How many times have you heard this refrain of late, “fuel has risen”? If you have a car you’ve said it yourself but even if you don’t own a car you still hear it; it affects all aspects of life. Now whenever you buy tomatoes, a loaf of bread or a soda you will hear the same chorus “fuel has risen”!
Energy price increases have knock-on effects on every sector and show in ways you wouldn’t expect. There are a number of global, regional, national and local macro and micro economic factors affecting this hike that all come into play and affect the supply chain.
Firstly, globally a barrel is just below $100 on the NYMEX (New York Mercantile Exchange). Remember when less than ten years ago a barrel was $28 and belief was that the days of oil dependence were over? So how did we get to the point where oil is so outrageously expensive?
Demand is obviously the main reason for the increase. America is consuming more oil than it ever did as is the developing world. China is the best example of globalization gone mad. The classic picture of a million bicycles riding through Tiananmen Square is old news; now those bicycles have been replaced by automobiles. China and India, which have about a combined population 2.5 billion and with a middle-class of 700 million between them, have joined the global consumer economy with gusto.
As the entire world has become more prosperous more people can now afford cars. The demand for plastics and oil-derivatives has also increased the demand for oil. Goods are now produced and transported thousands of miles to their eventual markets; this has meant that transport costs have increased the demand and final cost of goods.
The cost of prospecting and drilling for oil has also increased, oil is being found in very inaccessible places and the cost of putting pipelines is expensive. The aging oil fields have also made it more expensive to drill deeper for oil; this requires massive investment which is eventually passed on to the consumers. The oil companies made a mistake of overestimating the reserves of oil they had and had to revise them by reducing estimates by 30% thus made their existing oil stocks extremely valuable. OPEC countries are reluctant to increase production in order to preserve remaining stocks, to keep the price high and to reduce production costs
The global political situation is the final major factor in short-term increases; most oil producing areas or regions are unstable. The Middle East is affected by the Iraq insurgency and the Iranian nuclear crisis; this potential volatility makes markets restless.
Nigeria has conflict in its oil-producing Delta Region, Venezuela has been trying to use oil as a stick to beat America with and Russia has also used oil and gas to further its interests.
Supply lines are also threatened with their longer distances involving more risk. Refining costs have also gone up and that the quantities of petrol available to consumers are reduced. Petrol is produced JIT (Just in Time) meaning it goes straight to the market and isn’t stored in bulk as much; this means sudden jumps in demand cannot be coped with.
Regionally, the situation in Kenya has really affected the price of oil; making the price increase in Rwanda by 15% – 20%. The Kenya crisis showed us just how dependent we are on each other. The far distance of Rwanda from the coast increases the cost of transportation which is the biggest factor affecting our prices. It is also expensive for transporters to enter the market because of the high cost of buying and maintaining tanker-trucks.
In ‘poor’ Rwanda there is a prevalence of gas-guzzling 4×4’s while in the ‘rich’ United States Americans are switching to smaller, more effective cars. The fact that fuel is subsidized in Rwanda protects drivers from the proper cost of driving. The final destinations on the supply chain- which is the petrol station- are owned by a myriad of small companies. These smaller firms cannot afford to buy in bigger bulk to achieve economies of scale to pass on to the consumer in the form of lower prices.
Globalization means that events on the Mercantile Exchange in New York are felt acutely by a man 7,000 miles away in the backstreets of Kigali. The Government is trying to solve the issue. Claire Akamanzi, the deputy director of RIEPA, recently announced plans to form a uniquely Rwandan petroleum company to protect supplies. Rwanda consumes 130,000 liters a day or 15 million cubic meters a month that is a lot for a small country but underlines the logistical problem of transporting fuel. It is hoped that the new company will be able to store 4-6 months worth of fuel; this will stabilize the supply and avoid sudden rises of the price of fuel. The Kenya crisis has been a wake-up call to Rwanda and might help put on the right track in the reorientation of our supply routes as well as storage facilities.
It would take billions of dollars in research and development to discover a new sustainable energy source. New sources like bio-fuels have proved to be environmentally damaging as rainforests are cut down these bio-fuels compete for food with people for example in corn and sugar thus increasing food prices.
Oil is a bad source of energy but is the best we have to fulfill our short-term needs; however, the entire world is coming to the conclusion that it needs an alternative source of energy soon. The problem is; these new sources need to be cheaper than oil no matter how good they are for the environment.
By Rama Isibo
Filed under: ENERGY |