By Josef Kefas Sheehama
As long as global supply declines, the global price will increase. With crippling sanctions on Russia curbing their flow of oil, leading to a massive spike in the price of all fuels. Namibia hiked oil prices on 01 June 2022.
The demand for oil plunged in 2020 during the pandemic when lockdowns led the price to fall below zero first time in history due to a major downturn in economic activity. Pump price hike contributes to the burden of Namibia people, especially to those who were using public vehicles for a living and individuals using private vehicles to reach their point of destination. Oil prices have since risen sharply to more than $100 per barrel following a strong economic recovery post-lockdowns. As the economy grows so does the demand for oil. Moreover, rising geopolitical tensions between Russia and Ukraine are stoking supply fears. This is contributing to rising inflation and concerns about economic recovery. An increase in oil price will not only be seen at the gas station but it will be felt in virtually all the goods and services we use. Because oil is a feedstock, a source of energy and is used in the transportation of many things.
Monetary policy in Namibia is oriented towards keeping inflation low and stable. The Bank of Namibia’s Monetary Policy Committee is set to meet on 15 June 2022. So, if the Bank of Namibia wants to curb inflation, it may raise the repo rate. I believe that the Bank of Namibia will increase the repo rate by 0.50% basis points. The increase in fuel prices has been noted as a concern for the global and local economies. These increases will certainly impact every single Namibian given the reliance the country has on fuels for transportation, manufacturing and the agricultural sector. The sanctions on Russia by the USA and UK which have contributed to the increase in crude oil prices. Energy analysts warn that prices could go as high as $160 or even $200 a barrel if buyers continue shunning Russian crude.
Furthermore, 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. The recent increase in inflation by 5.60% took many by surprise. It is important to take note that, Ukraine’s exports of grain and oilseeds have mostly stopped and Russia’s are threatened. Together, the two countries supply 12% of traded calories. Wheat prices, up 53% since the start of the year, jumped a further 6% on May 16th, after India said it would suspend exports because of an alarming heatwave. Both Russia and Ukraine are exporters of major commodities, and the disruptions from the war and sanctions have caused global prices to soar. Food prices have also jumped. Therefore, rising crude oil prices amidst escalating fears created by the conflict in Ukraine is one of the main reasons for the increase in Namibia’s fuel prices. The fundamental debates about inflation are 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, and that it has nonmonetary factors.
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 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. Supply constraints will not allow much more than that even if producers were encouraged to do so.
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. Good corporate governance including transparency of monetary policy can be used to reduce the risk of speculation and forecast inflationary activity. Political stability also needs to be created through effective regulatory systems on financial and capital markets including bankruptcy laws and laws preventing capital flight in the face of the financial crisis.
Therefore, the inflationary pressure in surge oil prices sparked concerns about supply shortages stemming from the crisis in Europe. Raising rates to fight inflation is a crude tool, especially when the source is fiscal policy. Everyone feels the pinch when inflation is on the rise and so the pressure on central banks to manage inflation rates has grown exponentially.
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