Why falling oil prices are not good for Kenya
An oil terminal in southern Nigeria. The World Bank has warned that falling crude oil prices may not be good for exploration activities but will greatly benefit importing countries. PHOTO | PIUS UTOMI EKPEI |
What you need to know:
- Global lender says importers will benefit greatly from the current situation.
- World Bank warns that this will lead to firms cutting outlays in the sector, thus costing the economy.
The World Bank has warned that the declining crude oil prices are not good for exploration activities.
In its Global Economic Prospects report for January that is set to be released on Tuesday, the global lender said lower crude prices could discourage investment in exploration and development, specifically for new undertakings.
This comes less than three months after some firms searching for oil and gas in Kenya announced plans to cut their budgets, citing unfavourable market conditions brought about by the declining prices of crude oil.
LOW PRICES PERSIST
Market reports indicate that a barrel is currently trading at below $50, the lowest it has been in the past five years, having fallen sharply since June last year.
“If lower oil prices persist, they could undermine investment in new exploration or development. This would especially put at risk investment in some low-income countries or in unconventional sources such as shale oil, tar sands and deep sea oil fields,” reads the report.
It also cautioned that persisting weak oil prices could adversely affect growth prospects for major exporting countries by exposing their economies to trade deficits.
Kenya discovered oil in March 2012 at the Ngamia-1 well. The government estimates that the total amount struck so far is more than 600 million barrels, which is considered to be above the minimum threshold for commercial exploitation.
A research note released by Standard Chartered Bank last month indicated that in spite of Kenya discovering crude oil, it can only produce it at a profit if the price of a barrel is set at a minimum of $70, further spelling doom for exploration and production plans.
“It is not yet certain how much a lower oil price will impact on oil exploration activity in Kenya. According to industry estimates, an oil price of at least $70 per barrel might be needed for Kenyan oil to be viable,” said the bank.
Locally, motorists can breathe a sigh of relief following declining fuel prices over the last four months in line with those of the global market.
However, the reduction has not been at the same rate as nearly half of what constitutes local fuel charges because of government taxes and levies that remain unchanged.
