THE ART OF OIL

Jubilant crowds in Tripoli were met by speculation over oil prices. When the rebels swept into the heart of Libyan city, oil prices began to tumble over  speculation and expectation that once the rebels have taken over, oil supply from Libya will increase substantially from its low since the revolution.

On Monday as battle raged in Tripoli, Brent crude dropped $3.47 to $105.15 a barrel, a fall of 3 percent, and is now trading at $107.35, while US crude fell by a dollar before recovering by the same amount to $87.37 a barrel. Lybia could be pumping as much as 1m barrels a day within months, close to the pre-war figure of 1.6m, nearly 2 percent of global supply. The prospects of oil prices going down in the short term is not on assumption that Libyan production will go back to pre-revolution immediately, but rather that the political situation would stabilise, reducing risk associated with production and exporting oil.

Post revolution it appears that it will take a while for Libya to be back on its feet- both politically and economically. However,  one can only hope that the oil wells have not been sabotaged or tempered with. While we could all, oil users, get excited over the prospects of oil prices going down due to the potential end of the revolution, we must remember that there are a lot of factors that influence oil prices; Financial markets, demand by major markets (OECD) and global inventories just to mention a few. Just to illustrate, Global oil inventories balance supply and demand; If market makers notice an inventory build, spot oil prices will likely drop in response to balance demand with supply. Conversely, if oil futures rise in relation to the current spot price for oil, the impetus to store oil will increase.

During the month of August, international oil prices dropped; WTI oil declined by 10.88 percent; Brent oil fell by only 4.86 percent. So does this mean the rise in fuel prices in Botswana was unexpected, a hoax, a rip-off, like I have heard many people say? Not at all, in actual fact, we should have seen a higher increase earlier this year when we only got a 10 thebe increase/litter. The thing is our prices are decided about a month before they are announced and at the time when a decision was made, oil prices were going up and we needed to catch up. I know I will most probably get ugly stares for having made that statement but we have some of the lowest fuel prices in the region, look at our neighbours; South Africa is trading at around R10 per litre and we are still P7.70/litter (around$1.15). In Botswana retail fuel prices are regulated by the government, The National Petroleum Fund cushions and stabilises national prices when international prices are erratic. This means that sometimes, when international oil prices are too high, the government through the NPF will pay a share of the fuel prices for the consumers and sometimes when oil prices go down, the excess between real oil prices and what we pay is a contribution to the NPF.  If oil prices continue to go down, we will as Batswana enjoy those benefits as well.

BUCANEER ECONOMY- The Story of Somalia

Most of us know Somalia because of the pictures of starving women and kids the most memorable to me being that of a vulture overlooking a child nearing death. Also Somalia is known for the pirates who boost its coast economy. Other than that, most of us are clueless when it comes to Somalia and I must admit that it was not easy writing this peace. I hope this peace will shed some light on the Somali economy and maybe its people.

Historically, the Somalis raise cattle, sheep, and goats, but the camel plays the central role as an indicator of wealth and success. Camels provide meat, milk, and transportation for Somali pastoralists, and serve as their principal medium of exchange. Camels are provided as compensation for homicides and are a standard component of the dowry package.

At independence the Somali economy was at a near subsistence level, and the new state lacked the administrative capacity to collect taxes from subsistence herders and farmers. The state could rely on the customs taxes from international trade, which were easier to collect, but tariffs failed to meet the needs of a government with ambitious development goals. Somalia therefore relied on international subsidies particularly Italy and Britain, which funded about 31 percent of the new nation's current budget in the first three years of independence.

The country could not overcome its dependence on foreign assistance, even to meet its current budget. Moreover, imports of foreign grains increased rapidly, indicating that the agricultural sector was not meeting the needs of the growing urban population. There was however a boom in livestock export from Hargeysa, cows, goats, and camels were becoming concentrated in northern Somalia, much to the detriment of rangelands, which as we know now are completely eroded.

In the 1970s, Siad Barre, the then president, introduced Scientific Socialism which quickly brought a substantial proportion of the modern economy under state control. The government nationalized banks, insurance companies, petroleum distribution firms, and the sugar-refining plant and created national agencies for construction materials and foodstuffs. Two economic trends from this period were noteworthy: increasing debt and the collapse of the small industrial sector.

The Somali economy was hurt as much by these factors and by the economic cost of creating a large modern army as it was by the concurrent drought. During the 1970s, foreign debt increased faster than export earnings. Many loans, especially from the Soviet Union, were, in effect, written off. thanks to the accumulated debt burden, by the 1980s the economy could not attract foreign capital, and virtually all international funds made available to Somalia in rescheduling agreements came with the provision that international civil servants would monitor all expenditures. As a result of its international debt, therefore, Somalia lost control over its macroeconomic structure.  Like most countries devastated by debt in the late 1970s, Somalia could rely only on the nostrums of the IMF and its program of structural adjustment. The government had to scale down on its projects and cut down on expenditure. They also suffered much devaluation of the shilling and reductions in government personnel.

