African economies will pay a heavy toll for Gaza war; what can be done?

By Mumbi Mutoko

African countries are facing another round of higher costs from a war they didn’t start after Palestine militant group Hamas torched off a new conflict with Israel last month. While the conflict itself doesn’t directly involve major oil-producing nations, the Middle East, where the fighting is taking place, houses some of the world’s largest oil producers, including Iran and Saudi Arabia. This region also contains key transit routes for oil, like the Strait of Hormuz, often termed the world’s most important “oil chokepoint.”

Morgan Stanley – an American multinational investment bank and financial services company – suggests that the immediate risk to the oil supply remains low. Still, it could change if the conflict spreads to other countries.

As the world’s largest oil exporter and OPEC leader, Saudi Arabia plays a critical role. The Saudis aim to maintain crude oil prices at a level that supports their economy but does not lead to a significant global economic downturn, potentially causing a collapse in oil prices. They face pressure from various quarters, including Washington, to manage this balance carefully.

An Al Jazeera report highlights two key factors to watch. Firstly, whether the Israel-Hamas conflict draws in Iran or Hezbollah, a Lebanon-based armed group that is an ally of both Hamas and Iran, if these groups become more involved, it could have significant implications for the region and the global energy market.

Deputy President Gachagua’s concerns about rising fuel prices due to the Israel-Hamas conflict reflect the complex interplay between global geopolitical events and energy markets. While the conflict itself may not have an immediate, direct impact on fuel prices in Kenya, the broader regional and international dynamics it triggers can influence energy costs worldwide. Thus, governments, businesses, and consumers need to monitor the situation closely and prepare for potential fluctuations in fuel prices, which could have significant economic repercussions.

This scenario raises an important question: will the ongoing Palestine-Israel conflict noticeably impact fuel prices?

Several factors come into play when considering how conflicts in distant regions affect fuel prices. First, it’s crucial to acknowledge that a combination of global supply and demand dynamics, geopolitical events, and market speculation determines fuel prices. These intricate interactions make it challenging to predict precise outcomes.

One aspect that might provide some reassurance to consumers is the current market assessment. While oil prices can be volatile due to geopolitical tensions, the immediate risk to oil supply is considered low in the Israel-Hamas conflict. Morgan Stanley notes that the ongoing conflict hasn’t directly involved major oil-producing nations, which helps stabilise global energy markets.

However, there’s always a caveat. Any conflict escalation could disrupt oil supplies and increase prices, primarily if it draws in more regional countries. This is a point Deputy President Gachagua has emphasised.

The Nairobi Law Monthly reached out to financial expert Nicholas Gachara to shed light on the potential impact of the Israel-Hamas conflict on fuel prices in Kenya and explore practical measures for navigating the challenges posed by rising fuel costs.

Nairobi Law Monthly (NLM): Mr Gachara, could you shed some light on how the current Israel-Hamas conflict might affect fuel prices in Kenya?

Nicholas Gachara (NG): The current tension between Israel and Hamas should not directly impact fuel prices in Kenya. Kenya has established government-to-government supply agreements with major oil-producing nations in the Persian Gulf, including Saudi Arabia’s Aramco, ADNOC, and ENOC. These agreements involve using ports located in the Persian Gulf, which are geographically distant from the conflict area. Consequently, our fuel supply chain should be smooth.

The primary factors influencing fuel prices in Kenya are the depreciation of the Kenyan Shilling and the taxes imposed by the Kenyan government. Over the past year, the Kenyan Shilling has weakened by approximately 17%, resulting in higher consumer costs. Additionally, the VAT on fuel was recently increased from 8% to 16% during this financial year, further contributing to the increased fuel costs for consumers. Proposed levies, such as the road maintenance levy, may add to the burden for consumers at the pump. These are the main drivers behind the rising fuel prices in the country.

NLM: What measures should Kenya consider to counteract the impact of rising fuel prices and maintain stability?

NG: To mitigate the impact of rising fuel prices, Kenya should consider implementing measures to increase its exports and earn foreign currency. Kenya is a net importer of petroleum products, which puts significant pressure on the country’s foreign exchange reserves. We’ve seen a decline in our import cover from the recommended six months to the current three months, which is a cause for concern.

To address this situation, Kenya should prioritise efforts to expand its exports, thus earning the much-needed foreign currency. This strategy can help stabilise the country’s import cover, particularly in the face of escalating fuel prices. We must become more self-reliant and reduce our reliance on fuel imports to cushion ourselves against price increases in the international market.

In an interconnected world, international events like the Israel-Hamas conflict ripple across borders. The complex web of geopolitical relationships and energy markets means that even distant crises can have indirect consequences. While the conflict’s immediate impact on fuel prices is limited, the situation could change rapidly, with implications for consumers in Kenya and beyond.

The Energy and Petroleum Regulatory Authority (EPRA) raised these prices mid-October, adding financial pressure to many households. Deputy President Rigathi Gachagua’s assertion that these increases are due, in part, to international developments is a reminder of the delicate balance between local and global factors in determining fuel prices.

As the situation in the Middle East evolves, Kenyan consumers must stay informed about potential impacts on fuel costs. While it is challenging to predict the exact trajectory of fuel prices, awareness and preparedness can help individuals and businesses better manage their budgets in the face of potential fluctuations.

The Israel-Hamas conflict is another example of how geopolitical events can influence energy markets and people’s daily lives. It underscores the importance of considering global dynamics when discussing local issues like fuel prices.