While high coffee prices are a blessing to Kenya, expensive oil causes pain

Imagine a fictitious scenario whereby one owner holds all the land, houses, and apartments in all of Nairobi. Then, a different large-scale owner possesses all the properties in Mombasa and then a separate individual owns Kisumu. The three owners would set the price of accommodation in the largest urban areas in Kenya.

Then, perhaps the owner of all the land in Kitengela and Athi River puts up a million homes and charges rent of only 20 per cent the market price found in Nairobi, Mombasa, and Kisumu. Naturally, such a surge in cheap supply of housing would force the other land barons to lower their prices.

Naturally, land barons would not appreciate competition and would try to fight back. However, reaction by renters would register as overwhelmingly positive. Jubilant celebrations might erupt.

Now juxtapose the above scenario with the modern oil business. A handful of oil producing nations and big oil firms dominate the industry. Nearly everyone on the planet uses oil in some form or fashion. As consumers of oil, almost everyone celebrates when oil prices drop.

An opinion piece in last week’s Business Daily by George Wachira, in contrast, highlighted “why we should worry about falling global oil prices”. Mr Wachira clearly knows the oil industry well and in last week’s piece and others, one may learn interesting insights into the industry.

Mr Wachira correctly points out the reduction in possible foreign direct investment into Kenya’s oil sector and potential declines in oil firms’ corporate social responsibility activities.

Nonetheless, I disagree that Kenya should fear dropping global crude oil prices. We should celebrate the decline. Let me state categorically: high oil prices are bad for the Kenyan economy.

As an extreme example, the 1973 oil crisis marked by hyper oil inflation saw knock-on price hikes in general consumer price indexes around the world. The oil crisis brought the destruction of some national regimes and the macroeconomic adverse effects lasted in some respects into the early 1980s.

Further, the spike in global oil prices in 2007 into 2008 peaking in June 2008 caused many Americans not to afford and then default on their poorly priced mortgages, thus partially triggering the global financial crisis by September 2008.

While some individuals champion high oil prices, including the royal families of Saudi Arabia and Abu Dhabi, among others, average citizens only suffer because they pay a higher amount for the same quantity of goods and services.

As consumers, if the price of bananas increased, we would feel negligible effects. Why? We could simply purchase mangos or other fruit instead. Unfortunately, no large-scale substitute for oil currently exists. Oil touches every aspect of our lives far beyond cars or matatus.

In Kenya, like in most of the world, we enjoy the consumption of imported goods. We import nearly Sh150 billion worth of goods every month.

The price for consumables depends in part on the price of fuel used in shipping and trucking the products to store shelves. Even the plastics we use every day come from oil. Modern life revolves around oil as a non renewable limited resource.

Conversely, drastically lower oil prices help an economy, but hurt the environment as people consume more polluting fuel. The scenario stands as one of the only instances whereby big businesses stand on the same side of an issue as environmental activists, albeit for different reasons.

Slight increases in oil prices results in multiplied negative effects on our economy as consumers and businesses posses less disposable income to purchase additional goods and services. As a result, the GDP declines.

In Norway, on the other hand, increases in oil and gas prices help the nation. Why? Norway created a sovereign wealth fund to place profits from oil and gas exploration to serve the needs of the Norwegian people. In as much, Norway provides free university education, free quality healthcare and comfortable retirements for all citizens.

In Kenya, citizens do not expect to receive such benefits. Oil revenue will stay in the hands of the oil companies and their shareholders.

Even capitalistic Americans benefit from oil and gas exploration. In the United States, land rights on properties extend from the air above your plot down to the land itself and then all the way down in theory to the centre of the earth. Essentially, if a commodity is found underneath your land, a landowner must receive compensation.

Bottom of pyramid

In traditionally economically challenged Louisiana, thousands of land owners became rich when companies extracted natural gas. Kenyan land rights, though do not work in the same manner.

In regards to less corporate social responsibility initiatives in oil-rich areas of Kenya as a result of lower oil prices, citizens remain skeptical of firms that spend more on public relations touting donations than on the provision of aid itself.

Like naïve corporations in the movie Avatar that think building a small school or providing a few vehicles will pacify locals, Kenyans know that millions of shillings exit for every cent donated.

The bottom-line with higher oil prices: the rich get richer. Falling global coffee or tea prices should worry large swathes of rich and struggling Kenyans alike who would feel the adverse affects.

When oil prices decrease on the other hand, the middle class and poor at the bottom of the pyramid experience the upside benefits. Normal Kenyans stand to gain virtually nothing from oil exploration.

How do you spend your extra shillings from lower oil prices? Share your thoughts at #KenyanExecutives on Twitter.

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Prof Scott is the director of the New Economy Venture Accelerator (NEVA) at USIU’s Chandaria School of Business and Colorado State University, www.ScottProfessor.com, and may be reached on: [email protected] or follow on Twitter: @ScottProfessor.