• Gulf countries, especially Saudi Arabia which was giving relevance to the dollar through the “famous petro dollar” initiative, was angered by US meddling in the global oil market. Saudi Arabia main source of revenue is its oil.
• Instead of the US leaving the markets to dictate the price of the commodities, it started saturating the market by releasing its strategic reserves.
Image: OZONE
In October last year, OPEC+ cut oil production for the global market by nearly two million barrels per day.
While the globe was struggling with that, it once again announced surprise oil cuts to commence in May this year.
Saudi Arabia and Russia each cut production by 500,000 barrels per day totaling to one million barrels and the rest of the oil exporters jointly cut around 650 million barrels. So as from May, the oil market will be less of 1.6 million barrels per day up to the end of the month.
The US, also an oil producer, but not an exporter, with large strategic oil reserves at its possession, was trying to stabilize the oil market by releasing large amounts of oil to the market to influence oil prices for its domestic market and as well hurt its foes by reduced oil prices. This action helped in reducing oil prices from $100 to $60 a barrel.
Gulf countries, especially Saudi Arabia which was giving relevance to the dollar through the “famous petro dollar” initiative, was angered by US meddling in the global oil market. Saudi Arabia main source of revenue is its oil.
Instead of the US leaving the markets to dictate the price of the commodities, it started saturating the market by releasing its strategic reserves. Saudi Arabia did not take this lightly and that’s how the reduction came about.
In market economics “reduction in supply increases demand and just the announcement of the production cuts led to jump in oil prices and is now retailing at around $80 a barrel.
Saudi Arabia main cause of concern is the US actions is bringing instability and volatility in oil prices in the world market and to stabilize the oil prices, they resorted to production cuts.
CIA director William Burns’s secret visit to Saudi Arabia to convey the frustration and disappointment of the US on the recent oil cuts and geopolitical positioning says it all.
Oil output cuts will lead to higher oil prices of all other commodities that are manufactured. This leads to inflation and reduction of speedy power of the people.
Recently, after the sanctioning of the Russian oil and gas and the mysterious blowing of the Nord – Stream gas pipeline, it’s evident how Europe’s industries were affected. Higher production costs which further leads to higher production commodities’ prices.
Africa, where most countries are in the developing countries’ category and are thus adversely affected by market shocks, is the most affected by this production cuts.
Prices of basic commodities, fuel and manufactured goods went up through the roof. Spending cuts is also leading to low circulation of money in the market and increase in inflation.
Countries give priority for their national interest. As such, Japan one of the G7 countries and the second biggest economy after the US in the group, had to drop the G7 joint Russian oil prices cap as its economy would have been adversely affected by the lack of Russian oil. Russia refused to sell its oil to those implementing the price cap
KENYAN PERSPECTIVE
Due to the instability and price volatility in the global oil prices, it's paramount for our country to think ahead, plan ahead and move with the tides.
I commend the recent governement move to engage oil exporters and reach bilateral agreements in crude oil purchases.
This will in the short time bring about the stabilization of the Kenyan shilling against the dollar that's currently at the highest ever. This high exchange rate of the shilling against the dollar will increase the price of the oil and as well as most other manufactured products.
It's also wise for the government to seek further engagement with our oil suppliers on other bilateral arrangements in relation to commodities we export to them eg tea , value it in the market exchange rates in terms of dollars and pay for the same for the oil we import from them.( Barter trade type of trading)
This will lift the pressure of the other importers who seek dollars, stabilize the currency exchange rates in the market and bring the landing costs of imports down resulting in the further reduction of prices of the goods in the market.
This will have a positive impact on the cost of living and may reduce the rate of inflation in the country.
It's worth noting that several countries in the globe are now trading with each other using their respective currencies helping them in relieving their economies of the current market shocks affecting developing countries in the geo political cold war fights among the big countries with big economies.
This arrangement of trading using each other's currency is not new. The UK and China have a similar arrangement, as does Russia and China, Russia and India, Brazil and China. The list is endless
(The writer is CEC Roads Transport and Public Works, Garissa County and a commentator of foreign affairs)