Oil will remain a problem


Brent crude is likely to remain bid in the international market for at least the foreseeable future, another fine example of how exogenous shocks can hold our fragile economy hostage at any stage. And considering our overwhelming reliance on imported fuel, consumers must brace for repeated price shocks across the board (oil being an essential input in far too many processes). Normally one would expect the post 18th amendment environment to feature provincial governments stepping in to provide subsidy, but seeing bloated deficits and shrinking revenue, not to mention disappointing incompetence in the wake of devolution of power, there’s little chance of prices not rising.
Moving from what should be done to the more practical what can still be done, the government must at least heed ogra’s advice of posturing towards long term contracts. Apparently the regulatory authority is up to speed on reasons for oil’s abnormal bull run in the absence of justifying demand-supply dynamics. The reason is geopolitical uncertainty – Iran war, arab spring, revolutions in Africa’s commodity producers – that is near impossible to factor in using conventional risk management procedures. If we are to watch our interests, we must by-pass unforeseen fluctuations and set long term prices. As geopolitical risk premium increases, so will futures contracts, so the sooner we get a handle on the price issue the better. It might just provide a little price stability in the non-energy market as well.
At the risk of repetition, outside factors assume existential financial proportions only when deficits are swollen out of control. And that, more often than not, especially in economies like ours, reflects more a failure of the incumbent than just trying times. In the macro framework the oil phenomenon is only about as relevant as the PSE debate. All centre on, or encroach upon, the government’s fiscal elbow room. So long as its budget is not brought under control, the economy will remain exposed to price shocks, both external and homegrown.