Oil prices eased further to a new low this week with brent trading at US$66,80 per barrel on Monday (the lowest levels in five years).
Oil prices are down more than 40% from their peak in June this year when prices reached US$115. Oil prices are unlikely to rise significantly following the Organisation of Petroleum Exporting Countries (Opec)’s decision to keep average supply levels unchanged. The sharp fall in oil prices will have a direct benefit to Zimbabwe given that over 20% of Zimbabwe’s aggregate imports are petroleum and petroleum products.
Fuel prices are therefore likely to decline by at least 10% in Zimbabwe. The cost of imported goods is expected to fall due to reduced transportation costs. It will be interesting to see if these costs savings will be passed onto the consumer.
In a report published last Friday, US multinational financial services corporation Morgan Stanley adjusted its forecasts for oil prices, saying oversupply would most likely peak next year with Opec deciding not to cut output.
“Without Opec intervention, markets risk becoming unbalanced, with peak oversupply likely in the second quarter of 2015,” Morgan Stanley analyst Adam Longson told Reuters.
In a meeting November 27, the oil producers’ cartel announced it would not cut its output anytime soon, a move that aims at out-pricing the US domestic shale production according to many analysts. Morgan Stanley now expects prices to drop as low as US$43 a barrel in 2015, meaning the crude could lose a further US$20 in the coming months.
According to the Zimbabwe Energy Regulatory Authority (Zera), the prevailing fuel prices in the country are within the provisions allowed by the Statutory Instrument 80 of 2014, which provide the pricing slate and have been falling in tandem with the decline in the international prices of crude oil.
Zera says it does not set the price, but monitors the prices in the market to ensure that the cap is not exceeded. This means the authority does not control the price but only gives pricing guidelines.
According to Zera, Zimbabwe was not necessarily the highest and that there was a number of factors affecting the fuel price (See table above). In the UK, for example, prices of fuel have fallen over 20% in the last few months.
However, prices in Zimbabwe have remained the same over this period to the detriment of the consumer. Zera has commissioned a study on fuel prices with results expected in the next two weeks.
Lower oil prices are likely to benefit Zimbabwe in the short-term given its dependence on oil imports. It is, however, a matter of deep concern that lower oil prices are reflective of disappointing global demand growth.
If this is the case, then there is further downside potential for the prices of commodities that Zimbabwe exports, like platinum, gold and coal.
Mineral exports account for over 50% of Zimbabwe’s total exports and generate just under US$2 billion a year in revenue. The recent fall in platinum and gold prices is likely to see export revenues decline next year.
Despite the fall in oil prices, 2015 is expected to be a challenging year for Zimbabwe as a weaker global growth environment is likely to impact commodity prices further. Export revenues are likely to decline further and well below expectations.
Imports are likely to decline, but not enough to offset the sharp fall in exports. Mining companies are likely to suffer and even face closure if commodity prices decline sharply.
Zimbabwe will once again rely on the agricultural sector to drive growth. The late arrival of the rains does not bode well for the sector. Agricultural production is likely to suffer if there are any further delays to the rainy season to make 2015 an extremely difficult year for Zimbabwe.
The country relies far too heavily on the export of primary goods. Not much has changed since Independence and one could argue that we have gone backwards.
The government’s economic blueprint, ZimAsset, has identified this gap and tries to address it through the encouragement of beneficiation. Creating the capacity to beneficiate is capital-intensive and without significant long-term investment Zimbabwe will only continue to dream of beneficiation.
So lower oil prices have a direct benefit in the short-term. However, the risk is that any improvement in Zimbabwe’s terms of trade is eroded by a further fall in other commodity prices — and the short-term benefits of a lower oil price are quickly eroded by a weaker global growth environment.