prices continue to rise.

Airlines such as British Airways and Lufthansa regularly purchase long-term contracts for fuel, usually paying a premium to secure supplies at a set price.

Known as “fuel hedges”, these contracts remove much of the instability and risk associated with commodities such as aviation fuel.

Even if oil prices rise, well-hedged airlines continue to pay a lower price.

Ulrik Svensson, chief financial officer at Swiss, said in March that the sale of the airline’s hedges was a “calculated risk” worth taking.

By selling when it did, the airline was effectively betting that fuel prices had reached their peak and would fall during 2004.

But fuel prices have continued to rise, reaching $38.98 (SFr50) per barrel – a level not seen since 1990, during the run-up to the first Gulf War.

Depleted stockpiles

Experts blame the surge on a supply shortage and depleted stockpiles in the United States as well as ongoing concern about stability in the Middle East.

Last week’s killing in Saudi Arabia of several foreigners working for an oil division of Swiss-Swedish engineering concern, ABB, has added to the sense of volatility.

Crude prices have risen by more than 50 per cent over the past year.

Swiss energy expert Bernhard Piller told swissinfo prices would fall, but the pressure on reserves would eventually push oil prices up again.

“Prices will fall, but not to the previous levels,” said Piller of the Swiss energy foundation. “In the long run they will rise again and within ten to 15 years we will be at the point where we have used half the globe’s oil reserves.

“In the long term we will have to find other energy alternatives.”

swissinfo, Jacob Greber in Zurich

In brief

Oil prices have reached 13-year highs. A barrel of oil now costs almost $40 (SFr51).

Prices are now at levels not seen since 1990, ahead of the first Gulf War.

Economists warn that the cost of oil could slow Switzerland’s economic recovery.

Companies in the travel sector, including the airline Swiss, could be hit hardest.

Swiss has reported a first-quarter loss for 2004 of SFr78 million ($61.1 million), down from SFr200 million in the same period last year.

In March Swiss unwound contracts guaranteeing supplies of cheap aviation fuel – effectively betting on a fall in oil prices this year.