The oil price has been on a free fall in the past couple of months, hitting an historic low last Friday. For the first time in 12 years, oil prices tumbled below $30 as the fear for China’s economic slows down, the US dollar strength and steady oil reserves, disagreement among OPEC nations and the expected Iranian’s return into the global oil market intensifies, and gripping the financial markets with fear, which has sent oil prices plummeting.
Oil has recorded more than a 70% price drop in one year; A significant drop from 2014, peak when prices reached $112 a barrel. There are all indications that prices could hit below $20 a barrel before the end of the first quarter of 2016. The drastic and sharp drop in oil prices currently rattling the financial markets, is a combination of many factors, among which China’s economic slow down and the US energy policy shift plays a significant role.
As the US moves towards energy self sufficiency; it has been boosting its crude stockpiles (reserves) and upping its domestic oil production. This move has left her traditional suppliers such as Venezuela, Nigeria, Iraq Saudi Arabia etc, in the cold with millions of barrels of crude oil without buyers.
China’s dismal economic news is contributing greatly in the current oil price slump. As recently as 2012, China was a red-hot economy, growing at 10%, with consumption of oil at 10.8 million barrels per day. However, today, its oil consumption has dropped by a whopping 397,000 barrels per day. A drop that has partly been driven by the economic slowdown or declining industrial productivity, with projection of 6.5% growth this year, the lowest in 25 years.
The United States dollar plays an essential role in the pricing of commodities such as gold and oil in the global markets. With the US economy steadily recovering from the 2008-2009 financial meltdown, the US dollar has equally been strengthening in value against most other currencies, and since oil is traded in US-dollars, the rising dollar has been reflected by a fall in value of oil relative to the US dollar.
Iran, which has the world’s fourth-largest oil reserves, is also expected to return, and is expected to pump an additional half-million barrels a day into international markets very soon- after the United States and other western powers lift sanctions against its oil exports, and this is likely to send oil prices diving deeper
The Vienna based oil cartel, OPEC, seems to be in disarray, as its members do not seem to agree on methodologies to control the oil output. While Nigeria, Angola and other hard-hit countries by the price drop are pressing for oil production cut, Saudi Arabia, Kuwait, Qatar and the UAE would not agree to reduce their production. And without a unanimous agreement, oil prices could only keep on falling
Oil-price collapse is rippling economies throughout the world. Russia, an oil-exporting country has been one of the first major casualties. With oil prices slumping and sanctions painfully biting the country over its actions in Ukraine, Its currency (rubble) value has fallen by 9.7% in the last ten months. Last week, Russia conceded to economic difficulties and announced a 10% budget cut in light of the falling oil prices.
Nigeria, one of Africa’s major oil producers is on a catastrophic economic edge, and could possibly see economic implosion and unrest; citizens taking to the streets in protest of economic hardship, following the massive budget shortfalls caused by the tumbling oil prices. Nigeria's 2015 budget passed when the price of oil was around $53 per barrel, while its 2016 budget was assumed when price of oil was above $38 per barrel last December.
In short, Nigeria is a troubled economy on the brink of a recession. Matters are expected to worsen if India, one of her largest customers decides to buy oil from her neighbor Iran, who has been re-admitted into the international oil trade following the lifting of economic sanctions on Iran by the United States.
One man’s loss many a times, not all the time, is another man’s gain. In contrast to the widespread fear and panic in oil exporting countries, oil-importing countries should be in celebratory moments by seizing the opportunity provided by oil-price drop.
Both Tanzania’s motorists and policy planners will benefit from the historically low oil prices. While Tanzania’s motorists will benefit at the pump by paying less for their gasoline, the country’s economic-policy planners should work on re-distribution of resources realized in the form of low oil prices to tame the inflation.
Drop in energy prices, will enable importing countries (Tanzania inclusive) to reduce fuel subsidies, and thus, relieving the government of the heavy financial burden. Low oil price for that matter is more of a tax cut or stimulus incentive to the government of Tanzania. Savings realized from low oil prices should be spent on other critical projects to foster the country’s economic growth as well as taming the inflation as this would infuse extra cash into economic circulation .
The government of Tanzania could invest cash savings realized from low oil prices into alternative sources of energy, into education, healthcare or into geographic areas where infrastructure has been neglected or where manufacturing and jobs have dried up.
Mungu Ibariki Tanzania
John Mashaka
Mashaka.john@yahoo.com
