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The cause for the price drop is not clear. Some analysts suggest that the price war has more to do with Saudi Arabia fighting back regarding any possibility other producers coming up with new extraction methods, including producing the commodity from shale oil as is the case currently in the United States. Shale oil is abundant around the world. And shaling (extracting oil from shale formation in the sea) is considered cheaper than conventional methods.
Even China, one of the largest consumers of petroleum products, has unlimited deposits of shale oil. This alone has boosted America’s oil production to nearly 10 million barrels a day near or equaling that of Saudi Arabia, the world’s biggest oil producer. There is now a surplus of oil in the world. Oil production in the international market is influenced by demand. Some experts think that by refusing to lower production, Saudi Arabia is attempting to discourage those countries with large shale formations from exploiting their newly-found riches.
What is then the effect of all this to the Kenyan economy? Cheap oil is good for our economy, in the short term. A fall in the cost of oil has a consequent result of a fall in the cost of living. But then, the first major casualty in the price war is our own expected oil production in Turkana. Tullow and Africa Oil indicated late last year that any attempt to continue with the pumping out process of our own oil at Ngamia 1 will very much depend on the international price of crude oil. These two companies will soon make known their direct investment decision.
Petroleum is a major input in production activities in Kenya. The demand for oil imports in Kenya has been fluctuating though the general trend is an increase over time. This has led to fluctuations in expenditure on oil imports and a general increase in the annual oil import bill. Moreover, the escalating international oil prices, high demand for oil, and the fluctuating Kenyan currency against the major international currencies such as the U.S dollar have worsened the oil import bill for Kenya. This in turn has led to adverse balance of payments.
The oil crisis of the 1970s that was as a result of increase in the price of crude oil brought about an economic crisis in Kenya. Thus, any factor that influences oil and oil products has far-reaching consequences on the economic growth and development of the country over a period. The oil market is considered volatile if the value of oil imports changes significantly (by a large margin) within a short time.
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