Why we don’t benefit from low oil prices

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When international crude oil prices fall, consumers expect to benefit from the downward pressure on the price of petrol at the pumps.

The cost of imported goods, for example, should fall due to reduced transportation costs and consumers expect the attendant costs savings to be passed onto them. However, what happens in reality is a classic case of the “rocket and feather effect”.

According to Quentin Wilson, a motoring journalist and lead campaigner for Fair Fuel UK, this is the phenomenon where, “When oil prices go up, retailers and suppliers are quick to respond and prices at the pumps rocket the next day. But when oil prices go down, petrol prices fall as slow as a feather.” So, ultimately consumers feel cheated by the system and feel that someone in the chain hangs on to the profit.

Earlier in the year, reports quoting Globalpetrolprices.com revealed that Zimbabwe’s fuel prices were the 25th highest in the world despite a fall in oil prices in the global markets and the country’s mandatory blending policy, which compels fuel companies to sell blended fuel with 15% ethanol and 85% unleaded petrol.

Consequently, the Zimbabwe Energy Regulatory Authority (Zera) came under fire from the public over its alleged failure to align local fuel prices with falling international prices. So what could be some of the reasons for this dislocation which prevents local consumers from deriving meaningful benefits from the drop in crude oil prices?

Government policy on fuel taxes

According to Zera chief executive officer Gloria Magombo, fuel prices are affected by different factors such as government policy on fuel taxes, fuel supply chain structure (whether there is a refinery or not), fuel stabilisation mechanisms, whether landlocked or not (transportation); subsidies and exchange rate against the US dollar. Since the motoring public has not yet meaningfully benefited from low oil prices, it’s fair to say that this is largely due to government’s current energy policies.

For instance, while ordering fuel sellers to reduce prices, the government itself was increasing excise duty by 10c a litre for both petrol and diesel, essentially arrogating the benefit for its own purposes.

An unresponsive fuel supply chain

“Zimbabwe experiences a lag in terms of benefitting from the international fall of fuel prices due to the long period it takes to transport fuel from source to retail. Other procurers secure three to six months fixed price contracts as a way of hedging against price increases,” said Magombo.

True to form, fuel retailers in Zimbabwe said they did not immediately effect price changes in response to falling crude oil prices since they were yet to finish old stock. So clearly, the government’s challenge is to formulate fuel procurement and distribution policies that ensure efficient transmission mechanisms in our fuel supply chains.

Profiteering mentality

Due to the profiteering mentality that first reared its ugly head during the Zimbabwe dollar era, some retailers would rather hold out for as long as possible without lowering prices (in order to enhance their margins), than pass the benefits to consumers even when there is genuine scope to do so. The fact that they have room to do this suggests that Zera can do more in terms of monitoring the fuel retailing sector’s pricing practices.

High domestic cost structure

The operating environment in Zimbabwe is characterised by a high cost structure due to structural issues such as the high cost of finance, power shortages, outdated machinery and high labour costs which collectively militate against the fuel supply chain’s ability to efficiently pass on of the benefits of reduced oil prices to consumers. Even if there is a basis for reducing the pump prices of fuel and by default the goods on supermarket shelves, other cost pressures may conspire against such a move.

Potential impact of low oil prices on Zimbabwe’s economy

According the World Bank, low oil prices have numerous implications, including redistribution of income from oil producers to consumers, shifts in global growth and inflation, likely changes in monetary policy and environmental implications, especially increased carbon dioxide emissions, depending on how much demand will increase due to lower prices.

Low oil prices will exert downward price pressure on other commodity markets as highlighted below.

Natural gas
Low oil prices will translate to low natural gas prices. This clearly has an impact on Zimbabwean consumers given our electricity deficit which forces us to rely on Liquefied petroleum gas (LPG) for some of our energy needs. Since we do not produce LPG and import what we need, the impact of lower oil prices should have been experienced through lower LPG prices.

Fertilisers

Low natural gas prices will, in turn, put more downward pressure on fertiliser prices, especially the nitrogen-based ones, most of which use natural gas as a major component. Already, fertiliser prices are down 45% since 2011 and more than 50% lower since their all-time high in 2008. Farmers in Zimbabwe will not have felt this.

Grains and oilseeds

There are multiple channels through which low energy prices will impact on agriculture, an energy intensive sector, which is apparently four to five times more energy intensive than manufacturing.

A first channel reflects the fuel cost side, in which falling fuel prices reduce the cost of producing and transporting food commodities and the cost of chemicals and fertilisers, some of which are crude oil by-products or directly made from natural gas.

A second channel relates to policies favouring the production of biofuels, which are often driven by the policy objective of reducing dependence on imported crude oil. In a third channel, lower oil prices render biofuel production less profitable, or even unprofitable.

Oil price outlook
According to authoritative sources, nominal oil prices are expected to average $53/bbl in 2015, 45% lower than 2014.

This forecast reflects the shift in Organisation of the Petroleum Exporting Countries (OPEC)’s policy to let markets determine the price rather than engaging in supply management, easing of geopolitical tensions, ample supplies, and moderating demand.

The large production capacity currently in place points to a continuation of low prices for some time, with prices expected to recover only modestly, by $4/bbl, in 2016. And, since the current oversupply of oil is believed to be part of a long-term OPEC strategy to keep oil prices low, there is every reason for local motorists to expect to enjoy low prices for some time to come, but will that be the case on the ground?

lFeedback: omen.muza@gmail.com. Omen N Muza writes in his personal capacity. You can view his LinkedIn profile at zw.linkedin.com/pub/omen-n-muza/30/641/3b8

1 COMMENT

  1. In South Africa unleaded petrol was $1 when I was last there in April with a talk of it going down from May 1. In Botswana an in land country it is 80 cents a litre. Truly Tony Blair cannot do this to us? I want to say something of a truth, the problem with us people is that we always throw away what can really help for useless things. lets face it we could have been better than this now if we had voted mdc. but as usual we are always stupids. I did not say mdc is the best but the truth is they are better than these stupid liberators who are holding us at ransom while they enjoy everything they can lay their hands on without us. look at how we are stupid while we praise them at their rallies. stupid us.

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