Happy times loom for consumers as global oil prices fall

For months, oil prices have tumbled. Both Brent and West Texas Intermediate (WTI) crude oil prices have now hovered at four-year lows. In fact, Brent and WTI have shed off in excess of 20 per cent since the beginning of June.

Brent is a sweet light crude oil sourced from the North Sea and is used as the benchmark to price European, African and Middle East oil exported to the West. WTI, on the other hand, is generally sweeter and lighter than Brent and is primarily used as a US pricing benchmark.

A third benchmark is the Murban crude oil, which is set by Abu Dhabi National Oil Company (ADNOC). Kenya buys the ADNOC Murban crude and the good news is that its price has equally fallen in excess of 20 per cent since June.

But the cause of falling global crude prices is more technical than fundamental currently despite the fact that a number of factors are in play.

First, there are clearly supply shocks from Libya, South Sudan and Iran and the market is discounting this fact as evidenced by the fact that global oil speculators are exiting holding physical barrels. Secondly, there is also the issue of oversupply due to weak demand from Asia and Europe.

Finally, the resulting competition is also forcing producers to cut prices, hence lower prices. So from a bird’s eye view, it looks like a combination of several moving factors, that are really hard to place in one category.

However, at the moment, the exit of speculative participants is a key one.

Generally, falling crude oil prices are good for the global economy. In early October, the IMF, in its assessment of the potential impacts of oil-price shocks from the Iraqi conflict to the global economy, expressed worries about a potential 20 per cent rise in global crude prices.

It then concluded that, if it were to materialise, then global GDP would fall by 0.5-1.5 per cent and stock prices in rich countries would decline by three - seven per cent.

Well, Iraq, Nigeria, Syria and Libya, all OPEC members, are still in turmoil. But the price of Brent is still falling and maybe the IMF will need to issue a mea culpa.

But, according to the Economist, there is one group of countries that gains unambiguously: the most dependent on agriculture. Kenya is one those where agriculture accounts for 25 per cent of GDP.

In Kenya, where the bulk of farming is subsistence and small-scale, energy is needed to transport farm produce to the markets.

Energy is also needed to transform the raw farm produce into finished products, which again require energy to transport to the market.

Oil imports account for about a quarter of Kenya’s total imports and with oil prices declining in the region of 20 per cent, this will offer some breathing to the import bill with positive ripple effects.

Key among the positive effects will be the successful control of that part of annual inflation called ‘imported inflation.’

So as oil prices remain at rock bottom, consumers should brace for happier times, especially for those bills with fuel components.

Mr Bodo is an investment analyst