For the 4-year period between From 2010 until mid-2014, world crude oil prices have been static at around $110 per barrel but that quickly changed over the last 7 months from $107 per barrel in June 2014 to less than $70 in January 2015 – a 44% drop!
That astonishing statistic immediately leads to 2 questions: Why the fall? And; What are the ramifications for Kenya?
I find it impossible to attribute this decline to one thing but the following factors may have played a fairly significant role in this:
1. Increase in supply
There has been an increase in oil production, especially in the US. While America may not be an exporter, it is the world’s largest importer of oil. Increase in production in the US effectively means less importation by the biggest player and therefore more oil available in the global market.
2. Geo-political reasons
Organization of the Petroleum Exporting Countries, OPEC, is charged with the stabilization of prices in international oil markets. Saudia Arabia, though, among the world’s largest producers with close to 10 million barrels a day which translates to a third of the OPEC total, has refused to take any action to help stop the price fall such as say cutting down on production.
A possible connivance with the US to economically clip oil-dependent adversaries like Russia (where the Rouble is languishing in record lows), Venezuela and Iran, maybe?
3. Reduced demand
It looks like environmental conservation campaigns are starting to yield rewards with more switching to alternative energy.
This, alongside the gradual improvement in production efficiency by organizations over time and a sluggish world economy which is consuming less oil in total, are slowly reducing the overall demand for oil.
1. Food security
Oil prices are co-related to food prices. Higher oil prices make agricultural production expensive leading to higher food prices, therefore this fall may be a good thing in that it enhances food security not just in Kenya but globally.
Lower oil prices will make driving less expensive with Kenya’s Energy Regulatory Commission, ERC, already announcing considerable pump price deductions. This will mean more vehicles on the already strained Kenyan roads and a subsequent rise in average time taken for commuting, especially within the 4-million-crowded Nairobi.
3. Kenya as an oil importer
According to Fitch Ratings, this plunge in oil prices could boost Sub-Saharan Africa’s growth to 5 percent in 2015 from 4.5 percent in 2014 since most of SSA countries — Kenya included — are oil importers rather than exporters. Compared to an exporter like Nigeria whose falling stock market index that has gone down 24% since the fall begun, Kenya’s stocks have surged by 9.4%.
4. Kenya as future oil exporter
Although an oil-importing country at the moment, and as such gaining from current fall in oil prices, Kenya is set to become an oil-exporting country in the near future as a result of recent oil exploration projects. Falling oil prices may reduce the expected profitability of investments in the oil sector and should effectively serve as a deterrent against having an economy heavily dependent on oil.