Oil Price Volatility and the Way Forward for Nepal

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Oil Price Volatility and the Way Forward for Nepal

 
--BY VIJAY SATYAL
 
As an oil importing nation, Nepal needs to carefully assess the international market scenario and devise effective strategies to averse the risks related to oil price volatility.
 
Apparently, the Organization of Petroleum Exporting Countries (OPEC) has lost whatever control it had of the oil market. The actions (or tweets) of three men — US President Donald Trump , Russian President Vladimir Putin and  Saudi Crown Prince Mohammed Bin Salman Al Saud- seem to be the determining factors for the course of oil prices in 2019 and beyond. But of course, the three leaders have different motivations and are pursuing their own agendas. 
 
As oil prices have headed south making an unexpected downtrend, Saudi Arabia, the world’s largest oil producer, in November said it would cut its exports by 500,000 barrels per day (BPD) from December and warned fellow producers that they needed to cut about 1 million BPD from October production levels. That drew a lukewarm response from Putin and a swift Twitter rebuke from Trump. Nevertheless, in early December, OPEC and Russia agreed to collectively reduce crude oil production by 1.2 million BPD for the first half of 2019. According to the deal, the 15-member oil market monopoly will cut its output by 800,000 BPD and Russia will reduce its production by 400,000 BPD. 
 
This move has been directed towards finding equilibrium in terms of crude oil pricing, which became volatile in 2018 after a relative calm in 2016 and 2017. For instance, the Brent crude was at USD 54 per barrel in the end of December, a drop of over 40 percent from USD 85 per barrel in October. Coupled with the rising oil production of the United States and the falling demand for energy in China, oil producers are under pressure to maintain their fiscal balance. This situation has pressurised OPEC members and Russia to take some urgent measures to put a cap to the falling oil prices. According to the International Monetary Fund, Saudi Arabia will need oil prices to be at USD73.3 per barrel in 2019 in order to maintain its fiscal balance. 
 
Impacts on Nepal’s Economy
The developments in the global oil market indicate to increasing crude oil prices in the coming days which means higher prices for petroleum products for a country like Nepal. In this backdrop, “The impacts of higher prices of petroleum products in Nepal” is an important preview. 
 
Trade Imbalance, Depleting Forex Reserve 
Nepal’s fuel import bill went up to a whopping Rs 172.88 billion in FY2017/18 which was USD 810 million in FY2013/14. The share of fuel import was 14.3 percent of the country’s total imports. In the first four months of the current fiscal year, Nepal’s fuel import bill has amounted to Rs 69.07 billion, up 68 percent from the corresponding period of the last fiscal year. The increasing domestic expenditure on imported fuel has been one of the major factors behind the fast depleting foreign currency reserves of the central bank. In the first five months of the current fiscal year, Nepal’s forex reserve decreased to USD 9.29 billion which was USD 10.08 billion by the end of the last fiscal year which ended in mid-July 2018. According to NRB, the country is able to finance imports (of goods and services) only for 7.9 months with the current level of forex reserve. 
 
Fuel Subsidy Burden
The practice of deregulating fuel prices has been brought into effect by the government and the prices are reviewed every fortnight in order to make adjustments in accordance to international fuel rates. Still, this management does not seem to be working because the international crude oil price is prone to market volatility to render the fuel price mechanism introduced by the government less effective. This will eventually lead to a subsidy burden and financial losses either to the Nepal Oil Corporation or the general public.
 
Inflationary Pressure
Like in other developing countries, inflation has a direct relation with the fuel price in Nepal. As the country’s economic activities are primarily based on oil for the transportation system, fuel prices not only affect the consumer inflation rate, but the service industry is also hampered. The rise in import bills are reflected in the final prices of goods and services. Specifically, the increase in the cost of petroleum imports will either have a negative impact on the balance sheet of NOC or an increase in prices of fuel in the domestic market. The outcome will depend on whether the government opts for price rationalisation or absorption of costs in terms of subsidies. It might then have spillover effects on transport and retail prices. 
 
What the Government Needs to Do
The pricing mechanism needs to be reviewed and further scientific and efficient methods should be brought into practice to avoid the risks related to the international crude oil price volatility and the inventory reserve. Bringing an efficient system will help NOC and the government to work for the welfare of the general public and enable people to better manage their savings.
 
The oil price volatility has always been regarded as a problem. Nevertheless, many fund managers, investment companies and market regulators across the globe utilise the price volatility as an opportunity. Now, NOC and the government should to take this as an opportunity which can be essential for the country to attain sustainable economic growth. There is also a need for a government push towards reducing the dependency on fossil fuels. Phasing out the use of oil in the long run through adequate production and use of hydroelectricity can pave the way for a better future.
 

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