: BCIS Infrastructure forecast – Oil prices a risk to civil engineering costs

Oil prices are an upside risk to civil engineering costs in the remainder of 2018. With President Trump's decision to pull out of the Iran nuclear deal, Brent crude oil prices have risen to US$77 per barrel from US$67 at the beginning of April 2018.

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The decision means that the USA are imposing the highest level of sanctions on Iran. As a result, Iran's oil production is expected to decline, which could lead to new upward pressure on oil prices. However, the much-discussed decision may already have been priced in to the market.

Venezuela

Another possible upside risk is Venezuela's oil production, which has been in decline since the early 2000's. The oil industry in Venezuela has been affected by the country’s political turmoil, and there is fear that a further double digit fall could occur this year if there is not a significant change in the management of the industry and a reduction in the exodus of Venezuelans to neighbouring countries.

Venezuela is part of OPEC and, according to OPEC's 2017 Annual Statistical Bulletin, was the sixth highest OPEC producer of oil in 2016, with a 7% share of OPEC production. However, with OPEC's current agreement to restrict the supply of oil, increasing oil production in the remaining OPEC countries could replace any Venezuelan decline or at least mitigate it. Furthermore, at above US$70 a barrel, US oil from shale starts to become more viable, and along with additional rigs re-opening, the additional supply should contain oil price increases.

Political issues

Oil prices are sensitive to political issues, particularly in the Middle East, which could put sudden upward pressure on prices. BCIS will be keeping a close eye on the oil market in the upcoming months, with the potential of a turbulent ride for the price of oil. However, for the time being, BCIS is assuming that market forces will restrict significant upward movement, although prices might spike before falling back depending on how reactive the market is. BCIS is predicting that oil prices in construction will rise by 5% in the year to 4th quarter 2018, then by 3% per annum over the remainder of the forecast period.

Oil prices impinge on civil engineering costs as a whole, but with other materials, labour and plant costs rising significantly slower than oil prices, overall civil engineering costs are forecast to rise by 3% per annum over the first three years of the forecast, then by 5% per annum over the final two years of the forecast period. The sharper increases over the final two years result principally from sharper increases in wage awards driven by labour shortages.

Civil engineering tender prices are expected to outpace costs, due to strong demand and increased pressure on site rates in the second half of the forecast period.

Central forecast

Over the forecast period (Q417 to Q422):

  • infrastructure construction output will rise by 27%
  • costs will rise 20% and
  • tender prices will rise 28%.

BCIS has produced two further scenario forecasts (see graph below).

Upside forecast

Over the forecast period (Q417 to Q422):

  • infrastructure construction output will rise 39%
  • costs will rise 20% and
  • tender prices will rise 32%.

Downside forecast

Over the forecast period (Q417 to Q422):

  • infrastructure construction output will rise 19%
  • costs will rise 24% and
  • tender prices will rise by 5%.

Source: BCIS

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