As a result of the civil war in many areas, the economy deteriorated rapidly. Previously, livestock exports from northern Somalia represented nearly 80 percent of foreign currency earned, but these exports came to a virtual halt when the Saudi Arabian government banned Somali beef. Shortages of most commodities, including food, fuel, medicines, and water, occurred virtually countrywide.

Since the collapse of Siad Barre’s regime in 1991, Somalia has been functioning without a state, gradually descending to anarchy and chaos. This led a large amount of non-state actors seeking power to gain control over Somalia, creating a war economy where war-lords collected taxes to fund the war. However, there has been a gradual shift from the war economy of the 1990’s to a quasi-legitimate trade (import/export, telecommunication, transports) of the beginning of the 2000’s. Service sectors in Somalia are now more developed than in other countries, though Somalia remains one of the poorest countries in Africa. According to the World Bank, the development of such private sector should play a major role in the conflict de-escalation, and should encourage clans to cooperate with each other.  The agriculture sector is struggling and as we know, Somalia is hit by what the UN has termed the worst ‘humanitarian crises’.

The Somalia story goes deep beyond the famine, I’d like to encourage all to take some time and read some more on Somalia . Remember to lend a helping hand to those in need

The Colossus is Crumbling

As the biggest economy in the world is being rocked by winds of shock and debt chaos, we all wonder where our fate lies. Questions have been springing from all directions on what our prospects are and if the future looks bleak. While there is a lot of controversy in American politics, I would like to, as a person, believe that we as a race are able to set aside our ideologies and face reality, deal with issues and handle them the way they deserve. There is very little cooperation between the American legislators and that kind of dichotomy is hurting the US Dollar; this is no time for Russian roulette; the US is gearing up to shoot itself in the foot and the whole world in the face. Last week I wrote briefly on the repercussions of US default and this week I’d like to reiterate and add some more points on this topic.

If the US defaults on its debt, the global banking and financial market liquidity could dry up. Lending between institutions and people or businesses could possibly cease altogether or become cost prohibitive. Further, the US government will effectively start to run out of money to pay civil servants, government contractors, pensioners or holders of government debt. The shock would quickly spread throughout the world and would very likely lead to a serious global recession, possibly worse than the one seen a few years ago. The risk appetite of investors has been dented and rating agencies have warned of potential downgrade over the past weeks. Some of the fear arising now on the US defaulting on its debt could hoist interest rates, weaken the dollar and erode the dollar's reserve currency status.

As the dollar gets weaker, US exports get cheaper and our exports to the US get expensive. With a weak dollar, the oil exporters adjust their dollar prices upward to compensate, thereby forcing oil importers (like us) to bear higher energy costs and suffer the resultant rise in the prices of energy-dependent products and services. As the prices of oil rise, most commodity prices will raise leading to reduction of real incomes. When real incomes drop, consumers start to reduce consumption of luxury goods such as diamonds and the fact that our prices in the US then become expensive does not help our case. As Botswana from this we face another deficit in the balance of payments like that during the 2008 crisis.

The US dollar has always had the privilege of being the sole reserve currency in the world which meant that USA has been the only country with no foreign exchange risk when buying back its debt as it never faces the problem of an increase in foreign debt as the value of its currency declines. Most countries have their reserves in US Dollars and are worried that the continued weakening of the dollar may cause losses in their foreign reserves which cannot be offset by other overseas investment earnings. The big developing countries, those referred to as the BRICS countries (Brazil, Russia, India, China and South Africa), are making some effort to protect them from what they see as steady erosion in the value of the American currency; in a summit of the BRICS in Hainan recently, they agreed to make trade settlements with each other in their own currencies and not in US dollars. They also announced, “We support the reform and improvement of the international monetary system, with a broad-based international reserve currency system providing stability and certainty.”

The support to the international monetary system reform should become widespread after this turmoil; countries should follow on the path of the BRICS, encourage trade in other currency and most importantly diversify markets; reliance on one major economy creates instability. It will take a long time for the US Dollar to lose its sole reserve currency and the repercussions of the Dollar not being the centre of the world could introduce radical change to the lifestyles for both those in the US and other countries particularly those with currencies pegged to the Dollar, large foreign reserves and those receiving aid from the US while European and African countries who have loans in US Dollars will enjoy lower debt.