Oil prices lost half of their value in 2014 and have continued up to date. By fourth week of January 2015 it had dropped by 0.4%. Already U.S. oil for March delivery fell from $2.84, to $50.02 a barrel. This is 5.4% decline.
The oil industry is viewing the falling prices as an outrageous trend contrary to widely held predictions made in the year 2000; that crude oil was headed for increasing prices to the tune of 40 times by 2020.
The anomaly is presenting itself with 3 fundamental business questions; one, why sudden fall in prices? Two, what impact it presents to global business? Three, when will prices start to rise again?
Common view point explains crude oil price decline to have been triggered by increase in crude oil inventories. Rapid supply growth overwhelmed moderate demand. The market is oversupplied.
However oil supply and demand alone, cannot for instance account for a near 30% drop in the price of crude in just a few months. Other macro-economic factors are at play.
The effects of a likely end to quantitative easing on the value of the US$, which has surged against other currencies over the same period oil has fallen. Since crude oil is priced in dollars, a higher dollar translates to a lower oil price.
An imbalance in price ratios between oil and natural gas as close substitutes is another line of thought. In the energy mix the two are so clearly intertwined; it has been predictable for some years that one or other might have to force a trend. Indeed, the imbalance in this ratio has for some years been a driver of China’s investment in natural gas-powered vehicles. Plans to convert the world’s shipping fleet to natural gas over the next 10 years have the potential to weigh heavily on the economics of oil. Speculative oil- reserve business is letting out.
Subsequently fall in crude oil prices has affected all downstream business trading in petrochemical inputs. In Asia, prices have lowered by 55% and the chemical demand growth is expected to further slow by around 4.0% in the second quarter of 2015.
To developing countries like Uganda whose industries have been operating below capacity due to high price for key inputs, this is a period when they could; scan for efficient suppliers, negotiate long term business relations and improve on production efficiency.
At the tunnel end, consumers are expected to enjoy reduced prices, resulting from reduced cost of production and increased choice of abundant quality goods.
However in Uganda the reverse is prevailing. Forces of inefficient allocation are aided to supersede the market forces. Pump prices have only reduced by 0.02%. Manufacturing products have had constant prices while food prices instead continue to rise. Economic agents have raised some lines of arguments to explain why prices on Uganda market are such less responding. That the dollar exchange rate in Uganda is still up and therefore transitional costs like transport, storage and security kept up. Others anticipated that the fall in global oil prices would be for a short period to warrant marginal changes in shelf prices. They seem still hesitant.
The real sensitive cause actually lies with URA. The tax collector has not been ready to adjust by global forces. They take lowering prices on imported raw materials as undervalue declaration. On several occasions petro chemical imports such as Glycerin, Petroleum Jelly and White Oil have been held by customs. This results into direct financial costs arising out of un-premised delays, increased demurrage costs, retention fees and parking charges.
Indirectly delivery time of raw materials has worsened from the normal 02 days to over 17 days which has adversely affected business. This more often than not causes stock outs, failure to meet supply schedules, and tarnishes business image of those in production and distribution.
Contrary to expectations URA’s explanation for delayed clearance holds very little water for only eroding minds. That their tax monitoring system programmed on the principle of averages is viewing such low priced imports as outcasts. The danger with such comparative aggregation of importers is that the system will disadvantage efficient importers. Different importers have different sources, different bargaining power and differed purchasing capacity therefore possibility for price dispersion should be positively accommodated.
Of course the interaction between oil price, oil supply, and oil demand is notoriously strange and until stored supplies start shrinking, it’s really going to become increasingly difficult for the market to rally. The consumer welfare will continue to be at the ethical mercy of economic agents. To URA, these are simple tax administrative issues of price diligence that need to be premised and properly communicated so that short term revenue urge does not increase cost of doing business and compromise long term growth agenda.