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Low Crude Oil Prices Impact local Economy

Mon, 2 March 2015 17:08
by Kudzai Chimhangwa and Patrick Haingura

As current crude oil prices continue to hover below U$50 (N$572) a barrel with the price witnessing a recent 3, 8% drop, this development will have a progressive effect on Namibia’s overall economy, but could also bear an opposing impact on oil exploration activities.
Earlier this month, subdued oil prices were a major respite for Namibian motorists as they began paying N$1, 20 less for all diesel grades and N$1, 00 less for petrol.
In an interview with The Villager, Petroleum Commissioner, Immanuel Mulunga said any possibility of a further oil price reduction depends on the state of the international crude oil price.
“I suspect there will still be a reduction because there is a time lag between international crude prices and the pump prices,” he said, adding that he cannot tell right now whether indeed there will be a reduction or an increase owing to a lot of variables in the industry.
“It’s likely that there might still be a reduction in the pump price but this is my opinion. It (international crude price) might go down more until it recovers. Towards the end of this year maybe it will recover to better levels,” said Mulunga.
He pointed out that besides any likely reduction being good for motorists, the low fuel prices will be good for the economy as people would have more disposable income and that would be good for the country.
“From the exploration point of view it may not be good because companies will cut their exploration budgets and this will affect our exploration here in Namibia,” he said.
He said there has already been an impact (following the recent oil price reduction), as companies are closely re-looking their budgets and a lot of companies have actually slashed their exploration budgets.
“Fortunately we did not have any drilling commitments this year, they are only for next year, so we hope that between now and the end of this year, the price will rebound and then we can have our drilling commitments taking place in 2016,” said Mulunga.
Major oil producers including Royal Dutch Shell for instance have to date slashed billions of dollars from their investment programmes.
The United States (U.S) has scaled up production of shale oil owing to new technologies of fracking and horizontal drilling effectively making the U.S the world’s largest producer of crude oil.
Coupled with a substantial reduction in US imports of oil, the U.S government is continually reporting record highs in crude inventories.
Furthermore, intensifying competition between Saudi Arabia and Russia over geopolitical interests is basically spurring this global development.
Mines and Energy Minister, Isak Katali, contends that once competition is brought under control, it may take years before production can be substantially increased again.
A report from the Energy Information Administration said, U.S stockpiles reached 425, 6 million barrels recently representing a 7, 7 million barrel increase.
Experts contend however, that major oil producers are taking measures that will tighten supply, while demand will continue to rise.  Together, these forces will allow the oil market to gradually self- correct.
Inflation Factor
Economists on the other hand argue that, although lower fuel prices resulting from lower international oil prices have helped slow inflation in recent months and expect data to show that inflation moderated further, the relief from lower fuel prices will not last long as the windfall from lower prices is not sustainable.
“Lower inflation would, however, likely halt the cycle of interest rate hikes in the short to medium term, which provides more comfort and stability to the entrepreneur around these funding costs. The falling of petrol price between August last year and this month has reduced the input and operating costs of businesses, particularly those with a high demand for fuel such as manufacturing and logistics,” said Head of Business Banking of Mercantile Bank, Riaan Klopper in a report.
With indications of a 70c/l increase in the petrol price expected, Klopper noted, the consecutive fuel price cuts are likely to come to an end this month.