Josef Kefas Sheehama
Russia’s special military operation in Ukraine helped push the price of oil to over US$100 a barrel for the first time since 2014. Namibia increased fuel prices on 2 March 2022, a headache increase for Namibian consumers and businesses.
Demand for oil plunged in 2020 during the pandemic when lockdowns led the price to fall below zero for the first time in history due to a major downturn in economic activity. Pump price hikes contribute to the burden of Namibia’s people, especially for those who are using public vehicles for a living, and for individuals using private vehicles to reach their destinations. Oil prices have since risen sharply to nearly US$100 per barrel following a strong economic recovery, post-lockdowns. As the economy grows, so does the demand for oil.
Moreover, rising geopolitical tensions between Russia and Ukraine and in the Middle East are stoking supply fears. This is contributing to rising inflation and concerns about economic recovery. An increase in the oil price will not only be seen at the gas station, but it will be felt in virtually all the goods and services we use. This is because oil is a feedstock, source of energy, and is used in the transportation of many things.
The monetary policy in Namibia is oriented towards keeping inflation low and stable. The Bank of Namibia (BoN)’s Monetary Policy Committee is set to meet on 13 April 2022. So, if the BoN wants to curb inflation, it may raise the repo rate. I believe that the BoN will increase the repo rate by 0.50% basis points. The increase in fuel prices has been noted as a concern for the global and local economy. These increases will certainly impact on every single Namibian, given the reliance the country has on fuels for transportation, manufacturing and in the agricultural sector. The sanctions on Russia by the USA and UK have contributed to the increase in crude oil prices. Sources from the group told Reuters that the output deal is showing no cracks so far after Russia’s special military operation in Ukraine, and the group is likely to stick to a planned output rise, despite crude topping US$100 a barrel.
Craig Erlam, senior market analyst at OANDA, anticipated sustained unpredictability in the markets. He also pointed to US-Iran talks as a potential weight on prices. He said: “I expect we’ll continue to see plenty of volatility in oil markets for some time, with plenty of interest in the dips as geopolitical tensions remain so high. One thing that could take some heat out of the market will be a US-Iran nuclear deal, which has reportedly been very close for a while now. An agreement could quickly see around 1.3m barrels re-enter the market, which is no doubt a big incentive for getting a deal over the line.”
Therefore, rising crude oil prices amidst escalating fears created by the conflict in Ukraine is one of the main reasons for the increase in Namibian fuel prices. The fundamental debates about inflation are really concerned with whether the central bank is an inflation creator or an inflation fighter. The responsibility of monetary policymakers is to adequately respond to inflation. Those who see the central bank as an inflation fighter must, therefore, believe that inflation has some source other than the central bank, that it has non-monetary factors. The job of the central bank is to adjust its policy in response to these shocks.
Furthermore, should demand continue growing, more of it will be met by OPEC and that, combined with minimal surplus capacity, should mean higher oil prices. An increase in crude prices means an increase in the cost of production and transportation of several goods. A surge in crude prices tends to increase Namibia’s expenditure and adversely affects the fiscal deficit. A rise in prices impacts the current account deficit, which means the value of imported goods and services exceeds those being exported. We are facing a real immediate existential issue that requires all hands on deck, particularly on something as strategically and economically important as energy. Supply constraints will not allow much more than that, even if producers were encouraged to do so. One of my good friends said: ”Everyone rides bikes to work to save the economy. Only vacation where you can bike. Make your kids walk to school and join athletic competitions”.
Oil price increases can also stifle the growth of the economy through their effect on the supply and demand for goods other than oil. Increases in oil prices can depress the supply of other goods because they increase the costs of producing them. In economics terminology, high oil prices can shift up the supply curve for the goods and services for which oil is an input. Oil price increases are generally thought to increase inflation and reduce economic growth. In terms of inflation, oil prices directly affect the prices of goods made with petroleum products. Good corporate governance, including the transparency of monetary policy, can be used to reduce the risk of speculation and forecast inflationary activity. Political stability also needs to be created through effective regulatory systems on financial and capital markets, including bankruptcy laws and laws preventing capital flight in the face of a financial crisis.
Therefore, the inflationary pressure in surging oil prices sparked concerns about supply shortages stemming from the crisis in Europe. Brent crude prices soared above US$107 a barrel on Tuesday, the highest since 2014. Oil prices are surging over the risk of conflict. Ukraine connects some of Europe’s major energy customers to Russian gas and oil, making it a strategic intermediary and energy distributor in its own right.