Oil prices rise amid Gulf tensions

Crude oil prices have started an upward ride, following heightened tensions in the Middle East and the Gulf states.

The prices, which eased from the year’s average highest of $88 barrels in April this year to $78.12 in August 2024, dipped further to $72.42 last month.

However, as of October 7, a barrel of crude oil prices on the spot and futures market have started rising to an average of $77.14, giving rise to fears that it could affect the country’s ex-pump prices and further create imbalances in the local economy.

Some analysts, who spoke to the Daily Graphic, maintained that crude oil prices could fluctuate rapidly due to various factors, including geopolitical tensions, supply and demand and economic conditions.

Three analysts in separate interviews were unanimous in the increased use of renewable energy to reduce the country’s over-reliance on fossil fuel for power and energy needs in order to minimise the impact of such hikes on the local economy.

They are the Director of the Institute of Statistical, Social and Economic Research (ISSER) of the University of Ghana, Prof. Peter Quartey; the Chief Economist at Development Bank Ghana, Prof. Eric Osei-Assibey, and the Executive Director of the Chamber of Petroleum Consumers (COPEC), Duncan Amoah.

Background

Israel has waged a war on Hamas in the West Bank town of Gaza since its October 7, 2023 attack on Israelis.

However, weeks to the first anniversary of the attack, which included taking some 250 Israelis hostage, tensions have escalated, with Hezbollah joining in the attack from Lebanon, and Iran also firing some long-range missiles at Israel, while Yemen has reportedly also fired some rockets at the Jewish state.

Based on the escalating prices of crude oil and its implications for the local economy, economists Prof. Quartey and Prof. Osei-Assibey have advised the government to strengthen its Gold for Oil policy and other interventions intended to help stabilise the Ghana Cedi against the major trading currencies on the international market.

They said that would serve as a short-term measure to cushion the country against a surge in crude oil prices on the global market. 

In separate interviews with the Daily Graphic in Accra yesterday, they maintained that the government should consider investing in clean energy sources such as solar, biomass and wind, as well as operationalise Tema Oil Refinery (TOR) as part of medium to long-term measures to support the country as against external pressure.

Both economists said the country should take proactive measures to shield itself from the impending economic fallout from the ravages of the war.

Vulnerable economy

Prof. Quartey said increased global oil prices would inevitably affect Ghana's ex-pump prices, exerting pressure on the vulnerable economy.

Although Ghana produces crude oil, he said, the country's limited processing capacity made it vulnerable to global market fluctuations.

"We should process and consume more of our produced oil to cushion ourselves during global surges. Stockpiling oil and diversifying our energy mix through renewables like solar and wind would also help. In the short term, we urge the government to intensify the Gold for Oil programme to help support the local currency," he said.

Prof. Quartey added that some countries were now heavy on using electricity to power their vehicles, but solar to power their factories and that Ghana could learn from them.

"So the country should just consider exploring other renewables because we cannot continue to rely on crude oil anymore," he said.

Supply chain

Prof. Osei-Assibey said supply chain disruptions would impact Ghana, despite it being an oil-producing country.

"Rising ex-pump prices would increase transportation costs, leading to inflation. A weak local currency would exacerbate the situation," he said.

The Chief Economist stated that the war's negative impact on the global economy, including Ghana’s, was beyond the control of the government.

However, he said, stabilising the local currency against major trading currencies would mitigate the effects of surges in global crude oil prices.

"And once the supply chain is affected, it will have an impact on the prices at the pump because we are oil importing country despite the fact that we produce oil.

"If the ex-pump price goes up, transportation will increase and it will lead to a rise in inflation, and so if the local currency is not strong it will escalate the situation," he said.

Prof. Osei-Assibey said there was a need for the government to revive TOR to refine the crude oil locally produced to reduce the importation of processed oil.

GH¢16 a litre in sight

The Executive Director of COPEC said with the current escalation, petroleum prices at the pumps were expected to rise sharply to GH¢16 per litre on the average on account of the rising geopolitical tensions in the Middle East and fluctuating cedi rate on the exchange market.

The price of fuel currently averages GH¢12.99 for petrol and GH¢14.49 for diesel.

The abated prices, which appear relatively stable after a sharp rise in prices of petroleum products over the past eight months, have brought some relief to consumers in Ghana.

But Mr Duncan said the renewed increases in crude oil prices threatened to push the ex-pump prices to unprecedented heights before the end of the year.

Mr Duncan, whose organisation has been monitoring the behaviour of crude oil and prices on the international and local market, said unfortunately the government would not be able to do much because the Bulk Energy Storage and Transportation (BOST) had not been able to keep enough strategic store of oil to mitigate the looming crisis.

“It is not that people aren’t aware of this; we are all aware that our economy is reliant on imports, but duty-bearers care less because they won’t feel the brunt of any increment in petroleum prices,” he told the Daily Graphic yesterday.

COPEC also projects dire consequences of an increment in petroleum prices on the cost of living, inflation and transportation costs. 

“Small-scale businesses already struggling to stay afloat may be forced to shut down. The impact on the agricultural sector, which relies heavily on fuel for irrigation and transportation, will be devastating,” Mr Duncan said.
 

Current price

An increment in prices will exacerbate the current economic hardship faced by Ghanaians which is as a result of the volatility in the exchange rate.

For Mr Amoah, a hike in petroleum products would affect the economy and set the tone for a chain reaction that would increase the prices of goods and services.

“The exchange rate, another critical factor, continues to fluctuate wildly. A weak Ghana cedi against major currencies erodes the country's purchasing power, further exacerbating the fuel price crisis. Government doesn’t want to listen when we advise it, and it does not pay attention to COPEC,” Mr Amoah said.

Hedging

Touching on hedging, Mr Amoah said the government’s inability to strategically hedge was a significant contributor to the looming crisis.

Hedging involves securing fuel prices at fixed rates to shield against price volatility. 

Neighbouring Nigeria, for instance, he said, had implemented a successful hedging policy to protect its economy.

"Ghana's failure to hedge has left us exposed to the whims of the international market. We’re paying the price for lack of foresight and planning,” Mr Amoah said.

He urged the government to implement hedging strategies to stabilise fuel prices while diversifying energy sources to reduce dependence on imported petroleum.

He also entreated the government to invest in renewable energy to cushion the economy and provide subsidies or support to vulnerable sectors.