US embassy cable - 05WARSAW3270

UNCLAS SECTION 01 OF 02 WARSAW 003270 
 
SIPDIS 
 
Sensitive 
 
STATE FOR EUR/NCE DAVID KOSTELANCIK AND MICHAEL SESSUMS 
USDOC FOR 4232/ITA/MAC/EUR/JBURGESS AND MWILSON 
TREASURY FOR OASIA MATTHEW GAERTNER 
FRANKFURT FOR TREASURY JIM WALLAR 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PREL, PL, Economy 
SUBJECT: Polish Economy not yet Hurt by Rising Oil Prices 
 
 
This cable is sensitive, but unclassified, and NOT for 
Internet distribution. 
 
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Summary 
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1. (SBU) Rapidly increasing oil prices have had a limited 
effect on the rate of inflation in Poland to date.  Over the 
past 12 months, the average zloty price of oil has increased 
12 percent, while the consumer price index rose only 1.3 
percent and producer prices remained unchanged. 
Nevertheless, most analysts agree that the skyrocketing 
price of oil is a long-term threat to Poland's economic 
growth.  To date, however, high unemployment, low wages, low 
food prices, weak domestic demand, and the strong zloty have 
kept inflation under control and mitigated the impact of 
increasing oil prices. 
 
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Increasing Oil Prices Have Limited Effect - to Date 
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2. (U) The price of unleaded gasoline has risen 6.9 percent 
since August 2004 in Zloty terms, while the price of diesel 
oil has climbed 15.8 percent.  For Poland, which is an oil 
consumer rather than a producer, the most noticeable effect 
(aside from at the gas pump) has been the higher cost of 
imported materials.  Higher production costs in the 
manufacturing sector have reduced profitability and 
negatively affected investment demand.  So far, Polish 
households are continuing to purchase gasoline at the 
expense of some reduction in spending on other goods. 
Studies by the National Bank of Poland show that rising oil 
prices have a negative effect on demand in the short and 
medium term.  Thus a 10-percent increase in the price of oil 
may lead to a 0.2 percent decrease in GDP over 6-8 quarters. 
 
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CPI up only 0.5 percent due to low Domestic Demand 
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3. (U) Demand shocks have an effect not only on economic 
activity, but also on the consumer price index (CPI).  The 
share of fuel prices in Poland's inflation basket is 3.84 
percent.  Thus, the average 12 percent increase in fuel 
prices over the past 12 months added an extra 0.5 percentage 
points to the annual CPI.  In contrast to this direct 
effect, the indirect impact of changes in energy on the 
prices of other goods and services is hard to estimate.  In 
times of high consumption, increasing fuel prices are almost 
immediately reflected in the prices of such goods as food, 
shoes and refrigerators.  When domestic demand is low, as is 
the current case in Poland, the effect is usually delayed. 
 
4.(U) So far, the Polish National Bank reports companies 
have refrained from hiking prices for goods to avoid a loss 
in market share.  The companies accept lower profits by 
absorbing increased production and transportation costs, 
expecting an increase in demand in the near future.  This 
behavior considerably reduced the increase in the CPI in 
Poland during the first half of 2005.  However, most 
analysts expect consumption to pick up in the latter half of 
the year, and companies are acting accordingly. 
 
5.(SBU) Experts figure that the price of goods in Poland 
will start to jump significantly only after oil hits $75 per 
barrel.  According to Marek Zuber, an economist from the 
Internet Brokerage House (IDM), a $100 per barrel oil price 
would increase the CPI by 0.5 - 0.7 percent.  Most 
economists agree that starting in September, inflation in 
Poland will begin to rise, but that at year-end it will 
still be only around 1.8 percent, or well below the Monetary 
Policy Council's average inflation target of 2.5 percent. 
Thus, the Monetary Policy Council cannot use higher oil 
prices as a strong argument against further interest rate 
cuts. 
 
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A Drop in Russian Oil Prices would help 
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6. (U) The recent prediction by Russian Minister of Economy 
German Gref that the average price of Russian oil will fall 
to $48 per barrel by end 2005, if realized, would be good 
news for the Polish economy.  Poland uses Russian Urals' oil 
and processes it into gasoline considered expensive by 
Polish consumers.  Polish refiners are cautious about 
hazarding predictions of a drop in future prices.  PKN Orlen 
and Polish Nafta experts estimate that a drop in oil prices 
of 10 percent translates into a few percent decrease in 
gasoline prices, provided that other factors - such as 
exchange rates - remain unchanged. 
 
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Ministry of Finance won't budge on Excise taxes 
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7. (U) Despite strong pressure by fuel companies and 
consumers to reduce excise taxes, the Ministry of Finance is 
not contemplating a decrease.  The Finance Ministry believes 
market mechanisms such as the strong zloty and falling 
inflation are more efficient in controlling fuel prices in 
Poland than fiscal adjustments.  It also notes that excise 
tax cuts often do not reduce retail gasoline prices because, 
in practice, they are often absorbed by fuel producers, 
wholesalers and retailers. 
 
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Comment 
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8. (U) To date, the impact of rising oil prices on the 
Polish economy has been surprisingly limited.  Low domestic 
demand, high unemployment, low wages, and low food prices, 
combined with a stronger zloty have kept inflation moderate. 
However, many analysts now expect that the ultimate impact 
will take six to eight quarters to ripple through the 
economy.  As the price per barrel of oil hits new highs, it 
is harder and harder to discount the likelihood that it will 
impose real costs on Polish companies and consumers. 
#ASHE