advertisement
Ideas & Debate

Why fuel prices will fall below Sh100 this year

inflation
An attendant fuels a car at a petrol station in Nairobi. FILE PHOTO | NMG 

This year presents good chances of oil prices in Kenya settling below the magical datum of Sh100 per litre. The Energy Regulatory Commission (ERC) price reductions announced this month are a good start as February promises a further price drop. Any price prediction these days is influenced by many geopolitical variables, and is subject to updated outlooks based on the latest available information.

I can confidently vouch that the monthly ERC price changes are a true reflection of global products procurement cost fluctuations, which are calculated by the ERC price formula on a cost-plus basis.

The recent cost trends show that global crude oil prices dropped from about $85 per barrel in early November last year to mid-$50s in December, and have since climbed back to $63 this week.

The price reductions are a welcome relief for motorists, households and the general economy as inflation and production costs reduce. Pressure on the balance of payments will decrease thus strengthening the shilling.

On the flipside, more and cheaper miles will be driven resulting in increased traffic congestion, and more carbon emissions. For Kenya Revenue Authority, the petroleum VAT revenues will dip as these are a percentage of the final gross prices.

advertisement
 

Global oil markets are experiencing shifting forces of supply and demand which are pulling against each other. On the supply side, although the world is generally over-supplied (and has capacity to produce enough oil) supply chain reactions to US President Trump’s sanctions on Iran since early November are what have been affecting oil markets and prices in the past few months. .

By the time the Iran sanctions kicked off, the world had over-produced oil in anticipation of shortfalls from reduced Iranian oil exports. However, when the effective day for sanctions arrived, President Trump unexpectedly gave waivers to key importers of Iranian oil to continue importing from Iran for six months. Fear of a resultant oil over-supply is what caused prices to crash to $50s.

To stabilise the market and prices, the Organisation of Petroleum Exporting Countries (Opec) members and Russia agreed to reduce production by 1.2 million barrels per day effective this month.

This is the cause of the upward price corrections to about $63 today. It is the prospect of Opec production cuts being fully implemented that is encouraging 2019 price forecasts in the $60-70 range.

The newly found Opec and Russia oil production co-operation has the benefit of ensuring that the oil markets are promptly rebalanced to sustain stable supply and prices.

This co-operation is seen as focused on eventually achieving a $80 price which oil producing countries argue is good for balancing their national budgets, while assuring global economic stability.

On the oil demand side, the economic pressure imparted on the Chinese economy by the ongoing trade wars with US is already threatening Chinese energy and oil demands. Indeed when the Chinese economy “sneezes”, total global oil demands weaken driving oil prices downwards.

The Chinese economy is quite integrated with the rest of the world, and any impacts from the trade wars with the US will impact economies of many other nations, further reducing global oil demands. For varying reasons, the EU economies are not expected to perform strongly and this will also impact oil demands.

In the recent past, US has become a major influence on global oil markets, a role that used to be a preserve of the Middle East. With increasing shale oil production (and stepped up oil exports) the US has become the leading oil producing nation followed by Saudi Arabia, and Russia in that order. The US is a swing county for both global oil supply and demands. Politically the country has also become a major influence on global oil markets.

Prospects for Kenya as a potential oil exporter dim when global oil prices reduce, because the key economic input in oil commercialisation is the realisable netback price for crude oil in the export markets.

However, prices in the S$60-70 range are way above the breakeven economics for the Turkana oil project, which is expected to pump first oil in 2022.

advertisement