You, oil and the market

The price of oil has assumed centre stage- as it always does actually- in recent weeks. The only difference this time around, however, is that whereas in the past the economics of oil centred on sky rocketing prices that distorted national budgets, the current attention drawn to the market is largely looking at falling prices on the world market and its impact, this time on governments. 

Falling price is creating problems for major oil producing countries such as Scotland and Norway, for example.

Yes, falling market prices, and again, as always, the situation has brought about mixed reactions- tears and joy- as the joy of consumers are actually the tears for producing countries. 

When prices were getting out of hand, at one point at more than US$100 a barrel, most economies, especially the non oil producing countries, suffered. Economies became over-heated as the pull effect of by Browser Shop" href="#">oil price increases caused widespread economic distortions, such as inflation.

The reversal in the price trend, which some analysts are predicting at about US$30 a barrel by the end of the year, has now shifted the burden of pain to the oil producing countries.

Let us now look at the dynamics in the market: Oil as an essential energy source provides vital support to both industries and households. With the lack of or under-developed alternative sources of energy, oil has always been strong in the market, with the demand and supply conditions forged in such a way that prices remain at a particular level, to satisfy both the producers and the consumers alike. 

Such has been the power of oil that some of the producing countries have come together to form an organisation, a cartel, to seek to promote price stability.

Where the market is seen to be in excess supply of the commodity, producing countries within this cartel are able to reduce their supply to match demand at an “acceptable” price level; and vice versa when there is low supply.

It must also be pointed out that the producing countries that form part of the cartel have not always had it easy controlling the global price of the commodity as other major producing countries are not part of the group. 

This means that it wouldn’t always be smooth-sailing for the privileged members of the group when they want to direct the market in a certain way.

Now let us bring it back home to see how we have been affected by the oil market dynamics, shall we? Good. Two decades ago-or a little over that-, one thing that was most feared in Ghana was the reading of the national budget, specifically where the price of crude oil and its derivatives were concerned.

The Finance Minister deliberately saves the best for the last, announces the “juicy” government infrastructure project, and other subsidies, and gently introduces the next prevailing price of petroleum products. That then comes with newly announced fares!

What happens next only manifests the power of the commodity on household income and spending. Prices of all consumer products move in tandem, sometimes at a rate that is even higher than the varied increase in price and fares.

The “crippling” effect of this exercise and process led the Government to introduce an independent body, a regulating body that would ensure that the pricing and control of the dynamics of the oil market, and some aspects of its marketing and distribution, are handled in a way to protect the security of the state.

However, the ceding of the price control and some regulatory aspect to an independent body has not necessarily eased the pain and burden of individuals and the government. 

Recent events have proved, once again, how the dynamics of the oil market could become complicated even to the best brain.

With the global price of crude oil tumbling on the world market, on December 31, the National Petroleum Authority (NPA), the regulator, announced a reduction in ex-pump prices of petroleum products by 10 per cent, stating that it should be applied to all products.

The response to this “gesture” was swift, and perhaps too fast and furious too. “Too little, too late”, some said, with others strongly of the view that prices should be reduced by the same margin of fall in the price of crude oil on the international market.

This, however, makes sense in a way, as in line with an Automatic Adjustment Pricing Formula (AAPF), which is applied by NPA, consumers experienced an upward price review whenever prices increased on the world market. 

So, in a way, the demand by some civil society organisations and political parties for NPA to reduce prices to reflect the market price globally has some merit. The consumer, that is you, stands to benefit entirely. Nice!

But the managers of the economy have other ideas though, which again is understandable too! 

The past inconsistent application of the pricing formula, mostly due to political interference, which in turn also led to debt accumulation because not all costs were “recovered”, and many other bottlenecks are some of the reasons offered by the economic managers, as they try to keep the current price within a range that will allow for some of the under-recoveries to be clawed back and debts paid.

So, you see, oil continues to hold sway as far as the economy is concerned. But the wider concern should be about how policies introduced by the economic planners and managers would eventually help drive forward the development agenda of the country.

Constructive engagement would, therefore, ensure that not only the price of petroleum products is acceptable but also inflation, the by Browser Shop" href="#">exchange rate regime, as well as the general economic management programmes are fit for the purpose. This is the only way that we can experience a fruitful 2015 as promised by the government.

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