Sep 05

Fuel Price Hike Pain at the Pumps, but it Could Push Inflation

By Josef Kefas Sheehama

The Ministry of Mines and Energy, announces the adjustment of fuel prices based on current local and international factors with effect from the 6th of September 2023. The headache for Namibia consumers and businesses, as the prices of petrol increase by N$1.20 per liter and of diesel by N$1.70 per liter.

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 to individuals using private vehicles to reach their point of destination. Oil prices have since risen sharply to over $100 per barrel. As the economy grows so does the demand for oil. Moreover, rising geopolitical tensions between Russia and Ukraine and in the Middle East are stoking supply fears. This is contributing to rising inflation and concerns about economic recovery. An increase in oil prices will not only be seen at the gas station but it will be felt in virtually all the goods and services we use. Oil is a feedstock, a source of energy, and is used in the transportation of many things.

Namibia’s fuel prices are adjusted on a monthly basis, informed by international and local factors. International factors include the fact that Namibia imports both crude oil and finished products at a price set at the international level, including importation costs. The average Brent Crude oil price increased from 79.75 US Dollars (USD) to 84.78 USD, because of tightening supply resulting from production cuts by OPEC+. The Namibian Dollar depreciated on average, against the US Dollar (from 18.18 to 18.75 NAD per USD compared to July 2023. As a consumer, they may already understand the implications of higher oil prices. When fuel prices increase, a larger share of households’ budgets is likely to be spent on it, which leaves less to spend on other goods and services. The same goes for businesses whose goods must be transported from place to place or that use fuel as a major input such as mining, agriculture, and construction industries.  Higher oil prices tend to make production more expensive for businesses, just as they make it more expensive for households to do the things they normally do. So, when oil prices spike, you can expect an increase in inflation prices to spike as well, and that affects the costs faced by most households and businesses. An inflation rate increase pushes the Bank of Namibia to increase the repo rate and so does the commercial banks. Despite, Namibia’s CPI of 4.50% for August 2023 this does not mean that the Bank of Namibia cannot increase the repo rate, considering the variance in South Africa and Namibia repo rate (7.75% versus 8.25%), variance of 50 basis points. This means that Namibia is lax by 50 basis points.

Fuel 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.  Fuel prices indirectly affect costs such as transportation, manufacturing, and heating.  The increase in these costs can in turn affect the prices of a variety of goods and services, as producers may pass production costs on to consumers. Furthermore, high fuel prices also can reduce demand for other goods because they reduce wealth, as well as induce uncertainty about the future. The policymakers treated the economic shocks caused by rising fuel prices also may have played a role in the impact of the shocks on economic growth and the inflation rate. Specifically, policymakers tended to worry more about output than inflation during fuel increases and did not adequately consider the inflationary aspect of the fuel when fashioning a policy response to inflation. 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. One thing that could take some heat out of the market is a US-Iran nuclear deal, which has reportedly been very close for a while now. An agreement could quickly see around 1.3m barrels re-enter the market, which is no doubt a big incentive for getting a deal over the line.

Therefore, rising crude oil prices amidst escalating fears created by the conflict in Ukraine and the Opec+ decision to cut production are the main reasons for the increase in Namibia fuel prices.

Furthermore, 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. 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 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 financial crisis.

Therefore, the international price of petroleum products is driven mainly by oil prices and the NAD/USD exchange rate used in the purchase of these products.

The inflationary pressure in surge oil prices sparked concerns about supply shortages stemming from the crisis in Europe. Oil prices are surging over the risk of conflict and OPEC+.