A geothermal well at Menengai Crater. Kenya is embracing geothermal energy in a bid to slow reliance on imported oil. Suleiman Mbatiah
Kenya is currently going through uncomfortable economic experiences partly attributable to high global oil prices. Weakening balance of payment, weakening shilling, high interest rates and the resultant inflation are directly and indirectly associated with high oil prices whose direction no one is able to correctly predict .The slightest indication that oil prices could slide downwards provides comfort and hope to consumers, economic planners and politicians.
End of last week the International Energy Agency (IEA) which is a group of 28 industrialised countries (which mirror the OECD countries) decided to release two million barrels per day of oil from their strategic reserves for a period of 30 days with USA contributing half of this emergency release.
This action in essence is an oil price stabilisation decision to cushion their sluggish economies, still recovering from the 2008/09 economic downturn. Although such a release of inventories is not sustainable for a long time, one month is long enough to permit the oil supply world to re-adjust itself.
The IEA decision was prompted by OPEC failure earlier this month to collectively agree to increase their oil production to cover the Libyan production shortfall. Immediately on the announcement of emergency stocks release, Brent crude oil price has plummeted to as low as US$ 105 per barrel after a climb to nearly US$130 a couple of months ago.
It is also emerging that the key OPEC members (read Saudi Arabia) now think that their budgetary revenue target should be in the range of US$90-100 per barrel, which implies that the US$100 per barrel may become the break-even bench mark price that will be used to determine future oil production levels. Going below this price would trigger production reduction to safeguard national revenues .Last year the OPEC revenue targets appeared pegged to a price range of $80-90.
Any price above $100 will still be too high for Kenya and will permanently shift the economic planning bases that will require revised macroeconomic assumptions. Kenya will therefore need to come up with sustainable policies and strategies that take into account a new era of high oil prices.
1981 was perhaps the worst ever period for the Kenyan economy when the highest ever oil prices upset the country’s economic set up, especially the balance of payments. In today dollar terms, the 1981 oil prices were higher that what we have today.
Kenya forex allocated to oil import bill had risen to about 30 per cent, and the CBK was finding it difficult to finance imports of other priority items as the country’s dollar reserves dwindled to dangerous levels. As many anxious importers queued for the limited forex allocations, CBK became a known den of corruption.
To reduce pressure on forex, the government in 1981 came up with a raft of demand side policies and strategies to induce reduction of oil demand and imports since the country could do nothing about the supply side.
It is at this time that the government decided to be strategically involved in the petroleum supply chain which had hitherto been left entirely to the seven multinationals. The Nock was hurriedly created, while funds were sought from the Canadian government to establish strategic oil storage facilities. The facilities (today KOSF) were completed in 1984 but were never stocked with strategic oil reserves.
To curtail gasoline demand, the government suspended imports of passenger cars and this lasted from 1981 to around 1984. Oil import taxes were skewed and loaded on gasoline to give relief to diesel and kerosene.
Gasoline was considered a discretionally product, while diesel was the economic driver with kerosene providing lighting for the poorer households. The minister for finance used the same rationale in reducing taxes on diesel and kerosene.
To reduce dependence on imported gasoline, alcohol from the Muhoroni sugar complex was 10per cent blended into gasoline. The government also went out with public awareness campaigns to reduce oil usage through conservation and efficiency.
Today with high oil prices and weakened balance of payment, and until we discover our own oil, it is definitely not business as usual for Kenya. We need to be seen to be addressing the demand side of petroleum; how much oil we import and how well we utilise it as a country.
Alternative energy
The greatest gains in this respect will be made when we achieve electricity generation mix with minimum thermal generation which uses imported oil, and we appear to be on the right track as we embrace geothermal and wind power generation.
Fast tracking of rapid public transportation not only for the Nairobi metropolitan but also for the entire country will reduce overreliance on individual passenger cars and increase efficiencies in transportation oil usage. This is actually work in progress as we introduce metropolitan rail passenger systems; decongest the roads with removal of traffic bottlenecks; and raise “matatu” capacity from 14 to 29 passengers which will introduce fuel efficiencies per passenger transported.
There is political credit to be gained if the government prioritises reduced reliance on expensive imported oil.
George Wachira is the Director, Petroleum Focus Consulatnts [email protected]
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