Opec production reduction will impact Kenya’s economic recovery


Opec+ produces about 44 mbpd out of global demand of about 100 mbpd. FILE PHOTO | NMG

Last week, the 23-member Opec+ group of oil-producing countries announced the decision to reduce their crude oil production by 2.0 million barrels per day (mbpd) effective next month. The group produces about 44 mbpd out of global demand of about 100 mbpd.

Although their stated reason for the cut is economic, the action has strong geopolitical connotations. Within a week of the Opec+ decision, Brent crude oil price rose from $85 to about $98 per barrel with a strong likelihood of rising above US$100.

For Kenya, the Opec+ action is a major socioeconomic setback. Pump prices will increase at a time when inflation is a major issue yet to be controlled, and when the government is eliminating fuel consumption subsidies. It is indeed proper that the government has opted to postpone the implementation of inflation adjustment increases on fuel excise duties.

The country will also have to spend more dollars on oil imports at a time when the exchange rate is weakening. As happened during similar Opec actions in early 1980s, Kenya will need to embark on fuel efficiency campaigns to reduce oil consumption. This includes reduced non-essential government travel.

Since June, global oil demand and prices have been dropping, caused mainly by recessionary pressure and energy supply chain disruptions caused by the war in Ukraine. Opec+ claims that they are targeting the correction of oil markets to stabilise global economies.

In reality, this is a self-serving action to shore-up Opec+ revenues, an action that accelerates global economic slowdown and further demand reduction — a zero-sum game for global economies. Many argue that the Opec+ action is influenced by current geopolitical polarity, pitting two main Opec+ members Russia and Saudi Arabia, against the US and the west.

Increased production by Opec+ will result in increased revenues for Russia, which will balance Russian revenue shortfalls from western sanctions and plans to cap prices of Russian oil exports. The Opec+ is therefore seen as aligning with Russian interests, especially in respect of the ongoing Ukrainian war.

Others see the action as part of unfinished diplomatic matters between Saudi Arabia and the US.

President Biden has been pressing Saudis to increase oil supplies to lower global prices, at a time when energy inflation in the US is a major political issue, especially as midterm elections approach. There is also the angle of Opec+ retaliating against US Fed action to raise interest rates which are hurting economic fortunes of Opec+ members.

George Wachira is a petroleum consultant, [email protected]