7 November 2018

Namibia: Inflation From Rising Fuel Prices a Blessing in Disguise for Local Producers

Windhoek — Economists have cautioned that the country-wide increase in fuel prices of N$0.50 per litre for petrol and N$0.70 per litre for diesel, which came into effect today, will continue to push up inflation. This is because rising fuel prices will result in higher transportation costs which will gradually lead to higher prices for consumer products.

However, research associate at the Economic Association of Namibia, Klaus Schade, says there is a silver lining behind this dark cloud as it opens up opportunities for local producers. While Schade cautioned that the approaching winter in the northern hemisphere will lead to rising oil demand for heating purposes, he optimistically noted that the Namibia Dollar is currently stabilising against other major currencies, which could ease the price pressure.

"The inflation rate will therefore continue to rise. On the other hand, local producers competing with imported products could gain a competitive edge due to shorter transport distances. Therefore, sourcing inputs and final products locally could help contain the upward price pressure," said Schade.

According to the Ministry of Mines and Energy, the price of refined petrol and refined diesel remained stable compared to September at US$86 per barrel and US$95 per barrel. However, the Namibia Dollar weakened from N$14.40 in September to N$14.50 vis-à-vis the US Dollar, causing the cost of fuel in the local currency to rise. In addition, the local industry margin will be increased by 2 cents per litre. The industry margin increased from N$0.91 to N$0.93 per litre accounting for some 6.7 percent of the total pump price at Walvis Bay.

Commenting on the latest increases, Schade noted that local pump prices for diesel have been increased since May 2018 and for petrol since June 2018.

"Higher oil prices and a weaker Namibia Dollar have been the main reasons, but adjustments in the transport costs from Walvis Bay to inland destinations, as well as the increase in the fuel tax, added to price rises in previous months," Schade explained.

As a result of the latest price increases petrol prices in Windhoek will be 19.6 percent and diesel prices 23.5 percent higher than at the beginning of the year and 24.7 percent and 28.9 percent higher than in November 2017.

However, Schade pointed out that the pump price increases cover only 78 percent of under-recoveries per litre for petrol and 61 percent of under-recoveries per litre for 50ppm diesel.

"Under-recoveries occur when the actual costs of fuel landed in Walvis Bay plus the various additional costs such as dealer margin, industry margin, fuel levy and fuel tax remain above the pump price at service stations," Schade stated.

Under-recoveries are absorbed by the National Energy Fund (NEF), which has subsidised fuel prices since May 2018, because the first under-recoveries were experienced in April. Thus far the NEF spent a total of N$470 million to cushion the higher cost of fuel. The under-recoveries peaked in September at N$1.32 per litre for petrol and N$1.45 per litre for diesel. Schade explained that the drop in under-recoveries in October indicates that motorists carried a stronger burden of the fuel cost increases.

Schade continued that the average monthly Europe Brent oil prices, based on daily spot market prices published by the Energy Information Administration, increased to US$81.58 per barrel in October, the highest level since October 2014 (US$87.43). The price increased by 41.9 percent compared to October 2017. Using the average exchange rate of the Namibia Dollar versus the US Dollar for October 2018, the price of oil in local currency increased by 50.4 percent to N$1 182.86 per barrel, which is the highest price since July 2014.

"The re-imposition of sanctions against Iran by the US Government beginning of November 2018 that target the financial, shipping and oil sectors are likely to exert further pressure on oil prices, since other OPEC member states might not be in a position to cover the shortfall," Schade concluded.

Namibia

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