Title

Oil, Fuel Prices And Their Effects On The Maltese Economy

Authors

Bernard Mallia

Abstract

Oil, Fuel Prices And Their Effects On The Maltese Economy was a research study conducted during 2003 and published in 2004. It looked at the threat of increasing energy prices and their potential effects on the Maltese economy.

The paper departed from the observation that so-called “adverse oil shocks” have been ascribed in literature to the stagflationary periods of 1973 to 1975 and 1980. Given that Malta is unique on a multitude of accounts, it made sense to look into the stagflationary possibility within the Maltese Islands through the lens of Malta itself. Irrespectively of the mechanisms of price pass-through in the Maltese economy, fuel prices were deemed to affect Malta at least in an indirect manner through the channel of international trade if they affected Malta’s main trading partners.
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  • Government intervention: government subsidises energy prices thereby smoothing out the vagaries of the prices obtaining in the energy market.
  • Because of Malta’s limited availability of land, oil reserves also have to be limited.
  • The Maltese economy is highly (almost totally) dependent on oil for energy production, and has no domestic oil resources or close substitutes thereto on which it can rely in the eventuality of an oil supply disruption.
  • Alternative energy sources could potentially be economic – especially if subsidised in the same way as oil is – their employment is still paltry.
  • Water production in the Maltese Islands is energy-intensive.
  • Malta’s heavy dependence on tourism is important in energy production, which has to cater for peak demand times.
  • The overheads of the Maltese central administration are divisible over a smaller population than would have been the case for larger countries. Therefore, fewer human resources are available for statistics compilation, data takes longer to be published, and the time lag between a given event and policy responses take longer.
  • At the time of writing of this paper, the Maltese Balance Of Payments’ Capital and Current Accounts had been in deficit from 1984 and 1993 respectively, and government debt (exclusive of debt by parastatal entities for which government is a guarantor) stood at well over a billion Maltese liri.
  • In order for Malta to maintain the standard of living it has managed to achieve by the time of writing of this paper, it has had to specialise in certain areas. This has meant that Malta has had to rely on foreign trade to meet all its remaining needs.

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The main findings of this paper are summarised as follows:[list type=”icon-check-empty”]

  • If fuel is locally as price-inelastic as postulated in theoretical studies, then the result of a price increase will have a proclivity to be regressive and viceversa.
  • Fickle oil prices will be apt to generate cost-push inflation that can pass through to core-inflation, exacerbating Malta’s already-precarious productivity per lira vis-à-vis other countries.
  • With volatile oil prices, the Maltese balance of payments position in relation to OPCs will become more unpredictable and volatile itself.
  • Tourism could be adversely affected if the price of air fares change as a result of changes in the price of aviation fuel.
  • Hedging agreements for the supply of oil could be resorted to, but the result of such agreements is not always clear.
  • Enemalta, on account of its being a government-owned monopoly, is unlikely to invest in alternative energy sources even if these turn out to be economic. Liberalisation is thus needed so that eventually the benefits of green energy can be availed of.
  • This paper also constructed an inferior alternative to the Herfindahl–Hirschman Index (HHI) that could be used in the absence of data required to compute the HHI itself and endeavoured to shed light on competitiveness within different sectors of the Maltese economy to understand potential inflationary pass-through and looked at the lagged effects of political events in the Middle East on fuel prices.