Tough times for motorists as US, Iran row raises oil price

Motorists and cooking gas users face tough times ahead after global crude oil prices rose to an eight-month high after last week’s assassination of a top Iranian general by the US last Friday fanned fears of a major conflict in the Middle East.

The indicative Brent crude price rose to an average of $72.01 a barrel, up from $65.50 in December, setting up oil importing economies such as Kenya for hard times ahead.

This is the highest price crude has hit since May last year and petroleum market analysts have warned that the world may end up paying a higher price for a barrel of oil in coming weeks if a solution to the US-Iran stand-off is not found.

This will feed into Kenya’s monthly price review of diesel, petrol and kerosene, when the energy regulator adjusts prices on February 14 since the next price adjustment will based on the December crude prices.

Kenya, which has set a cap on the retail prices of fuel since 2010, lists maximum prices for each county at mid-month and they remain valid for a month.

Energy and transport costs have a significant weighting in the basket of goods and services used to measure inflation in Kenya.

“Anything that affects geo-politics impacts on crude price and a prolonged standoff will certainly influence local pump prices,” said a top official at Vivo Kenya.

This will upset the recent trend of falling petrol prices on reduced crude costs and cheaper refined products — which Kenya uses after it shut down its sole refinery in Mombasa. But crude prices dictate the prices of refined products that are imported into Kenya.

Motorists got a slight reprieve in the December review when the prices of petrol, diesel and kerosene decreased by Sh1.09, Sh2.83 and Sh1.75 per litre respectively. Super petrol, diesel and kerosene have been retailing at maximum of Sh109.50, Sh101.78 and Sh102.31 respectively in Nairobi until January 14, when the fresh adjustments take effect.

The fuel prices were based on crude prices at $66.60 a barrel, according to the Energy and Petroleum Regulatory Authority. This is a pointer that Kenya is set for higher petrol and cooking gas prices should the US-Iran standoff persist.

US President Donald Trump has warned of a “major retaliation” against Tehran after it threatened revenge for Friday’s killing of military commander Qasem Soleimani, which shocked world markets and triggered a spike in crude prices.

Iran on Sunday announced a further rollback of its commitments to its nuclear accord, while Iraq’s Parliament demanded the departure of US troops from the country as the fallout from the attack spread.

This has heightened concerns about an escalation of conflict in the Middle East and its possible impact on oil supplies. The region accounts for nearly half of the world’s oil production, while a fifth of the world’s oil shipments pass through the Strait of Hormuz, off Iran’s southern coast. The channel, which is only 21 miles wide at its narrowest point, is the only way to move oil from the Persian Gulf to the world’s oceans.

“If there is no de-escalation of the (US-Iran) conflict the cost of crude prices will go much higher and this has implications on Kenya’s economy,” said economist Tony Watima.

In the short-term, a sharp rise in crude oil price means inflation pressure that began to increase at the end of the year will deepen.

Oil is the single biggest item on Kenya’s import bill whose pricing has an immediate impact on the demand for dollars and ultimately the exchange rate.

Producers of services such as electricity and manufactured goods are also expected to factor in the higher cost of petroleum, which could spark upward pricing pressure across the economy with serious ramifications on the cost of living.

The inflation rate rose to a four-month high of 5.82 percent in December 2019, up from 5.56 percent recorded in November, data released on December 31 showed.

In Kenya, for instance, the majority of the population relies on kerosene and gas for lighting and cooking, making crude price a key determinant of the rate of inflation.

Gas prices have in recent months dropped with the cost of refilling a 13-kilogramme gas cylinder at petrol stations, falling to an average of Sh2,050 from Sh2,150 in September.

The economy also uses diesel for transportation, power generation and running of agricultural machinery such as tractors with a direct impact on the cost of agricultural produce as Kenya enters the ploughing season, which runs from February to April.