Crude prices Friday rose to a three and a half year high to stand at nearly $80 (Sh8,000) a barrel, its highest level since November 2014.
Imposition of fresh US sanctions against Iran could cut global supply by between 200,000 to 1.5 million barrels per day.
The cost of goods in Kenya — especially food items — has traditionally been sensitive to oil price movement.
Kenyan consumers are headed for tough times in the shops as global crude prices continue to rise pushing up the cost of transport and energy, and causing a general rise in the prices of goods and services.
Crude prices Friday rose to a three and a half year high to stand at nearly $80 (Sh8,000) a barrel, its highest level since November 2014, saddled by concerns over possible reduction in global supply in the wake of US imposition of fresh sanctions against Iran – a major oil producer.
Imposition of fresh US sanctions against Iran could cut global supply by between 200,000 to 1.5 million barrels per day, according to some estimates setting the stage for a general rise in crude price.
Crude price has risen 33 per cent since January and any further increase is expected to deepen consumer pain in countries like Kenya that totally rely on imports to run their economies.
The cost of goods in Kenya — especially food items — has traditionally been sensitive to oil price movement as dealers and traders pass on higher transport costs to final consumers, who must also contend with higher petroleum prices at the pump.
Effects of the Iran-US standoff are typical of the risks that distant geopolitical events pose to an oil importing economy like Kenya’s.
Inflation
Kenya’s inflation rate stood at 3.73 per cent in April, the lowest since January 2013, but economists expect a steady rise in the near term driven by higher transport, energy and food prices.
“Oil prices and inflation are known to have a positive correlation in Kenya. The cause-effect relationship is on two fronts; directly through higher pump prices and production costs and indirectly through the effect of dollar pricing given petroleum imports account for nearly 15 per cent of the country’s import bill,” economists at Commercial Bank of Africa said in a brief.
“This could see inflation rise to the upper band of the CBK target in the second half of the year with the potential to sovershoot the upper limit in the last quarter of the year.”
Fuel prices
The latest changes in crude prices points to yet another increase in pump prices mid June when the Energy Regulatory Commission (ERC) conducts its next review.
The ERC last week raised the prices of petrol, diesel and kerosene in Nairobi by Sh0.34, Sh0.78 and Sh1.50 per litre respectively citing higher international prices.
“The April changes…have been a consequence of the average landed cost of imported super petrol increasing by 1.18 per cent from $672.90 per ton in March to $680.83 in April; diesel increasing by 2.91 per cent from $614.72 to $632.72 and kerosene by 3.06 per cent from $66.36 to $683.67 per ton,” said ERC in a release last week.
Motorists are expecting more pain at the pump in September, when a 16 per cent value added tax (VAT) on petroleum products takes effect.
The potential of the base price per litre going up in the period before September will only make the amount payable in the tax higher.
At current prices, a litre of petrol would go up to a record Sh124.30, and that of diesel to Sh114.40 with 16 per cent VAT.
Locally made goods
Locally produced goods also become more expensive with higher diesel prices as manufacturers pass on the higher cost of running industrial machinery to the end consumers. Higher diesel prices is also often passed on to electricity consumers in the form of higher billing arising from the increase in fuel levy element in the monthly bills.
The higher oil import bill also has a knock-on effect on the shilling, which comes under pressure when the country’s current account deficit widens.
Payment for oil imports eats into the country’s dollar reserves, eroding the CBK’s ammunition against exchange rate volatility even as higher dollar demand from oil importers weakens the shilling. Kenya being a net importer of goods, a weaker shilling also immediately translate into higher cost of goods.
The spat between the US and Iran could also negatively affect Kenya’s tea exports to Iran, which accounts for 17 per cent of the Middle East nations annual tea imports of 120 million kilogrammes.
Tea is Kenya’s second biggest foreign exchange earner after diaspora remittances, bringing in Sh144 billion ($1.43 billion) in the 12 months to January 2018.
US President Donald Trump’s administration has issued a six-month window for firms trading in America to stop doing business with Iran, which would leave Kenyan tea traders unable to sell in Iran from November.
These traders would experience difficulties getting payments should they go ahead and export to Iran, as few banks will be willing to transact business with the country in the face of US sanctions.
