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Opinion & Analysis

Expect fuel prices to rise as crude goes up past $55

A fuel attendant at a petrol station. FILE PHOTO | NMG
A fuel attendant at a petrol station. FILE PHOTO | NMG 

The past two weeks have seen the benchmark Brent crude oil price move out of the familiar $50-55 range to around $56.

This signifies that the OPEC production curbs that have been in place since early this year may be fulfilling their price strengthening objective.

Reports indicate that major economies are drawing down oil inventories as demands are hardening. At $56, the prices are about half of where they were in mid-2014 and double the lowest price reached in early 2016.

In Kenya changes in global oil prices prompt double-edged interest. Firstly, Kenya is fully dependent on oil imports and consumers watch with a lot of anticipation the pump price changes announced by the Energy Regulatory Commission (ERC) every 14th of the month.

Secondly, as an expectant oil producer and exporter, the success and speed of Turkana oil reserves commercialization is dependent on realisable export prices. The higher the global oil prices the better for Turkana oil investors and stakeholders.

My opinion is that having survived prices above $100 per barrel for some time prior to 2014, Kenya will withstand oil price increases of up to US$ 60 per barrel without significant upsets to the economy.

Above $60, and if the rise is sudden, we may experience a number of macro-economic upsets such as inflation and a weakening exchange rate as oil importers seek more dollars to pay their bills.

It has apparently been a bonanza since the collapse of oil prices in mid 2014. A growing car population amidst a growing economy has pushed up petroleum fuel demands which grew by 8.3 per cent in 2016. The balance of payment has been healthy affording the country relief in meeting foreign exchange commitments.

There is a correlation between oil prices and demands, and also with the number of vehicles clogging our roads. It is also a fact that our middle-income group has a strong aspiration to own cars which in a healthy economy is quite normal. However as the traffic gridlocks increase, the negatives impacts are showing as Kenyans continue to waste valuable time and fuel on our roads.

It is the transport authorities that may be lagging in sufficiently planning for the rapid motoring growth. Plans to establish efficient, convenient and comfortable mass public transportation remain very much on paper.

We should therefore not entirely blame low oil prices or our society’s ambition to own cars for the traffic jams.

Any talk of future global oil prices remains very much a game of assumptions and speculations. Experience gained over the past two years indicates that prices above $55 may not hold for long.

This is because any increase in oil prices will encourage more oil production by the US shale investors, who have systematically lowered their unit production costs through efficiencies and technologies. More shale oil production will increase supply and suppress oil prices.

However, the OPEC appear optimistic that we are headed for higher prices, a mood they will likely maintain as they wait to meet in November to assess the market and make decisions whether to extend the ongoing oil production limitations beyond April next year.

Turning to Kenya oil reserves, it is the global oil price uncertainties that have reduced the speed and scope of oil exploration and development activities in Kenya. This is because realizable export prices are a prime assumption and input in oil and gas project economic modelling.

However there are issues that are Kenyan which may also be contributing to the slow pace of oil reserves exploitation.

I am not quite sure how much the ongoing political mood is holding up investor decisions, but history tells me that elections in Kenya normally induce a wait-and-see attitude.

Recently, we witnessed the entry into Turkana oilfields of Total, the French oil major, but it is still unclear how the investor will prioritise the Turkana oil project, especially in respect of oil export pipeline project. As options are evaluated this may cause delays.

Yes we need not entirely blame low oil prices for the pace of oil exploitation in Kenya.

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