Manage risks related to the Kenya, Mid-East oil import deal carefully

A fuel station. FILE PHOTO | NMG

Last week, global crude oil prices went up from mid-$70s per barrel to about $85 prompted by oil-producing countries' (Opec) decision to cut production by an additional 1.16 million barrels per day, justified on a need to strengthen dipping prices due to weak oil demands.

Recovery of global economies is still a work in progress and depending on how global oil demands strengthen or weaken, prices can swing either way. It should also be noted that non-Opec oil producers continue to invest in more oil production, which increases supplies and suppresses prices.

Whatever oil import cost structure agreed upon between the Kenyan government and the Middle East oil suppliers, the Opec-prompted price increase will be a pass-through to consumers, magnified of course by a worsening dollar/shilling exchange rate.

Fuel inflation is expected to further impact transport services, thermal electricity, and industrial and agricultural production costs.

This time around blame cannot be apportioned to the war in Ukraine, but to Opec oil producers who are intent on protecting their national revenues from erosion.

My understanding of the government-to-government oil supply arrangement is that the only benefit to Kenya is a six-months credit on FOB [Free on Board] costs.

This means Kenya will delay spending dollars on oil imports for six months after cargo loading, a relief that permits the country to accumulate sufficient dollars as it continues to meet other pressing dollar commitments.

Oil accounts for about 30 percent of the total national imports bill. It is important that Kenyan money managers accumulate enough dollars to be ready and available on the payment due dates to avoid the possibility of defaults, a situation which can lead to unintended supply chain consequences. Risk management around this novel import deal is utterly necessary.

Global oil supply chains and markets which were disorganised by the war in Ukraine have more or less settled to a new equilibrium. Oil-consuming nations have redefined their energy security requirements while accommodating energy inflation impacts.

Globally, the energy transition continues at paces determined by renewable energy technologies and green capital spending. Selective investments in new oil production continue to ensure global oil demands are met as the energy transition progresses.

Kenya, as a full importer of oil, has to reassess its capacity to fund unrestricted use of oil whose importation is crowding out other priority imports.

Either we accumulate enough dollars ( exports, FDIs, and import substitution) or plan to reduce discretionary oil demands. Electric transportation should be accelerated, and thermal power eliminated while facilitating the widespread use of off-grid solar applications.

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