An escalation of the conflict in the Middle East will push crude prices above $100 a barrel, the World Bank has warned, presenting a fresh inflation headache to consumers and central banks that have been looking to cut rates to stimulate economic growth.
In Kenya, motorists have enjoyed five straight months of falling fuel prices, with a litre of petrol retailing at Sh193.84 and diesel at Sh180.38 in Nairobi after the April 14 review, down from Sh212.36 and Sh201.47 respectively at the beginning of the year.
The decline has largely been due to the strengthening of the shilling against the dollar, which has offset spikes in international oil prices, with Murban and Brent crude prices standing at $89.50 a barrel on Friday.
Inflation has also come down, from 6.63 percent in December to 5.7 percent in March, thanks to lower fuel and food prices.
The Middle East conflict is, however, threatening to reverse the recent improvements in inflation and fuel costs, reflecting the elevated exposure net oil importers like Kenya face whenever there are geopolitical flare-ups affecting oil producers. Israel and
Israel and Palestinian group Hamas have been embroiled in a war since October 2023, and Yemeni Houthis have carried out attacks on the Red Sea shipping lane in solidarity with the Palestinians. Israel and Iran exchanged missile and drone attacks this month in an escalation of the conflict.
Israel is also preparing to launch an offensive on the southern Gazan city of Rafah, further raising tensions in the region.
The World Bank says in its April 2024 commodity markets outlook that without further escalation of the conflict or worsening of transportation bottlenecks in the Red Sea, oil should average $84 per barrel in 2024.
A severe escalation on the other hand, the World Bank said, would initially cut supply by up to three million barrels per day.
“In such circumstances, average oil prices could average $102 per barrel in 2024, more than 20 percent above the baseline. An oil price shock of this size could almost entirely stall progress on global disinflation,” said the World Bank in the commodity report.
However, a moderate conflict-driven disruption—seen as a likelier scenario compared to a lack of escalation— would raise the price by $8 per barrel above the baseline projection to $92 a barrel, presuming a cut of supply by one million barrels per day.
The commodity markets outlook is published quarterly in January, April, July and October, providing analyses for major commodity groups, including energy, metals, agriculture, precious metals and fertilisers.
In Kenya, a large increase in the price of crude oil will pile renewed pressure on the cost of living, in a period of ongoing economic challenges.
Fuel prices also significantly impact the cost of food in the country given that the price of transportation is passed on to the final consumer. Electricity prices also go up in tandem with a rise in the cost of diesel, owing to charges related to thermal power production.
For the Central Bank of Kenya (CBK), renewed inflationary pressure would complicate efforts to cut domestic interest rates, which rose to highs of above 18 percent on risk-free government securities earlier in the year.
For private sector borrowers, the cost of credit has gone up to the mid-20 percent range, limiting the ability of businesses to borrow for investment purposes.
In the last monetary policy committee meeting held on April 3, the CBK held the base rate at 13 percent, noting a positive inflation and exchange rate outlook, despite persistent geopolitical tensions.
The CBK noted that there was no need to tighten the policy further given that the recent rate increases had been effective in lowering inflation toward the mid-target point of five percent, while addressing exchange rate pressures.