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Sanctions: Why US-Iran impasse could hike oil prices

By Macharia Kamau | October 30th 2018
By Macharia Kamau | October 30th 2018
Analysts have projected that the price could go up to as high as Sh10,000 by end of 2018.

Kenyans will continue grappling with the high cost of living as global crude oil prices further inch up.

Fluctuations in oil prices have become a concern to Kenya - a net importer of petroleum products.

The country has for many years failed to explore key initiatives such as petroleum reserves to cushion the economy against shocks such as sudden price increases.

In the global markets, a barrel crude oil that hit a four-year high of Sh8,420 early October has now eased over the last two weeks to settle at Sh7,700 by last Friday.

Analysts have projected that the price could go up to as high as Sh10,000 by end of this year.

Among the factors expected to push up prices include fresh sanctions on Iran by the US, which restricts the Middle East country’s sale of oil and petrochemical products.

These sanctions, expected to take effect on November 4, could cut global oil production by about two million barrels.

Other than the general increase in pump prices, especially in the coming months, high oil prices also tend to impact the cost of transport and manufacturing which in turn increases the cost of goods and services.

The impending hikes in prices of fuel could come even as consumers grapple with the eight per cent value-added tax (VAT) on petroleum that has resulted in a rise in the cost of living.

Different producers of basic items have adjusted prices on their products to factor in the impact that the additional levy has had. IDB Capital Managing Director Karen Kandie in a recent report said high oil prices will in the coming months worsen the high cost of living among Kenyan households.

The Government imposed an eight per cent VAT on all petroleum products in September, which although lower than the 16 per cent rate that had come into place early September has had the impact of pushing up transportation costs.

A litre of petrol in Nairobi went up to Sh116 per litre, an incremental rise from Sh99 in September last year. In August, before the inclusion VAT, a litre was on average going for Sh113 before shooting up to Sh128.7 on the imposition of 16 per cent VAT.

Little option

It later dropped when the VAT was reduced to eight per cent by the Finance Act 2018. Data by the Kenya National Bureau of Statistics (KNBS) shows that public service vehicles plying long-haul routes have gone up 19.2 per cent by end of September.

This is compared to prices over a similar period last year and 6.7 per cent when compared to fares in August this year.

The statistics body noted that the hike in fuel prices has resulted in an all-around increase in costs as transporters up costs for moving people and goods across the country. Further hikes in the cost of transportation and other basic items should be expected should global oil prices stick to the predicted pattern.

“The transport index increased by 7.99 per cent (in September) compared to the previous month and 17.29 per cent compared to the same month (September) in 2017,” said KNBS.

“This was mainly on account of increase in pump prices of petrol and diesel which triggered an increase in prices of other transport components.”

The Kenya Institute for Public Policy Research and Analysis (Kippra) said poor Kenyans have little options and suffer the most whenever there is an increase in the cost of energy.

“The Kenyan economy has experienced a rapid and persistent rise in energy prices that have had far-reaching consequences. Poor households bear the greatest brunt of energy price increase,” said Kippra in a report. “Additionally, expensive fuels and power lead to higher costs of production in the manufacturing sector which is then passed on to consumers.”

It added: “Industries may also shift their resources from the energy-intensive to sections that may use less in a bid to minimise production costs. This resource shifting and or cuts in production may potentially lead to job loss and higher prices for industrial goods and services.”

The think tank notes that while Kenya might not have control of the geopolitics responsible for the volatility of oil prices, initiatives such as strategic petroleum reserves could help stabilise local pump prices.

“Kenya needs to have sufficient strategic petroleum energy reserves to act as energy security measure to cushion the domestic economy whenever there are oil price spikes and unexpected supply disruptions in the international market,” said Kippra.

“The storage should be managed by the national government only to be released during emergency times.” The US, however, moved to calm fears of crude oil prices reaching Sh10,000 this year and 2019.

Its Energy Information Administration (EIA) forecasts that it will average at Sh7,500 next year. The levels are still high and also experienced in November 2014.

EIA expects Brent spot prices will average Sh7400 per barrel in 2018 and Sh7,500 per barrel in 2019,” said EIA last week.

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