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Fuel prices rising again as the economy struggles

Fuel prices rising again as the economy struggles

By Josef Kefas Sheehama.

The Ministry of Mines and Energy has announced an increase in the prices of petrol and diesel, citing a combination of rising international oil prices and the depreciation of the Namibia Dollar and catastrophic flooding in Libya.

With effect from 04 October 2023 the price of diesel will increase by N$2.40 per litre while the price of petrol by N$1.90 per litre. This substantial increase means that a litre of petrol will be N$22.88, diesel 50ppm N$23.15 and diesel 10ppm N$23.35.

The Ministry of Mines and Energy also increased the industry margin for oil wholesalers by 18 cents to N$1.46 cents from N$1.28 cents per litre. The dealer margin for service station traders rise by 20% to N$1.83 cents from N$1.63 cents per litre. The international oil prices have risen above US$100 a barrel for the first time in more than a year, since the turmoil that followed Russia’s invasion of the Ukraine.

According to the International Energy Agency, the price of Brent crude oil has now climbed more than 30% since a recent low point in March after which Saudi Arabia and Russia cut their oil production, squeezing prices even higher.

I, therefore argue that as from October 2023 onwards, the loss of OPEC+ production, led by Saudi Arabia, will drive a significant supply shortfall through the fourth quarter. The oil stocks will be at uncomfortably low levels, increasing the risk of another surge in volatility that would be in the interest of neither OPEC+ nor end users, given the fragile economic environment.

The global economy will weaken in the coming year, according to 61% of the respondents in a survey of senior economists. The report indicated that about 90% believes geopolitics will be the source of global economic volatility, 79% indicated that domestic politics will be a source of global economic vitality and about 85% predicated that lending conditions for businesses will tighten.

At this point, oil price increases can only 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 production. 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. Therefore, 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 impacts the current account deficit which means the value of imported goods and services exceeds those of exported. We are facing a real immediate existential issue that requires all hands on deck particularly on something as strategically and economically important as energy.

Moreover, each individual has a different background and set of knowledge, therefore, I will simplify the issues of globalization. To understand globalization and supply chain effects on prices, let’s go back to simple supply and demand. Globalization has meant that consumers can get goods more cheaply from countries with low labour costs or high technology usage. Increased globalization is therefore like an increase in the supply of goods and, to a lesser extent, services. That increased supply means lower prices, all other things being equal. The price-reduction effect continues as long as globalization increases. If globalization levels off, then the price level stays lower but does not continue to fall.

That’s important because inflation is the rate of change of the price level. And a price reduction lowers measured inflation when it occurs, but does not continue to lower inflation unless prices keep falling. Rising fuel prices is a global issue, and no country exists in isolation. As the world becomes increasingly interconnected and interdependent, multilateral solutions are required to address the risks and benefits of integration. Namibia’s heavy reliance on imports has exposed its economy to the global surge in prices experienced by most nations. Hence, my argument can be substantiated by the floods in Libya as it had to shut four of its eastern oil export terminals due to a deadly storm, while OPEC+ reduced daily oil output for maintenance. This natural peril contributed to the shortage of fuel.

Namibia, like many nations, has grappled with the economic repercussions of these external factors, which have cascaded down to consumers in the form of higher fuel costs. The Ministry of Mines and Energy tries to strike a balance between managing these economic challenges and ensuring a stable energy supply in the country. As these new prices take effect, consumers and businesses are likely to feel the impact on transportation costs and overall living expenses. The government should closely monitor the situation to mitigate the effects of these price adjustments on the population.

The government can cancel or reduce some fuel levies for NAMCOR and the Road Fund Administration as fuel drives the prosperity of the economy for any nation and should therefore be readily available and at affordable prices. Furthermore, it is important to note that the fuel levy funds are not necessarily ring-fenced for roads and transport. The money goes into the Namcor pot, to be used and allocated to the country’s affairs. These levies can be cancelled or reduced to ease the situation.

The discovery of oil in Namibia will be able to solve some of the problems for us, but this is a process. The government still has to refine the laws to manage oil revenue and draft policies for an independent regulator. Transparency to population is very important. We need to learn lessons from others’ mistakes and point out that Namibia’s economy is more diversified than other oil-producing countries in the world.

To that end, the oil prices will continue to push up prices across the board for consumers and add to inflation across the entire Namibian economy. If inflation gets out of hand due to external factors such as the price of fuel, the Bank of Namibia will use this again to increase interest rates. This will be catastrophic for an economy that has already been suffering since 2016.


About The Author

Josef Sheehama

Josef Kefas Sheehama has more than 21 years banking experience serving as Manager Credit, Branch Manager and now Centralize Credit Head Office at Bank Windhoek. He holds a Certified Associate Institute Bankers CAIB (SA), Associate Institute Bankers AIB(SA), Chartered Banking Professional CHBP (SA), B Com Banking, B Com Law, Postgraduate Islamic Finance and Banking, MBA and an LLB degree. Also founder of church since 2009. He is an independent Economics and Business Researcher. Authored more than 100 articles in Economics and Business. Served on Northwest University panel (Green Hydrogen). His MBA thesis published by the International Journal of Current Research (Exploring sustainable economic challenges and opportunities).