The importance of gas in an economy, whether in high-income, mid-income, or low-income, cannot be overemphasized. It is key for various facets of life. It has a direct impact on transportation, heating, and logistics chains and equally affects how households operate. In fact, an impact on the gas sector threatens the broader local, if not the global economy. The only difference is that low-income economies are usually hit harder by such effects.
Low-income communities have been on the receiving end due to the high energy burden. The burden is characterised by location and geography, home characteristics, socio-economic conditions, energy costs and policies, and behavioural variables. With the supply chain disruption attributed to the Russia-Ukraine war, things are not about to get any better. This article highlights some ways in which gas can be made more available to the low-income communities in the wake of the Russia-Ukraine War.
Russia-Ukraine war and its Increasing Negative Effects on Gas Prices
In Eastern Europe are two countries that border each other: Russia and Ukraine. It has been about one month since Russia invaded Ukraine in what has been cited as anattempt to breach the world order. A lot has happened since then, and various theories have been advanced regarding why the invasion is taking place. The discussion is quickly shifting from why to what next. The latter debate has been spurred by the disruption of supply chains and imposing various sanctions on Russia, particularly by the West. In this fashion, one of the sectors that have outstandingly suffered is the gas sector, which, as we have observed, is such a critical sector to the world economy.
According toAntónio Guterres, the Secretary-General of the United Nations, Ukraine is a breadbasket to many nations as it accounts for up to 30 percent of the world’s wheat supplied to hunger-stricken countries, the majority of which were already facing hunger and high energy prices prior to the war. This war not only restricts wheat exports but also affects fuel prices in a significant way. This is because Russia is reported to be the world’s third-largest oil producer and the world’s second-largest producer of natural gas. With the sanctions being imposed on Russia, it only means that there shall continue to be a decrease in the flow of Russian barrels to the gas market. The balance between demand and supply can, therefore, not be obtained. This leaves just one thing, an increase in pump prices and gas-related products. Interestingly, an increase in pump prices has a similar ripple effect on almost all other goods and services. This also comes in the wake of various government and international community initiatives to achieve theUnited Nations Sustainable Development Goals, under which access to affordable, reliable, and modern energy is at the centre.
War and in price paid by the Low-Income Communities of Africa
Low-income economies, particularly African countries, have been on the receiving end. In the words of the International Monetary Fund (“IMF”) Managing DirectorKristalina Georgieva “War in Ukraine means hunger in Africa.” The Agence France-Presse (“AFP”) bureaureports that in many parts of Africa, the inflationary machine has already lurched into a higher gear.
Diesel used to sell inNigeria at around 300 naira (0.72 cents) a litre but now goes for 730 ($1.75) a litre. In addition, several local airlines have recently warned that they were forced to cancel flights due to aviation fuel scarcities. Nigeria has also recently experienced increased blackouts.
High prices continue to aggravate food insecurity in conflict-torn Ethiopia, where nearly 20 million people need food aid.
In Uganda, according toDavid Bahati, Junior Finance Minister, cooking oil has risen from 7,000 shillings per liter ($1.94) in February to 8,500 shillings ($2.4) and a kilo of rice from 3,800 to 5,500 shillings, according to Kampala retail shops. This comes at a time when Uganda is still recovering from a fuel crisis that hit the country over a month ago, in addition to shortages of petroleum products. Moreover, high fuel prices may persist on the back of international oil prices that continue to soar.
In Somalia’s capitalMogadishu, prices for fuel, cooking oil, construction materials, and electricity have equally shot up. A 20-litre jerrycan of cooking oil was which was $25; today, it is about $50. A litre of gasoline was $0.64, and today it runs about $1.80, an increase in price that traders label as crazy. In Malawi, bread and cooking oil prices have shot up by an average of 50 percent.
United Nations Sustainable Development Goal 7: Access to Energy for All
The United Nations Sustainable Development Goal 7 (“SDG 7”) seeks to ensure access to affordable, reliable, and modern energy for all by 2030. Although continuous efforts are directed towards achieving this SDG 7, the issue of affordability continues to bedevil nations, particularly the low-income communities. In the words of Dr. Philip Mshelbila, General Manager, Communication, Shell Nigeria, “access to affordable, reliable, and clean energy is fundamental for poverty reduction and sustainable development”.
In the past few years, volatile gas prices have been at the centre of media, leadership, and political discussions. This has been attributed to various factors, including geopolitical tensions, natural disasters, and the worldwide pandemic that we are just beginning to fully recover from. It is therefore worth noting that the world economy, to a greater extent, depends on the gas sector for its survival.
