What tumbling oil prices mean for East Africa

Global oil prices fell to a record low of 70 USD a barrel this month, from 115 USD in June and experts expect the trend to continue into the first half of 2015; but what does it mean for importing economies of East Africa?
Cheaper oil imports will gradually result into lower fuel prices at the pump. (File)
Cheaper oil imports will gradually result into lower fuel prices at the pump. (File)

Global oil prices fell to a record low of $70 a barrel this month, from $115 in June and experts expect the trend to continue into the first half of 2015; but what does it mean for importing economies of East Africa?

Economists expect, in the short run, tumbling prices to benefit East African consumers in form of reduced commodity prices. But two East African economies, Kenya and Uganda that have invested heavily in recently discovered oil, could suffer negative effects if the trend persists up to the time they are expected to start production.

Though Rwanda is naturally expected to wish well fellow members of the Northern Corridor, the Rwandan economy will largely benefit if fuel becomes even cheaper.

Rwanda’s case

Currently, all East African economies import oil and the continued drop in prices means they’ll use less foreign currency to pay for their petroleum supplies.

Cheaper oil imports will gradually result into lower fuel prices at the pump, giving relief to both transporters and travelers and likely to boost economic activity.

Actually, this is the trend already where the government has been responding to global oil price fluctuations since March when Trade Minister François Kanimba announced fuel price cuts from Rwf1,030 to Rwf1,010 for a litre of petrol and diesel.

In April, global oil prices shot up again pushing local pump prices to around Rwf1,050 by May just before they begun their current descent in June.

As of December, a litre of petrol at Kigali pumps had reduced to Rwf960 and if global prices decline continues, motorists might have a New Year gift in form of another announcement from the trade ministry cutting prices.

There’s a reason why the government regulates fuel prices and not those of sugar or anything else.

The price of oil is a prime cost of production that shapes the supply chain; the transportation cost of commodities from the factory to the market ultimately determines the final price that a consumer will pay for them.

In a statement issued by the IMF Board of Directors on Monday, they expressed optimism that inflation levels will be kept low and encouraged the Central Bank to maintain its current monetary policy.

Being landlocked and heavily dependent on imports, Rwanda often suffers from imported inflation which is basically caused by an increase in the price of imported goods.

The high or low cost of imported goods is mainly influenced by many factors, including the cost of production in the country of origin and taxation; but the cost of transport is a major factor which becomes even more influential when fuel prices are high.

For instance, Rwanda buys cement from Uganda and the cost of a bag of cement has been relatively high because a litre of diesel was at Rwf1,050. But since transporters are now paying Rwf960 for a litre, cement prices should naturally ease—other factors remaining constant.

The same should happen to food suppliers in Kigali who are picking Irish potatoes from Musanze or beans from Rwanda’s Eastern Province.

However, in cases where a supplier signed long term contracts with a buyer at previous prices, the falling cost of fuel may not benefit them especially if the contract terms are fixed.

Kenya, Uganda’s case

Early in November, Kenya’s Energy Regulatory Commission (ERC) also announced that the price of diesel will drop by $0.066 while that of Petrol $0.044 in December.

The decision came after the price of Kenya’s diesel imports reduced by 11.33 per cent from $891.59 per ton in September to $790.61 per ton in October 2014, according to ERC’s Director General Joseph Ng’ang’a.

Sources in Nairobi indicate that the new pump price for a litre of diesel is Ksh94.52 ($1.044) while that of petrol is retailing at Ksh106.80 ($1.180) per litre.

In Kampala, by Tuesday afternoon, petrol prices had reportedly dropped to Shs3, 650 ($1.31) while Diesel was selling at Shs3,450 ($1.24) for a litre.

Unlike Rwanda and Kenya that regulate their fuel prices, Uganda largely leaves the market forces to prevail something that sometimes is problematic.

For instance, while global prices are going down and countries fuel prices going down in most countries, some Ugandans expect fuel prices to go up during the festive season as travel picks up.

Nonetheless, the general reduction in fuel is expected to reduce urban inflation in most East African towns as food prices and other commodities go down.

Negative prospects

East African economies should enjoy these short term benefits because they may not last long.

According to The Economist, oil prices are going down because there’s low demand yet major producers under the Organisation of Petroleum Exporting Countries (OPEC) have not agreed cut supply.

Normally, when prices are low like they’re currently, OPEC members cut production hence reducing supply and push prices up again.

This is not happening now because a section of members such as Saudi Arabia can afford to keep their output steady yet still earn profits unlike countries like Iran and Russia whose production costs are high.

Also, oil demand is low because of weak economic activity, increased efficiency, and a growing switch from oil to other energy efficient fuels.

Other analysts say, turmoil in Iraq and Libya—two big oil producers with nearly four million barrels a day combined—has failed to affect their output, hence keeping global supplies steady.

The Economist also opines that USA, formerly the largest importer of crude, is no longer buying because it’s also now the world’s largest oil producers.

China, another large economy and currently the largest importer, is also not buying that much crude because its economy is experiencing a slow moment.

A solution would be for OPEC members to agree on cutting production and send prices up, but Saudi Arabia and their Gulf allies are not keen on that because while they can endure low prices, the situation hurts their enemies Iran and Russia whose production costs are very high.

Saudi Arabia can tolerate lower oil prices quite easily as it has $900 billion in reserves and its own production cost are estimated to be $5-6 per barrel, several times lower than Iran and Russia.

Impact on Kenya, Uganda

If these conflicts among OPEC are not resolved earlier, Kenya and Uganda who are bracing for their first oil production in 2017 have all reason to worry about the low prices.

Tullow Oil and its partner, Africa Oil found more than 600 million barrels of oil in Kenya with another 8 commercially viable oil wells discovered since 2012.

With over 6.5 billion barrels of oil, Uganda expects to earn $2 billion annually from oil for about twenty years from the time of production.

If you calculate the worth of Kenya and Uganda’s oil deposits at the current global price, the value is much less than two years ago and no investor wants to hear that.

Therefore, Uganda and Kenya are happy with current oil price drops; they will be worried in the long term when they are expected to become producers.

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