Thursday, January 19, 2023
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BusinessGlobal oil production cuts spark inflation fears, fuel supply concerns in Ethiopia

Global oil production cuts spark inflation fears, fuel supply concerns in Ethiopia

The latest decision by the Organization of the Petroleum Exporting Countries (OPEC) to reduce production of oil in their countries by two million barrels per day is feared to cause more trouble for Ethiopia’s inflationary economy.

The OPEC Plus, a group of 23 oil-producing and exporting countries mainly dominated by Saudi Arabia and Russia, came up with a decision to curb global fuel supply last Wednesday in a bid to increase fuel prices. It is a move that has Western countries, including the US, vexed.

Already struggling with an increasing import bill for fuel and scarce foreign currency, the decision and its implications also had the petroleum industry in Ethiopia highly concerned. The government was unable to bear the financial burden due to the increasing cost of fuel and began lifting fuel subsidies in July, 2022.

The only petroleum importing entity in the country, the state-owned Ethiopian Petroleum Supply Enterprise, has Kuwait as its government-to-government fuel supplier. Some companies are selected based on bidding processes to supply the petroleum products to the enterprise, but none are bound to supply at a fixed price throughout the year.

Tadesse Hailemariam, the Chief Executive Officer (CEO) of the Enterprise, disclosed that the decision by OPEC+ could have a huge impact on Ethiopia as it creates shortages and irregularities in the global market.

Gas prices spiked to about USD 130 per barrel a few months ago, but have decreased to about USD 90 recently. The exporting countries made the decision to reduce production and create high demand in order to maintain the high price.

“The more prices increase and remain high, the greater the chance that we will be affected. We might not have a shortage problem as long as we have the supply agreement in place,” Tadesse said, explaining the terms of the agreements his company inked with suppliers.

While the supply quantity remains in place, the agreement specifically excludes price setting and leaves it to the market price. “The companies have a mandate to supply, but with the market prices,” he said.

Kuwait supplies half the demand for light diesel and jet fuel, while the company Vitol supplies benzene and the other half of light diesel. Another company, BE Energy, supplies heavy diesel to the enterprise, but the consumption of heavy fuel is small as industries only make use of it.

Ephrem Tesfaye, board chairperson of the Ethiopian Petroleum Dealers Association and a fuel dealer for over a decade, claims that the impact of OPEC’s decision might not be as great as feared. He says the countries are teaming up on the decision to mainly keep the current price from going lower by limiting the supply.

Gas imports to Ethiopia remain nearly constant year after year, at around 3.8 million metric tons. On a daily basis, about nine million liters of diesel, 2.9 million liters of benzene, and 2.5 million liters of jet fuel are imported.

But the bills are what have been growing over the years. Last year alone, about USD four billion was spent on gas imports, a USD one billion increase from the preceding year. It is also the same amount Ethiopia earned from the best performing export sector.

For the existing fiscal year, about USD five billion is expected to be spent on fuel imports. The import of this single item alone might surpass the income earned from the export of goods.

Tadesse has more concerns about foreign currency spent to pay for fuel imports. If prices spike higher, he says there may be no better option than lowering the import quantity.

“Even though we can afford it, we might not have enough foreign currency to pay for it. The public buys fuel in local currency while the government has to shell out the scarce foreign currency,” Tadesse said.

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