Crude oil price hits $85 per barrel as demand keeps rising

Crude oil has hit $85 (sh302,866) per barrel for the first time in seven years. The rise in oil prices is attributed to high demand in Asia and America.

Experts say the supplies and inventories are low at the moment leading to the outstripping by demand. There are 159 liters in a barrel.

Analysts estimate that by December the price may hit $100 (sh356,313) per barrel. This is good for producers but bad for consumers. For Uganda which is targeting the first crude oil barrel in 2025, this is a positive boost for the moment for the investment in the industry.

The rebound in crude oil prices has intensified in recent weeks as a global energy crunch has emerged, marked by spikes in prices for natural gas, coal, and crude prices. Crude oil price is up 13% this month alone and is now up 120% from a year ago.

The oil spike is amplifying inflationary pressures and raising the cost of living for everyday citizens. The rise in crude oil has an impact on pump prices.

A year ago, when fewer people were driving and with many restrictions in place including curfew, closed businesses, the demand for petroleum products were low.

But as many global economies ease up COVID-19 restrictions as it is in Uganda, the demand for oil and gas is rising.

The rise in crude oil prices indicates increased demand for fossil fuel although the world is moving towards renewable energies.

The Organization of Petroleum Exporting Countries (OPEC) and its allies have been restrained in easing the draconian supply cuts imposed in 2020 to salvage prices.

Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman said that producers shouldn’t take the rise in prices for granted because the coronavirus pandemic could still hit demand.

OPEC and its allies are raising daily production by 400,000 barrels each month, and have resisted pressure to do more. The oil market’s tightness has been exacerbated by some members failing to reach their output quotas.

Experts estimated that global oil demand had now almost entirely recovered from last year’s coronavirus-induced collapse and would hit its pre-pandemic peak of 100m barrels a day, as Asian economies rebounded from a wave of Delta variant infections.

Soaring natural gas prices in Asia are pushing consumers to buy more oil for use in power generation.

As Uganda, gears towards producing its first oil, questions arise about how to ensure locals participate in the industry.

“There is a need to ensure equity and safeguard the interest of Uganda’s private sector. There are concerns about local suppliers not being registered in the Petroleum Authority Uganda supplier database,” Dr Paul Bagabo the country director at the Natural Resource Governance Institute said.

Bagabo said that given the bad experience is affecting oil production timelines, the country has to be careful how contracts are negotiated of unforeseen occurrences (force majeure).

Force majeure clauses are contractual clauses that alter parties' obligations and/or liabilities under a contract when an extraordinary event happens. Bagabo said Uganda’s negotiators have not been reading the clauses of force majeure and taking care of it diligently.

Bagabo given the amount of oil discovered in Uganda today of about 1.7m barrels that is recoverable and the planned refining of 230,000 barrels per day, of the 40m Ugandans, each Ugandan is estimated to get two barrels per capita (per year) at the moment.

He said this quantity needs to be increased by discovering more resources. He said that as the Uganda National Oil Company would be getting Uganda's share of oil in kind, care has to be taken so that there would be no gain or loss in valuation and it may require setting up an escrow account.

Bagabo said this is an account in a financial institution that will ensure that funds from the sale of oil in kind are not commingled with other funds.