If you ask President Biden of United States (US) what keeps him awake at night these days, he is likely to admit that it is not President Putin of Russia or the war in Ukraine that bothers him most, rather it is the ever-rising gasoline pump prices in the US which have become headline news.
Not a good scenario when US inflation is hitting a record 8.6 percent , and mid-term elections are coming in November.
With all his presidential powers and global influences, Biden has been unable to bring oil prices down, even though the US is the largest crude oil producer in the world. It is global oil supply/demand fundamentals that are keeping oil prices high.
The world is marginally low on oil supply, as production investments are reduced to align with energy transition away from fossil fuels. And this is happening as post-Covid economic recoveries around the world are screaming for more oil.
Global oil prices have this month firmly perched above US$120 per barrel having risen from an average of US$87 in January 2022, and US$54 in January 2021.
The current high prices are expected to prevail for some time, as further oil supply disruptions are expected from the ongoing European Union boycott of Russian oil, and as the Chinese economy recovers from impacts of the recent Covid-19 attacks.
Kenya, which relies on imported oil for most of its energy requirements has every reason to be worried about the sustainability of such high oil prices, mainly due to trigger inflationary impacts on the entire economy and a drain on foreign exchange reserves.
Concurrent high import costs of food (grains and cooking oil ) are over-stretching our financial systems resulting in a steady decline of dollars.
Other factors not helping our dollar reserves are reduced Foreign Direct Investments, foreign debt repayments, repatriation of huge volumes of dividends (banks, telcos), and Nairobi Stock Exchange sales by foreign investors.
Should Kenya confirm that capacity to fund essential imports is indeed diminishing, then hard and pragmatic decisions will need to be taken by the National Treasury, economic planners, politicians, as well as consumers.
Kenya was in a similar predicament in 1981 when the country suddenly faced a significant increase in oil import costs (30 percent of total imports). This is when oil prices suddenly rose from about US$15 to US$37 per barrel, occasioned by political disturbances in Iran and Iraq.
To conserve and prioritise use of available foreign exchange, Kenya instituted significant austerity policies and measures, some of which was not a pleasant experience for Kenyans. Generally, policies were put in place to reduce imports of oil and other non-essential goods and to increase exports of dollar-earning crops.
Today, I understand that commercial banks are accumulating scarce dollars to meet customer requirements. This implies that queuing, prioritisation dollar allocations are already informally taking place. In the early 1980s, foreign exchange allocation by CBK set in a new breed of corruption which created instant millionaires
A key oil sector “dollar conservation” policy was blending of 10 percent of locally produced alcohol in petrol (gasohol) which was mandatory. This lasted from 1982 to about 1990, when exported alcohol was fetching more dollars than imported oil.
A fiscal policy loaded more taxes on petrol by reducing taxes on diesel which was accorded status of a critical economic input, while petrol was labeled a discretionary product. Many switched from petrol to diesel vehicles.
Importation of passenger cars was banned from 1981 to around 1985, and this made garages to creatively convert locally assembled panel vans to beautiful passenger cars. Local second-hand cars gained a high premium as new ones were not available.
The government enforced strict controls on purchase of new public vehicles while seriously regulating road travel by civil servants.
In general, energy conservation in the entire country was gaining credence- for varied reasons from the climate change advocacy of today. Incidentally, the high oil prices were already destroying much of the oil demands as fuel became unaffordable.
There is every sign that it will be difficult for Kenya to sustain unrestrained imported consumption, and this is why the authorities and campaigning politicians should read glaring global economic indicators.
There is every reason to be worried about the sustainability of imports, especially the essential ones. Creative solutions will soon be called for.
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