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Catastrophic increase in oil prices pushes up Namibian inflation

Catastrophic increase in oil prices pushes up Namibian inflation

By Josef Kefas Sheehama.

Russia’s attack on the Ukraine helped push the price of oil to over $100 a barrel for the first time since 2014. As a result, the Ministry of Mines and Energy had to hike Namibian fuel prices on 02 March 2022. These drastic increases will hit 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. This was due to a major downturn in economic activity.

But this year, pump price hikes contribute to the burden of the Namibian people especially to those who are using public vehicles for transport and to individuals using private vehicles to reach their point of destination.

Oil prices have risen sharply with Brent hitting US$118 per barrel on Thursday. In the post-lockdown period part of the increase was based on an increase in demand, but over the past two weeks it was mostly the result of the political upset in eastern Europe.

The 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 increased oil price will not only be seen at the service station, but it will be felt in virtually all the goods and services we use because oil is a feedstock for energy and is used in the transportation of just about everything.

The increase in fuel prices has been noted as a concern by the Bank of Namibia as well at its most recent Monetary Policy Committee meeting when the repo rate was raised by 25 basis points. If the trend in fuel prices continues, there is a good chance that the rate will be raised again at the next meeting scheduled for 13 April. I believe that this increase may even be a full 50 basis points.

These increases will certainly impact every single Namibian given the reliance the country has on fuels for transportation, manufacturing and in the agricultural sector.

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 1.3 million barrels re-enter the market, which is no doubt a big incentive for getting a deal over the line.”

The fundamental debate about inflation is 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 also impacts the current account deficit which means the value of imported goods and services exceeds those of exported.

We are facing a real and 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 friend said, ”Everyone ride bikes to work to save the economy. Only vacation where you can bike. Make your kids walk to school and 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, and through transportation, affect the price of basically every conceivable consumer product.


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