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29 June, 2011

Release of Oil Reserves Might Hurt Kenya.

The decision by the Obama administration to release its strategic oil reserve to ease price pressure, brought about by the Libyan crisis, might be too costly to the Kenyan economy if OPEC decides to retaliate by tightening supplies.

The release of the 60 million barrel of oil might help in the short term to bring the prices down, but if the oil producing countries view the action as an affront by a consumer government to control their business ,they might reduce production, further creating a shortage that the strategic reserves can not satisfy resulting in an upward price pressure that might cause a recession in Kenya.

The prices of oil in the international market has lately been falling with Saudi Arabia promising to increase its quota to bridge the gap created by disruptions in Libya.OPEC failure to reach an unanimous decision to increase production might have triggered US and a 28 member International Energy Agency (IEA)decision to release the strategic oil reserves into the market.The oil from the reserves will obviously stir the market in the next few months with prices dropping by about $10-$12, this is according to a Goldman Sachs note.But what will happen after the reserves has been depleted?How will the consumer countries like Kenya protect themselves from the rising prices?

Kenya will enjoy the dropping prices for now, but how will it cushion itself once,as some analyst are predicting,a tightened supply start exerting an upward price pressure by year end?
We have seen how rising oil prices has negatively impacted the Kenyan economy especially the rising inflation and the depreciating shilling,in fact oil imports account for 50% of all Kenya's Imports Bill.

Kenya has no strategic reserves and relies solely on oil marketers’ 21-day oil reserves required under industry regulations.National oil corporation of Kenya (NOCK)is in the process of building a strategic national petroleum reserve but due to the capital outlay required it will need to partner with the private sector.The reserve will hold about 1bn litres — equivalent to 90 days consumption — and help ease disruptions in the supply chain.NOCK has sought consultants for a detailed feasibility study on the development and implementation of the reserves.

Lack of strategic oil reserves in the meantime means the country is exposed and vulnerable to shocks brought about by high oil prices.Treasury, therefore, needs to be proactive and come up with strategies to insulate the country against shocks in the medium term.Treasury and the ministry of energy should continue with their efforts to negotiate with oil producing countries for good prices through bilateral concessions.The economy needs a predictable business environment to grow.Price shocks brought about by oil price fluctuation threatens the growth of the economy and the stability of the nation.

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