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Record-High Gasoline Further Burdens Consumers in Europe

Mumtaz Ozkaya, a leather-clothing salesman in London, is slashing his usual 1,000 miles (1,609 kilometers) a month of driving by 30 percent and taking cheaper vacations, as record fuel prices burden European motorists.

“Wages are still the same so I am cutting back on miles and also on holidays,” Ozkaya said in an April 23 interview at a Shell-branded service station near Old Street in the U.K. capital, where regular gasoline costs 143 pence a liter ($8.76 a gallon). “Whereas we used to go on holiday to a five-star hotel for three weeks that is now a four-star for two weeks.”

The average retail price in the European Union’s 27 member nations surged to a peak of 1.69 euros a liter ($8.44 a gallon) on April 20 with Germany, France, the U.K., Greece, Italy and Spain all at records, according to European Commission data. The cost of gasoline at the pump in the continent, more than double U.S. levels, had made a fresh high every week since Jan. 13. U.K. gasoline advanced to a new all-time high last week.

Policy makers are confronted with an oil-price increase that threatens to curb consumers’ spending power at a time when at least six of the 17 euro nations are in recession. The continent, which is struggling to contain a sovereign-debt crisis that has already forced Greece, Ireland and Portugal to seek bailouts, has fewer ways to combat scarcities after shrinking profits and declining demand forced the closure of the most European refineries in three decades.

Vicious Circle

“It’s a major negative for the growth story on top of so many negatives right now in Europe,” James Knightley, senior economist at ING Groep NV, the largest Dutch financial-services company, said by phone from London on April 24. “At a time when household incomes are under immense pressure from wages being frozen and rising unemployment, rising fuel costs mean consumers are left with less and less money to spend on services.”

Weaker household spending delays investment by corporations required for economic growth, creating a “nasty vicious circle,” Knightley said.

European Central Bank President Mario Draghi said on April 4 that euro-area inflation will stay above 2 percent this year, with “upside risks” stemming from higher-than-expected oil prices. “We will pay particular attention to any signs of pass- through from higher energy prices to wages, profits and general price-setting,” he said.

Confidence Plunges

Italy’s inflation rate was at a six-month high of 3.8 percent this month amid higher energy costs and tax increases passed as part of Prime Minister Mario Monti’s austerity program, Rome-based national statistics office Istat said today in a preliminary report.

Consumer confidence in the country plunged this month to the lowest since 1996 as Monti’s cost-cutting measures deepened the recession that started in the fourth quarter. Rising crude prices and the government’s increase of value-added taxes led to a jump in gasoline costs that neared 2 euros ($2.65) a liter last week, crimping demand. Business confidence declined to a two-year low.

Gasoline prices rose 3.1 percent in April from the previous month and 20.8 percent from a year earlier, the fastest pace since the data series began in 1996, according to Istat.

A driver filling the 55-liter (14.5-gallon) tank of Europe’s most popular car, Volkswagen AG’s (VOW) Golf hatchback, pays 92.40 euros, or $122.38, compared with $55.54 for the same amount in the U.S.

Driving Less

With fuel prices rising, Europeans like Britain’s Ozkaya are driving less. In Italy, March gasoline use decreased 9.5 percent from the previous year to 713,000 metric tons, while diesel and gasoil demand dropped 8 percent, according to data from the ministry of Economic Development. French gasoline consumption dropped 9.1 percent that month, from a year earlier, the Union Francaise des Industries Petrolieres, an industry group, said in an e-mailed statement April 16. In the U.K. last year, gasoline demand dropped by about 6 percent to 16 billion liters, according to the Retail Motor Industry Federation, while diesel consumption remained stable at 18 billion liters.

“It is hitting household budgets hard,” Brian Madderson, chairman of the federation’s petrol division, said in an April 20 phone interview from London. “Motorists are cutting back on fuel expenditure where they possibly can.” The RMI represents 5,500 independent gas station operators in Britain, two-thirds of the country’s total.

U.S. Election

In a U.S. presidential election year, gasoline has become an issue for politicians and voters. The nationwide average retail price climbed to $3.94 a gallon on April 4, the highest in 11 months, and has since retreated to $3.82, according to AAA. On April 17, President Barack Obama urged Congress to bolster federal supervision of oil markets, including bigger penalties for market manipulation and greater power for regulators to increase the amount of money traders must put up to back their energy bets.

Americans pay less because taxes are lower, accounting for 11 percent of the retail price, compared with 60 percent in Britain, according to data from the U.S. Energy Department and the AA, a U.K. motoring organization.

Fuel has become more expensive on both sides of the Atlantic after international crude prices rose this year on concern that Middle East oil shipments would be disrupted after the U.S. and EU tightened sanctions against Iran over its nuclear program. New York-traded wholesale gasoline futures rallied 19 percent in the year through April 27, the second- biggest gain in the Standard & Poor’s GSCI index of 24 commodities after soybeans. Wholesale gasoline in northwest Europe, traded on barges, advanced 18 percent this year.

Exchange Rate

Fluctuations in the dollar-euro exchange rate mean that prices are more extreme in Europe than in the U.S. In euro terms, the price of Brent crude rallied to an all-time high at 96.27 euros a barrel on March 13, versus the previous peak of 93.07 euros in July 2008. In dollar terms, Brent hasn’t yet exceeded its 2008 record of $147.50.

Back at Old Street, filling his car with 70 pounds worth of fuel, Ozkaya isn’t confident his holiday spending budget will improve anytime soon. “Maybe next year it will be a three- star” hotel, he said.

The following table shows retail fuel prices for six European countries, and an average of 27 nations, in euros a liter, as of April 27. The table also shows the year-to-date gain.

Country      Price    YTD 2012 Gain
France       1.65       7.5%
Germany      1.71       6.9%
Italy        1.85       9.4%
Greece       1.85      10.8%
U.K.         1.74       7.8%
Spain        1.47       8.5%
EU Average   1.68       8.0%

Source: European Commission

To contact the reporter on this story: Lananh Nguyen in London at lnguyen35@bloomberg.net Rupert Rowling in London at rrowling@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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