How Kenya handled past oil supply crises

Oil is a global commodity whose supply and prices are influenced by interconnected dynamics – both real and speculative- and by geopolitical events that can disrupt global supply chains. Specific country energy and fiscal policies could also influence local oil supply chains and prices.

The high oil prices and recent outages in Kenya are indeed reactions to most of the above global and local factors.

I will narrate two historical global oil crises which had profound economic disruptions around the world including Kenya. Both occurrences were geopolitical and centered on Middle East oil supply disruptions.

The 1973 Arab vs Israel war saw the later vanquish the Arab armies. In retaliation, Arab oil producers cut off supplies to US which was suspected of aiding Israel.

This included supplies to American companies, including those in Kenya. Iran, a non-Arab country, remained neutral in the war with its oil exports unaffected by the Arab embargo. Around this time, the Organisation of Petroleum Exporting Countries (Opec) controlled about 75 percent of global oil production

At this time, I was working as a Refinery Technologist at the Mombasa Refinery, which processed about 60 percent Arabian and 40 percent Iranian crudes.

Three American marketers in Kenya (Esso, Caltex, and Mobil ) could not access oil from Arabic sources, necessitating substitutes or maximisation of Iranian crudes. Somehow, through elaborate global inter-company crude oil exchanges, the non-American companies (Shell, BP, Total, and Agip) were able to supply Kenya with enough non-Arab oil.

The price controller at the Treasury, in full consultation with marketers, changed pump prices nearly every week to keep up with global price changes.

In mid-1970s Kenya was an exemplary economic performer with an effective team of macroeconomic managers at the Treasury and CBK. Strong results in agricultural production and exports allowed Kenya to withstand the oil price shock, with balance of payments remaining healthy and the shilling protected from devaluation.

Globally, Bretton Wood institutions were deeply involved in stewarding global economies in a new era of volatile oil markets and nationalistic Middle East geopolitics. This is when the International Energy Agency (IEA) was formed to specifically manage OECD energy security.

The most impactful consequence from the 1973 oil crisis was diversification of oil production away from the Middle East, with Opec oil supply share reducing to about 40 percent by 2000.

However, the oil crisis with the greatest global economic impact ever was the 1979 Iranian revolution when the Shah of Iran (a US ally) was dethroned by the Ayatollah Khomeini.

The subsequent taking of US hostages by Iran resulted in an economic embargo by US on Iran including its oil, vestiges of which subsist to this day. In Kenya, Iranian crude oils were not available to American marketers.

The Iraq/Iran war that followed in 1980 further reduced global oil supplies with prices rising to a new high of about US$37 in 1981 from a previous US$15 per barrel. This created a prolonged global economic recession which badly impacted Kenya.

When the recession hit in 1981, the Moi government was already into serious economic mismanagement with public resource diversion already embedded.

The country’s weak balance of payment could not fund the oil import bill which was already at 30 percent of total imports. New oil pricing measures and conservation policies were introduced to reduce oil consumption.

Importation of gasoline passenger cars was banned. Gasoline blended with 10 percent ethanol was introduced. Product runouts, black marketeering and smuggling became commonplace. Soaring energy costs resulted in serious local inflation.

A serious standoff in 1981 between the Treasury (price controller) and marketers ended up with the government crying “economic sabotage” and justified formation of National Oil Corporation of Kenya (Nock) to import 30 percent of fuels, an opportunity used by political players to mobilise Kenol/Kobil to source the import quota for Nock.

By the way, the oil CEO deportation incident last week was the second in Kenya. Jim Skane , an America CEO of Esso Oil Company was in 1974 deported when he stopped diesel supplies (due to non-payments) to a Nakuru farm belonging to a high-value political personality.

“The Farm Account” (as it was code-named) had remained an outstanding sensitive agenda with the Board of Exxon Corporation and the US State Department until it was fully paid by the estate of the farm owner four years later