16 APR 2018
BCIS is forecasting that oil prices in construction will rise by 2% in the year to Q4 2018, then by 3% per annum over the remainder of the forecast period. Oil prices are sensitive to political issues, particularly in the Middle East, which could put sudden upward pressure on prices. Consequently, oil prices are one of the biggest risks to the forecast.
The price of European Brent Crude oil rose by 25% in 2017 compared with the previous year, but oil fuel used in construction (Gas Oil/DERV) only rose by 10%.
Although there is a strong relationship between the two, the change in price of Oil/DERV is significantly dampened due to the high level of full duty included in its price, currently accounting for nearly 50% of the price for petrol and diesel, which follows a similar trend to Oil/DERV.
Oil price fluctuations have a greater effect on construction costs in civil engineering than in building, as oil represents a significantly higher weighting in civil engineering cost.
At the peak in the price of European Brent Crude in 2008, when oil prices rose to around US$140 a barrel, fuel duty fell to below 40% of the price of Oil/DERV, and consequently, changes in crude oil prices had a larger effect on the price of Gas Oil/DERV, as fuel duty had a smaller weighting in relation to total price. Figure 2 shows the annual percentage change in oil prices.
Another factor in the price movement of Oil/DERV is the exchange rate, as crude oil is priced in US Dollars. When Sterling is stronger, this also contributes to a dampening in the annual percentage change in Gas Oil/DERV. The Sterling/US$ exchange rate is currently quite strong relative to the immediate post EU Referendum period.
Over the first three months of 2018, European Brent Crude oil stood at between US$65 and US$70. 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 will contain oil price increases. However, the US oil glut shrunk significantly over 2017, which could make the market more susceptible to sharp rises in prices from sudden disruptions in production.