This being the highest drop in the last four years, the trend is expected to continue for the first quarter of this year, according to experts.
The main reason for the low fuel prices is due to a huge drop in global crude prices during the last six months which has been brought about by various factors.
In an interview with Capital FM Business, Petroleum Institute of East Africa (PIEA) Chairman Polycarp Igathe gives some insights on some of the major reasons behind the oil prices slump.
High oil supply
First I would like to say that what the industry is seeing is an oversupply of oil in the global market. And all of us industry players are estimating that with this drop, Kenyans are going to continue enjoying favourable fuel prices at least- guaranteed-for the first quarter of this year into March and April. This is a good thing because Petroleum is a necessity and for me on behalf of the industry is to commend ERC for being able to explain to the consumers. The rules of economics say, when supply exceeds demand, then prices start to come down and I think that is what we are seeing.
Lack of production control by Organisation of Petroleum Exporting Countries (OPEC)
We cannot ignore the fact that OPEC, which produces 30 percent of the World’s crude today, is a cartel. But it is not really working how a cartel should work. For a cartel to work, it should have three ingredients. First of all it should have discipline; secondly it should have a dominant market position and thirdly, there must be barriers to entry into the market. For example let’s take discipline.
There is no discipline anymore because right now they would be stopping more oil production to avoid oversupply. But they are doing the opposite. They would have cut the supply, but none of them is doing so. Because everybody is saying, ‘let the best person in the marker win.’ So when those three ingredients don’t exist it means that there is no longer a cartel and the beneficiary however, is the consumer in this case.
Competition and geopolitical rivalry
I also think that when we read what a majority of industry players are saying is that a low oil price has a geopolitical advantage to Saudi Arabia and America. The geopolitical rival of America is Russia. The geopolitical rival of Saudi Arabia is Iran. And both countries (Saudi and America) are there to weaken Russia and Iran. For example, the lowest producer of crude in the World in terms of costs is Saudi Arabia. They produce their crude for about five dollars to six dollars a barrel. The rest of the World, people are producing crude at numbers of 25 dollars a barrel. So the only single country that can move the needle in terms of the price would be Saudi but I think they are prepared to try and take out the competition of crude. Even if they sell at low cost, they don’t suffer much since their production cost is low.
Emergence of more oil producing states
An oversupply is a clear consequence of new oil finds in every part of the World. If we went back five years ago, there was not as much oil finds say in the continent of Africa as we have found today. Ghana is a new oil producing country, Kenya is almost becoming one, South Sudan is producing, Uganda, and many others. I mean there has been a lot of oil that has come into the market and I am just using Africa as an example. America is also producing shale
oil through fracking.
Meanwhile, Igathe argues that the only time we are going to see a rise in the oil prices will be “when demand matches supply. Right now supply is exceeding demand. At the moment, I cannot predict when we are going to see this change.”