body-container-line-1

Rising fuel prices: Why?? Are we alone in this?

Macroeconomic Bulletin Rising fuel prices: Why?? Are we alone in this?
MAR 28, 2022 LISTEN

The Discovery of crude oil in the Middle East changed their fortunes because of continuous demand for the commodity. Life does not exist without energy. In today’s world, fossil energy/crude oil is considered one of the most prominent energy sources with a large global market.

Renewable energy is catching up. But obviously not fast enough in Ghana and many other places in the world. As it currently stands, everything is literally linked to the price of a litre of petrol or diesel. So when fuel price shifts, an entire economy shifts with it.

Fuel prices have shifted. They’ve leapt and the entire country has reacted correspondingly. At a press event on March 24th, Ghana’s Finance Minister, Ken Ofori-Atta, said, “To mitigate the rising price of petroleum products at the pumps for the next three months, the government has decided to reduce margins in petroleum price build-up by a total of 15 pesewas per litre with effect from 1st of April.”

Any increase in fuel pricing seems to affect every other price. This is because the increase in the petrol price leads to an increase in the cost of transportation, leading to overall inflation in the country. Hence, there is a direct impact on the citizen's expenditures, import bills, savings, and the overall living standards of the people.

There has been a massive increase in the petrol price in recent times, not just in Ghana. After COVID-19 and the reopening of the world, the demand and price for oil in Africa have skyrocketed, leading to adverse impacts on inflation, domestic budget, and economic savings. (Business insider Africa)

Although some African countries have crude oil, our region is home to 5 out of 30 oil-producing countries in the world. Yet, not all these countries in the region produce crude oil. Further, the countries producing crude oil have certain strategic failures to address demand. (investpedia)

There are local and international factors that impact oil prices and if these factors can be managed, the economic outlay of our African countries can be reduced.

LOCAL FACTORS AFFECTING THE PETROL PRICES IN AFRICA

1. Operational incapability of oil-producing African countries

The biggest problem with oil-producing African countries is mismanagement (and the c-word). It's why oil-rich countries in Africa still need to import petroleum products into their country. It's why a country can import crude oil from Europe and have it arrive "dirtier than black market fuel". (investpedia)

2. Tax and levies implication on the petrol price

The implication of taxes on the sale of petrol leads to a higher price. As the rate and number of the tax increases, the price of fuel increases. For instance, in 2019, there were about 12 different types of surcharges on petrol, leading to a higher price. These added up to about 40% (ghana business reviews). These taxes and levies include road fund levy, Energy debt recovery levy, energy sector recovery levy, special petroleum tax, distribution, marketing margin etc.

Nevertheless, Government is in the process of negotiating some of these to reduce the price. That is why the announcement by the Finance Minister is in order. It might be temporary though till the prices in the international markets go back to normal.

3. Legal and security issues within local oil-producing countries

On a broader spectrum, there have been security problems in major oil-producing countries like Nigeria during the last decade. It’s evident from the report of the US Energy Information administration that it was a security risk to explore and develop oil fields in the country. (investpedia)

Further, most of the oil exploration activities are dependent on foreign companies. So, we are dependent on imports and foreign machinery work for our very own welfare.

4. Currency depreciation

The import bill increases when the local currency depreciates. It's simple to understand that when currency is weak, you have to pay more to import the product. The cedi has been depreciating in recent times. So, when cedi is converted into dollars, more cedi will be needed to make the product's price.

It's also important to note that persistent depreciation is increasing because of a gap in imports and exports. The import bill exceeds the country's exports, which weakens the local currency. We need to choose locally manufactured products where possible. It can help to boost the economic stability of the country. (norvanreports)

INTERNATIONAL FACTORS AFFECTING OIL PRICE IN THE COUNTRY

  • Geopolitical tension between Russia and Ukraine

Russia is the third-largest oil-producing nation in the world after Saudi Arabia and the United States. Russia’s oil extraction capacity and supply ability are higher than most other oil-producing countries around the globe. And it has been a major oil supplier for the global oil market. However, a recent clash between Russia and Ukraine has created tension and uncertainty about the operational sustainability of its oil market. (iaee)

It’s important to note that international sanctions on Russia aim to make it unable to find a buyer. The US and Canada have already banned oil purchases from Russia. The UK is about to do the same by the end of the year.

So, there is global uncertainty regarding supply and what the future has to unfold.

2. Increasing economic activity throughout the world

In 2020, this world witnessed zero oil prices in the international market due to reduced/no economic activity. However, oil price exceeded $100 per barrel in recent times due to increased economic activity.

The rise of petrol prices has triggered inflation throughout the world, not just Ghana. For instance, in the United States, the current inflation rate is 7.9% which is a massive increase compared to 1.4% in 2020. Although it's not entirely due to a hike in the oil price, it remains a major factor in boosting inflation. (ycharts)

The use of crude oil is not limited to transportation and mechanical energy. Many petrol products are used as the main component in a wide range of products like electricity, chemicals, synthetic material, road oil, feedstocks, and many other mass consumer products.

