Tough times ahead as Iran crisis pushes up price of oil

Crude oil prices on Tuesday rose to a nine- month high, setting up oil importing economies such as Kenya for hard times ahead.

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The indicative Brent crude price rose to an average of $120.20 a barrel in London after Iran imposed a ban on petroleum exports to Britain and France in response to Europe’s recent decision to tighten economic sanctions against the Islamic state.

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This is the highest price crude has sold since April last year and petroleum market analysts warned that the world may buy a barrel of oil at $150 in the next three months if solution is found to the Iranian stand-off.

The centrality of oil in an economy such as Kenya’s means policy makers will have a tough assignment managing the cost of living and ensuring exchange rate stability in a charged election year.

In the short term, a sharp rise in crude oil price means inflation pressure that began to ease at the end of last year will reverse.

Oil is the single biggest item on Kenya’s import bill whose pricing has an immediate impact on the demand for dollars and ultimately the exchange rate.

Producers of services such as electricity and manufactured goods are also expected to factor in the higher cost of petroleum unleashing an upward pricing pressure across the economy with serious ramifications on the cost of living.

Oil marketers said a prolonged dispute between Iran and the West has become the biggest challenge that policy makers must deal with in the near term.

“Anything that affects geo-politics impacts on crude price with serious consequences in prices across all outlets,” said Kenya Shell country manager Jimmy Mugerwa.

In Kenya, for instance, the majority of the population relies on kerosene and gas for lighting and cooking making crude price a key determinant of the rate of inflation.

The economy also uses diesel for transportation, power generation and running of agricultural machinery such as tractors with a direct impact on the cost of agricultural produce.

Henry Rotich, the deputy director for Economic Affairs at the Treasury said higher global prices will have adverse effect on inflation especially if the trend is sustained for long.

In recent weeks, a prolonged dry spell has cut water levels in hydro-power dams, forcing the country back to the more expensive petroleum generated thermal power that is known to push up power bills whenever its consumption rises.