Israel-Hamas war could further drive up fuel prices

Crude oil prices could hit a high of Sh23,636 ($157) per barrel should the conflict in the Middle East escalate, negatively affecting oil-importing countries like Kenya where consumers are already grappling with record-high pump prices.

The World Bank’s latest Commodity Markets Outlook found that in case of a “large disruption” scenario —comparable to the Arab oil embargo in 1973 — the global oil supply would shrink by six million to eight million barrels per day.

That would drive prices up by 56 percent to 75 percent, to between $140 (Sh21,077) and $157 (Sh23,636) a barrel, a significant geopolitical risk to oil markets since Russia’s invasion of Ukraine last year.

For Kenyans, this would be disastrous as the cost of living in the past one year has been worsened by costly food and fuel.

External shocks have disrupted global supply chains and driven up prices of critical raw materials, including petroleum products.

Already, spooked by the high retail prices of fuel, an increasing number of motorists have been forced to leave their cars at home.

Reduced consumption of petroleum products — including Super petrol, diesel, kerosene and jet fuel — has also had a knock-on effect of tax collection.

Collections from the Petroleum Development Levy (PDL) dipped by nearly Sh1 billion in the year ended June, pointing to the depressed consumption of Super petrol and diesel, according to data from the Ministry of Energy and Petroleum.

Even worse is the prospect of higher food prices due to higher fuel prices should the Israel-Palestine conflict spill over to oil-producing countries in the Middle East.

“Higher oil prices, if sustained, inevitably mean higher food prices,” said Ayhan Kose, the World Bank’s deputy chief economist and director of the Prospects Group.

“If a severe oil-price shock materialises, it would push up food price inflation that has already been elevated in many developing countries. At the end of 2022, more than 700 million people — nearly a tenth of the global population — were undernourished. An escalation of the latest conflict would intensify food insecurity, not only within the region but also across the world,” added Kose.

Fuel is a critical input in most productive processes, including agriculture. Powered machinery such as tractors and combined harvesters run on diesel. Sectors that rely heavily on petroleum products include manufacturing, transport, electricity production and mining.

High crude oil prices and the implementation of new tax measures such as the doubling of the value-added tax on petroleum products from eight percent have seen retail prices of fuel per litre surpass the Sh200 mark.

In Nairobi, a litre of Super petrol is retailing at a record Sh217.36, diesel (Sh205.47) and Kerosene at Sh205.06 since October 15.

The price increase was despite the application of a subsidy aimed at cushioning consumers against the shock of higher prices.

But international oil prices decreased in the week ending October 26, even as concerns of a wider Middle East conflict eased, said the Central Bank of Kenya (CBK) in its weekly bulletin. United Arab Emirates’ Murban oil price dropped to $90.23 per barrel on October 26 from $93.11 per barrel on October 19. Kenya imports largely Murban oil from the UAE.

The World Bank found that in a “small disruption” scenario, the global oil supply would be reduced by 500,000 to two million barrels per day — roughly equivalent to the reduction seen during the Libyan civil war in 2011.

Under this scenario, the oil price would initially increase between three percent and 13 percent relative to the average for the current quarter — to a range of $93 to $102 a barrel.

In a “medium disruption” scenario — roughly equivalent to the Iraq war in 2003 — the global oil supply would be curtailed by three million to five million barrels per day. That would drive oil prices up by 21 percent to 35 percent initially — to between $109 and $121 a barrel.

Luckily, neither Israel nor Palestine is a significant oil and gas producer. Their immediate neighbors — Lebanon, Syria, Jordan and Egypt — are also not major oil and gas producers or exporters.

In June 2023, Opec+ members announced they would extend crude oil production cuts through 2024, limiting global crude oil supplies, particularly sour crude oils.

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