– Oil Crisis...is the world about to be shocked

Oil price crunch
By Benson Kathuri

Just as Kenyans are beginning to breath easy with the assurance that the economy is back on track, an external threat to the growth is unfolding in the form of skyrocketing crude oil prices.
 

The greatest casualty of the high oil prices is however expected to be the economy.

Fears of a looming global oil shock gripped international markets last week as crude prices hit a new record high of $60 a barrel – the highest price ever since trade in oil futures began in 1983. And as the prices pointed northwards, analysts painted a gloomy picture over the growth prospects with a clear warning that the era of hyperinflation may be beginning to unfold.

On the domestic front where the inflation rate already stands at 16 per cent, there were genuine concerns that a steep rise in oil prices could push prices even higher and slowdown growth in key sectors. Though local figures were not immediately available, it is estimated that a rise in the price of crude by a margin of $10 pushes inflation up by a margin of 3 per cent.

This means that although Kenya is this year expecting a bumper harvest due to good rains, inflation is likely to remain high due to high oil prices.

Among the sectors of the economy that are expected to bear the brunt of high oil prices are aviation and tourism. Last week, British Airways announced that it was beginning this week adjusting its fuel surcharge to keep pace with the rising crude prices. Prices of most manufactured goods are also expected to rise significantly as manufacturers adjust their costs in tandem with the rise in fuel costs. Kenya’s manufacturing sector is estimated to use 60 per cent of the total oil imports leaving only 40 per cent to motoring and domestic uses.

"When I see the retail prices of oil touching the Sh75 mark, I get worried as to whether we shall attain the targeted 5 per cent inflation rate," Mr Anthony Kilele, the director of the Central Bureau of Statistics told the Financial Standard.

Kilele is concerned that the rising oil prices will erode the purchasing power of consumers and slow down economic growth.

Continued rise in oil prices is also expected to pile pressure in the cost of public transport as operators increase fares to defend their profit margins. This is turn expected spread the impact to all sectors of the economy.

"The unique thing about the next oil shock, should it ever occur is that consumers will bear the full impact since the Government lack the means to intervene in a liberalised environment," Ms Lynette Oyuke, a policy researcher at the Institute of Policy Analysis and Research (IPAR) said.

She said on-going cartel-like activities in the retail oil market does not offer any hope for Kenyans who should brace for hard times ahead.

While agreeing that the Government cannot be held accountable for what is happening in the international market, Oyuke called for the immediate establishment of policies that protect the consumers from unfair trade practices.

"The oil companies are always quick to adjust their prices upwards whenever oil prices go up in the international market but rarely come down when the reverse happens. The unfortunate thing is that nobody seems capable of forcing them to comply," she lamented.

Since the beginning of this month, the oil companies have adjusted prices upwards three times in tandem with the steady rise in international crude prices.

The greatest casualty of the high oil prices is however expected to be the economy.

Prof Njuguna Ndung’u, a research economist with the African Economic Research Consortium faults the Government for failing to put in place mechanisms to ensure that ongoing economic recovery is protected against external shocks such as runaway inflation that results from high oil prices.

The International Monetary Fund (IMF) that is supporting the recovery programme to the tune of Sh26 billion has also expressed concern that the rising oil prices are a real threat to economic prosperity.

"While inflation eased in the first quarter of 2005, it remains high amid the persistence of high oil prices and relatively loose monetary conditions," an IMF report released after a programme review in April says.

"The authorities’ program aims at quickly reducing inflation to the target of 5 per cent, as the persistence of inflationary pressure could affect expectations and complicate on-going efforts to dampen wage pressures and restore a competitive economic environment."

The IMF is worried that inflationary pressure will pollute the labour environment as workers demand higher wages to cushion them against the effects of increased cost of living.

Kenya spends over Sh70 billion annually on oil imports, making it the biggest consumer of foreign exchange.

According to the Economic Survey 2005 indicates the import bill stood at Sh88.8 billion in 2004 having risen by 37.6 per cent from Sh64.5 billion in 2003.

Increased economic activity and a depreciating shilling is expected to push the import bill to a new height this year.

Last year, the IMF under the Poverty Reduction and Growth Facility (PRGF) provided the Government with over Sh4 billion to cushion it against the effects of the rising oil prices and a devastating drought that left over 3 million people in need of emergency relief food.

The fund estimates that the Government will face a financing gap of US$1.2 billion (Sh93.6 billion) over the 2005/06 - 2006/07 as a result growing current account deficits. This is a problem that a steep rise in the oil import bill can only aggravate.

Data from the Ministry of Energy indicates that the total quantity of both crude and refined petroleum imports rose by 10.6 per cent in 2004 compared to 26 per cent recorded in 2003.

Last year, crude oil imports increased by 47.8 per cent compared to a decline of 7.4 per cent recorded in 2003.

The import bill for crude oil nearly doubled from Sh25.4 billion in 2003 to Sh45.9 billion while importation of petroleum fuels declined by 18 per cent from 1.8 million tonnes in 2003 to 1.4 million tonnes last year.

The Economic Survey 2005 indicates that nearly all economic sectors registered increased energy consumption compared to 2003.

In the agriculture sector, consumption rose by (1.9 per cent), retail and road transport (19.6 per cent), power generation (34.8 per cent) and industrial and commercial sectors (3.9 per cent) witnessed the highest consumption levels. The same sectors were the main drivers of the modest economic growth, which the rising oil prices could easily wipe out. Instability in crude oil prices started in the last quarter of 2003 and continued to the end of 2004.

Since the beginning of the year, there has been a temporary lull in crude prices until early this month when the pressure began to build.

Crude prices touched a 13-year high of $42.80 (Sh3,200) per barrel in October 2004 before lodging an attack on an all time high of $60 a barrel last week.

By the close of last week, analysts expressed fear that prices may hit the $100 (Sh7,600) a barrel by the end of the year with poor-non oil producing countries like Kenya as the victims.

While the Organisation of Petroleum Exporting countries (OPEC) was responsible for price instability in the seventies and eighties, conflict in oil producing countries such as Iraq and increased global economical activities have contributed to the current situation.

In the middle of the instability last year, OPEC pledged to increase production quotas from the ceiling of 23.5 million barrels a day to 25.5 million barrels per day by July last year.

Intensification of economic activities in the United States, China, India and Japan have however continued to exert excessive demand pressure on the producers.

In its current magazine the WTRG, the US-based global energy analysis think tank says "many of the warning signs that existed before the energy crises of 1973 and 1979 exist today and they indicate that the current situation could be even worse." Crude oil prices have soared by around 35 per cent since the beginning of the year, averaging $10 (Sh780) more than in 2004.

Analysts at the International market research firm Bloomberg said the situation is so grave that the world should prepare for an oil shock in the near term. "It will not be surprising if the year were to end with the prices at $100 a barrel," said Tommy Jones, an analyst with Bloomberg.

His gloomy forecast is underpinned by the fact that the global oil production capacity is said to be lagging five behind demand at current levels. There were strong warnings that prices would peak in the fourth quarter of the year as demand rises with the onset of winter in the northern hemisphere.
 

Source	back to top	back to Headline Index
home	Word from main	back to Oil Crisis Word from