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Opinion - The impact of rising oil prices on local economy

2021-11-05  Staff Reporter

Opinion - The impact of rising oil prices on local economy
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Namibia imports a lot of fuel, which will inevitably cost more in Namibia dollar terms. Meanwhile, international oil prices remain on the advance, adding further pressure. 

Global uncertainty continues to pressure commodity prices. The sovereign wealth funds or relatively low public debt levels will weather the storm. 

Namibia plans to establish a sovereign wealth fund by the end of this year, which will be used to serve as a buffer against future economic shocks. 

By working together, pooling our skills, knowledge and experience – and building on our strengths, we can accomplish great things.

The impact on financial markets, in turn, provides additional channels through which the oil price increase would affect economic variables. 

However, given cyclical developments in the world economy, it is unclear to what extent the imminent increase in the oil price has been directly responsible for the turbulence in advanced country financial markets and movements in currency markets. 

There are clear indications that the increase in oil prices has had an adverse effect on economy by affecting the pace of activity and corporate earnings, as well as confidence. 

The disruption caused by an oil price hike also depends on the state of the business cycle, the response of macroeconomic policies, and the flexibility of the underlying economies. 

I concurred with Mr Shiimi, who asserted that “Sovereign Wealth Fund will be split into short- and long-term funds – and be financed with proceeds from the renewable-energy industry, mining royalties, fishing quotas and the sale of state-owned assets”. 

I, therefore, urge all Namibians to join hands. If we don`t speak up against disunity – if we keep quiet and remain under the radar, the enemies of peace and those who want to promote disunity will have their ways. 

H.E. Dr Sam Nujoma, Founding President and Father of the Namibian Nation, always says, “A people united, striving to achieve common good for all members of the society, will always emerge victorious!”

Indeed, it is important to take action to pre-empt the second-round effects of the consequent inflationary pressures. If the monetary authorities accommodate an oil price shock, the resulting increase in inflation tends to get incorporated into inflationary expectations, which become persistent and significantly raise the costs of the subsequent disinflation. 

In practice, the situation is more complex because oil prices and GDP growth run both ways. High oil prices could dampen economic growth.

In addition to increasing international prices, a weaker foreign exchange rate plays an extensive role in higher oil prices within Namibia. 

Increase in oil price indirectly and directly affect the prices of a variety of goods and services that are dependent on oil in the production and the delivery of these goods and services. 

These increases can stifle economic growth by their negative effect on supply and demand. Increasing prices of goods and services reduces the supply and production of other goods and services due to increased production costs. 

Additionally, demand for these goods and services will also decline due to higher purchasing costs. 

These elements can lead to a rise in inflation and suppression of economic growth. 

Because Namibia imports a substantial part of the energy it needs, energy price increases have a larger negative effect on the standard of living of Namibians. 

If all of the petroleum used in Namibia were produced domestically, higher oil prices would not lower the overall Namibia standard of living in the long run by any more than they would lower GDP. 

The loss of business and consumer confidence resulting from an oil shock could lead to significant shifts in levels and patterns of investment, savings and spending. 

Higher oil prices would undoubtedly drive up the prices of other fuels, magnifying the overall macroeconomic impact. 

Unfortunately, those changes in spending patterns can be quite disruptive for certain key economic sectors and seem to be part of the mechanism by which the earlier oil price shocks had contributed to previous economic recessions.  

Oil prices remain an important macroeconomic variable. Higher prices can still inflict substantial damage on the economies of oil-importing countries and on the global economy as a whole. 

Companies are less able to pass through higher energy-input costs in higher prices of goods and services because of strong competition in wholesale and retail markets. 

As a result, higher oil prices have so far eroded profits more than they have pushed up inflation. Yet, the economic threat posed by higher oil prices remains real. Fiscal imbalances would worsen, pressure to raise interest rates would grow and the current revival in business and consumer confidence would be cut short, threatening the durability of the current cyclical economic upturn.

In summary, an increase in the price of crude means an increase in the cost of producing and transporting many goods. 

A surge in crude prices tends to increase Namibia’s spending and negatively affects the budget deficit. 

A rise in prices impacts the current account deficit, which means the value of imported goods and services exceeds that of exports. 

Consumption is the largest variable in the economic growth measurement. In this regard, increase in oil prices affects both the microeconomic and macroeconomic growth. 

Microeconomic units such as the industry and the households are the variables of macroeconomic unit. 

This means, once micro economic variables are affected by fuel prices, the economy growth rate derails, causing unemployment and inflation.

2021-11-05  Staff Reporter

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