Oil price stabilisation - Time note ripe to rejoice

Business page (lead) August 21/2008

Lloyd Evans and Charles Benoni Okine

GRADUALLY, the world is beginning to see some level of decline in crude oil prices. It is the anticipation of all that the decline would continue so as to give some amount of relief to countries, especially developing countries.
The high crude oil prices that the world experienced late last year and early part of this year were of great concern to economists, businessmen and policy makers, as well as the general public.
Since July last year, when the price stood at $147 per barrel, many economies, especially the developing nations, went into disarray.
When the prices of petroleum products increase, consumers use more of their income to pay for oil-derived products, and their spending on other goods and services decline. Governments would have to use more foreign exchange to bring in the same amount of crude oil it did previously. The development budget then changes.
Oil is a vital input for the production of a wide range of goods and services, because it is used for transportation in businesses of all types. Higher oil prices thus increase the cost of inputs; and if the cost increases cannot be passed on to consumers, economic inputs such as labour and capital stock may be reallocated. Higher oil prices can cause worker layoffs and the idling of plants, reducing economic output in the short to medium term.
The country is a net importer of oil and therefore higher oil bills affect the purchasing power of the government as resources will have to be reallocated, thereby affecting the macro-economic stability of the country.
These are seen in high transport fares, demand for higher wages, high cost of production, leading to higher inflation.
The oil price shocks of the 1970s completely surprised many firms and households in many different countries at the same time. Firms and households made decisions about production and prices that had important consequences for the strategies of other firms in the economy.
The 2007/2008 oil price hikes caused similar problems for many countries and therefore the slowing down of the prices should serve as a great relief for developing countries, which are net importers of crude oil.
Though the government has made some interventions in respect of the high prices of the product at the present levels, the ex-pump price is still eating deep into the pockets of businesses, industry and the individual.
With the declining prices, most people would like to see a downward movement in the ex-pump price of the commodity. However, the National Petroleum Authority (NPA) says it will allow traders in crude oil in the country to recover from their losses before prices are adjusted to reflect the downward trend in the price of the commodity.
According to Mr John Attafuah, Chief Executive Officer of the NPA, when the prices were skyrocketing, the traders lost huge sums of money and indicated that as prices now slowed down, the importers would recover their losses over time.
It is expected that with the prices of crude oil dropping since last month, there would be a resumption in the adjustment in the product at the pumps to reflect the trend but Mr Attafuah said “we are not going to do so now”.
The prices of crude oil now stands at about $112 per barrel, down from about $147 per barrel in July this year, when the government announced a mitigation package, including a halt in the upward review of prices at the pumps and the scraping of some petroleum taxes.
The country imports about 60,000 barrels of crude oil a day, 45,000 of which goes to the Tema Oil Refinery (TOR) and the remaining to the Aboadze Thermal Plant for the production of electricity to feed the national grid.
Oil imports for January to June this year amounted to $1,257.0 million (25.4 per cent of total imports) compared with $846.6 million (24.4 per cent of total imports) for the same period in 2007. This means that the country has spent more foreign exchange importing the same amount of crude oil imported for the same time last year. This again means that some sectors of the economy has to suffer as budget for those sectors would have to be slashed down.
The lowering prices of the crude oil on the international market will, therefore, ease the pressure on the government’s foreign reserves, while at the same time reallocating the saved exchange to other areas.
Mr Attafuah described the receding prices of crude oil on the international market as a welcome news but was of the view that “it was not time to jump for joy, since we do not know what may happen”.
However, he said, the authority would continue to keep a close watch of the situation on the international market as far as prices were concerned, to ensure that there was continuous supplies of the product on the market to keep the economy going.
He said speculations over the future prices had also eased drastically because those who held paper contracts in anticipation of future rise in the prices also stopped for some reasons. He said the strengthening of the dollar against other major currencies like the Euro and the British Sterling would go a long way in stabilising the prices of the product.