There has been steady an increase in crude oil for the past five years. Crude oil prices have risen from $25 to $50 and finally reached $75. However, until recently they up surged to $110 per barrel. In the Kenyan marketplace, premium gasoline has settled close to Sh100 per liter.
High oil prices and recession are economic indicators that are related to each other and are truly showing their effects in Kenya.
Kenya is already facing inflation due to higher oil prices along with the after effects of post-election violence. These factors are influencing economic growth projections in a negative manner. High price inflation, increasing interest rates and shrinking credits have far reaching impacts on Kenyan business.
Similar circumstances were prevalent in Kenya in the early 1980s after the Iranian political turmoil led to skyrocketing oil prices. They were as high as $45 per barrel, which is equivalent to almost $110 per barrel today.
However ever increasing oil prices continue to raise questions. It is known that supply and demand are in a state of equilibrium. The supply is slightly higher then the demand but it is not at the adequate level to avoid price hikes when ever there is subtle, unpredictable disruption in supply.
OPEC nations have two thirds of the world’s oil reserves and they are responsible for almost one third of production. Therefore, there is a dire need that OPEC nations invest more in oil productions. Failure to increase the production levels will result in worldwide supply stress for quite some time.
Rising prices always lead to initiative for oil exploration.
“Easy oil” is not accessible and exploration for “difficult oil” is getting expensive as prospectors continue their search into high risk and expensive frontier areas that include offshore deep water regions.
There is an additional benefit of extracting “easy oil” from already developed regions like Middle East. The “easy oil” extracted from these areas costs as low as $10-20 per barrel to produce. However, new frontier regions are proving expensive, as oil production costs are $50 per barrel, here.
This indicates that Middle East countries are making billions of dollars in excess due to their easy oil reserves. Where as, the multinationals and independent oil companies have to spend billions of dollars in developing newer, expensive oil reserves.
This increased production can only be continued, if the prices are high enough to cover the high risks related with tough frontier zones. Therefore, high prices in the future can be attributed to this incremental production.
However, the expected price Sh100 per liter price for gasoline is dreaded the most in Kenya. If prices continue to remain at above $100 per barrel, as this is expected, the double digit inflation will become a permanent feature.
Without its own oil reserves, Kenya will be able to do little to protect itself from the after effects of high prices.
The Minister for Energy should come up with a team of experts who device measures that should prevent Kenya’s people and economy from the impact of climbing oil prices. Some of the ways to reduce this impact include bio-fuel, strategic stock programs and utilization of geothermal and wind energy.
Advanced Geophysics
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