The decline in crude oil prices and its impact on African economies

23Jun 2020
The Guardian
The decline in crude oil prices and its impact on African economies

On April 20, 2020, the Business Insider reported that the world market for crude oil experienced a tremendous slump in prices. Excess supplies pushed the price per barrel from $18 to negative $40 in a span of hours. This was the lowest point in 18 years. The oil industry experienced booms-

Sophia Kulaja

-booms and downfalls in the past but nothing compared to this happened before.

Tanzania’s Energy and Water Utilities Regulatory Authority (EWURA) price publication in June 2020, revealed a decline in world market prices by $182.9/tonne and $153/tonne for petrol and diesel respectively. For the month of June, pump prices in declined by 348/- (18.7 percent) and 300/- (16.2 percent) per litre of petrol and diesel respectively. The lowest regional price being 1,520/- for petrol and 1,546/- for diesel. Currently, world market price for crude oil is positive $38 per barrel.

Since the novel Coronavirus was declared a pandemic by World Health Organisation, a number of economies across the globe experienced turns and twists. Business activities remained at a near standstill as a result of shutdown of factories, restricted movement and declining use of fuel consuming products. These together with grounded flights amidst lockdowns, travel bans, and stay-at-home orders led to a significant decline in effective demand for oil.

As it is for any other commodity, prices are influenced by demand and supply forces. Oil is traditionally a scarce commodity which customers are willing to pay more for, however over the years, technology played a huge role in ensuring producers can access oil at low cost and sell at affordable price. As demand sharply falls while supply maintains its inelasticity, prices are set to decline.

To salvage price decline, most producers embarked on curtailing production, however the attempt did not match the declining demand, eventually leaving more supply. Storage facilities were saturated causing cost escalation without immediate demand.

Some governments believe this is a short-term challenge while for others, this could be a precursor to a possible recession in their economies. Africa is no exception, some of the largest oil producers and exporters in the continent including Nigeria, Angola, Algeria, Egypt and Libya have been adversely impacted.

There are winners and losers. Winners include haulage companies that deal with the commercial transportation of goods, packaging industry that use crude oil in making plastics and farmers using fertilizers made from oil by-products. Operating airlines will be able to minimize fuel costs and users of private cars that use petrol/diesel have started to benefit from the decline in prices.

Losers include some of the governments. Oil is one of the strategic commodities and some economies depend on oil revenues to balance their budgets. A lot less revenues are likely to be collected from oil sales and taxes this time around.

This has started to have adverse consequences on countries whose currencies have a high dependency on oil exports to drive economic growth. Investors within the oil industry now earn less and face potential significant losses. Jobs and the future of the industry is at stake.

The recent renewable threatened if consumers decide to switch to cheaper oil energy alternatives. We are already seeing deflation of currencies, as spending slows down monumentally while consumers are waiting for lowest prices, suppliers respond by dropping down prices.

Oil prices also affect the natural gas price. Other factors include among others; refinery costs, distribution costs, tariffs and margins. The industry has been volatile, with the world’s natural gas prices dropping from $280 per metric tonne in March to $123 per metric tonne in April and $149 per metric tonne in May.

The combination of price war and the pandemic has kept the price of natural gas below the March price by almost 50 percent. Companies within the energy industry need to take into account the impact of the price cuts on their cash flow projections and possible operational and supply chain disruptions.

Responses from governments and public health authorities play a significant role in reopening the economies, travel, supporting corporates, salvaging jobs, and ensuring the public is able to get back to the day-to-day routines including resuming the normal consumption pattern. I would also argue that it is important for oil prices to remain regulated to avoid supply shocks and attain balance in the future.

NB:

Sophia Kulaja is an Audit Senior at KPMG Advisory Limited. The views and opinions are those of the authors and do not necessarily represent the views and opinions of KPMG Advisory Limited.

 

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