3. Limited supplying capacity

It’s important to note that although there are deep reserves for oil globally, extraction requires giant machinery and modern technology. And, oil needs to be refined to make it useable. There is a limited oil generating capacity of the oil-producing countries.

Plus, OPEC – (Organization of the Petroleum Exporting Countries) seems to control the petrol supply to ensure prices do not fall below a certain threshold. In effect, via going about their supply management and oil pricing, OPEC tends to influence global inflation. (weforum)

It’s important to note that member countries of the OPEC have been diversifying their income sources and investing in non-oil generating streams.

SO, IS AFRICA ALONE IN THE INFLATION JOURNEY?

That’s not true; Africa is not alone. It's an international phenomenon where war is up. Hopefully, the oil price will come back and contribute to economic feasibility around the globe.

But, from a Ghanaian author's perspective, these external oil price hikes would not have affected our local economy this much should we have already succeeded in optimally exploring the oil we discovered in Ghana for Ghana a while back. We must strive to achieve full-scale production.

So, from the comfort of my laptop keyboard, not at the frontlines, knowing very well of the varied complexities involved in such an endeavour along with all the roadblocks that have popped up in attempts recent and old to make it work, I will still type that we must take firm initiatives to extract and refine the crude oil as we do have oil reserves within Ghana. Because that's what needs doing.

ANY OPPORTUNITY FOR AFRICA FROM THE RUSSIA AND UKRAINE WAR?

After America and Europe put sanctions on the Russian oil, it could be a great opportunity for the African countries to sell their crude oil in the international market. However, the problem is that Africa does not have sufficient refineries to meet demand. Further, there has been a backlash in the refinery development and well exploration due to COVID-19 restrictions in recent years.

It may be a challenge for African countries to meet demand due to operational incapability. However, putting available resources at higher efficiency can lead to a higher probability of achieving this towards economic feasibility. (abc)

So yes, it’s an opportunity full of challenges.

LET’S CONCLUDE

Oil is one of the most prominent commodities in the world. The countries with oil-producing capability have revolutionized their fortune. Although Africa is one of the oil-rich regions of the world, it has to import petrol and other related products.

Recently, there has been a rapid increase in petrol prices. The increase in the price can be attributed to internal and external factors. The internal factors include operational incapability of the oil-producing countries, tax implications on the petrol price, the legal & security issues in some oil-producing countries, and the cedi depreciation, amongst others.

External factors include the ongoing geopolitical conflict between Russia and Ukraine, increased economic activity around the globe, and the limited supplying capacity of the oil-producing countries.

I hope you enjoyed the read. Hit me up and let’s keep the conversation going! I read all the feedback you send. Also, feel free to throw at me topics you’d like to read or hear my thoughts on. You can always head to my Calendly to schedule a quick chat by going to calendly.com/maxwellampong. Or connect with me your own way through my Linktree: https://linktr.ee/themax.

These are all facts. And this has been an opinion piece.

Have a blessed week!

...

References

abc. (n.d.). https://www.abc.net.au/news/2022-03-09/petrol-price-panic-as-new-normal-above-2-a-litre/100894860.

Business insider Africa. (n.d.). https://africa.businessinsider.com/local/markets/east-africans-are-reportedly-going-through-tough-economic-times-as-prices-of/fzgk01r.

ghana business reviews. (n.d.). https://www.ghanabusinessnews.com/2021/11/29/you-pay-so-much-for-fuel-in-ghana-because-40-of-price-is-taxes/.

iaee. (n.d.). https://www.iea.org/reports/russian-supplies-to-global-energy-markets/oil-market-and-russian-supply-2.

investpedia. (n.d.). https://www.investopedia.com/articles/investing/101515/biggest-oil-producers-africa.asp#:~:text=The%20African%20continent%20is%20home,about%209.6%25%20of%20world%20output.

norvanreports. (n.d.). https://norvanreports.com/cedi-records-4-7-depreciation-rate-against-the-greenback/.

weforum. (n.d.). https://www.weforum.org/agenda/2022/02/why-oil-prices-matter-to-global-economy-expert-explains/.

ycharts. (n.d.). https://ycharts.com/indicators/us_inflation_rate.

...

Dr. Maxwell Ampong designs Sustainability Development Models and is the CEO of Maxwell Investments Group. He is also the Co-Founder of The RIO Corporation, the connectors between impoverished communities and impact solutions worldwide. He writes about trending and relevant economic topics, and general perspective pieces.

328202283047-txobrfdq5l-mig-logo-horizontal.jpeg

Maxwell Ampong
Maxwell Ampong

Content ContributorPage: MacroeconomicBulletin

body-container-line