Statistics demonstrating the Increase in Current Gas Prices
As we have highlighted above, gas is an important driver for low-income economies. The dependency rate is higher in low-income economies than in other economies as they keep struggling to implement alternative energy sources.
According toCNBC, crude prices recently crossed $90 per barrel, representing an increase of more than 20% this year and a rally of more than 80% since the beginning of 2021. Those gains, however, can also be attributed to other factors such as tight supply. According to Andy Lipow, president of Lipow Oil Associates, oil could spike to $110 per barrel if the crisis worsens.
In Kenya, for instance, the fuel prices have increased to KES 135 per liter of petrol and KES 116 per litre of diesel. On the other hand, Liquefied Petroleum Gas (“LPG”) which is used in a majority of urban homes for cooking, has not been spared. The prices have soared to an all-time high. The increase in prices has been estimated at 24.5%. A thirteen-kilogram LPG cylinder now retails at Sh3,340 from Sh3,113, while a six-kilogram LPG cylinder will now be refilled at Sh1,560 from Sh1,441. Families were refilling the same at Sh1,243 before the introduction of VAT. Although the state has come up with a subsidy plan to keep fuel prices low, this is not seen as a sustainable way to ensure accessibility and affordability for these citizens of the low-income economies.
What Determines Gasoline Prices?
Gasoline prices are the easiest to note whenever there are increases or decreases. This is because they are easily felt by the common citizens. This makes it a hot-button political issue where blame games are usually traded between industry players and politicians. But it is not always politicians that affect prices, as much as it is usually part of it.
First, gasoline prices are primarily determined by the laws of supply and demand. For example, where the balance between demand and supply cannot be achieved, the prices will increase. The supply chain disruption can be occasioned by various factors, including geopolitical tensions. A great example is the Russia-Ukraine war.
The retailing price is determined by the prevailing market cost of crude oil, taxes imposed on the product, costs used in refining, distribution, and marketing costs. Gasoline prices cover the cost of acquiring and refining crude oil as well as distributing and marketing the gasoline, in addition to state and federal taxes. Whenever there is an increase in the crude oil prices, the cost of acquisition, refinery, as well as distribution, equally increases. This cost is usually passed through to the consumers. As such, prices go higher.
Factors that Cause an Increase in Gas Prices in Low-Income Economies
Broken Supply chain– Low-income economies experiences broken supply chains. This is either in the form of unnecessarily longer supply chains or a lack of clean supply chains. The impact of this is that it creates room for various players. Each additional player comes at a cost. This increases gas prices at delivery to the ultimate consumers.
Over-reliance on other states– Low-income economies heavily depend on other states as they either do not have the natural resources or do not have the means to convert those resources into usable gas products. The overreliance can lead to higher prices in cases where the states relied on experience a supply chain disruption, political turmoil, or ideological differences between such two states.
Constraints for rural energy development– Low-income economies experience low levels of socio-economic and infrastructure development. Such infrastructure is critical in supplying gas and related products. In the absence of enabling infrastructure, the cost of transporting, marketing, and distributing gas increases. This increase is passed on to the consumers.
Under-developed rural energy markets– Markets in low-income economies are, in most cases, underdeveloped. This makes it difficult for players to enter the market. The few who enter such markets take huge risks which are covered by increased prices.
Increase in taxes– Ironically, low-income economies have the most tax burdened citizens. The increase in taxes is because the states are usually in debt. To repay such debts, the most used products are the most taxed. Gas is one of those products that experience tax increases. An increase in tax means an increase in costs for the retailers. The retailers usually pass such taxes to the consumers. This leads to ever-increasing gas prices. Some of the common taxes include fuel levies and petroleum levies.
Initiatives to make Gas more Affordable and Accessible to Low-Income Economies
The issue of gas prices, as had been before the Russian invasion of Ukraine, remains to be a thorny issue, particularly in the flesh of the low-income economies and the citizens. Government responses have so far been in terms of coming up with subsidy packages to cushion their citizens. This is commendable but not sustainable. Below are initiatives that, if implemented, are likely to solve this problem in a sustainable manner.
Education and information
Inadequate information combined with a low level of education experienced mostly by the low-income communities is the main behavioural and informational barrier. The government can offerincentives and performance parameters that could be stipulated under the contract to impart information about the services to the poor and educate the poor about the use of gas in their households and help them understand their needs and preferences. Further education on the type of energy and consequences of the products they purchase and how to maintain and protect these gas energies from being misused is important too. In an era where information is power, the more educated and informed public is more likely to make better informed decisions. The education should also include market information and encourage more entrants into the market. This is likely to drive down the prices, especially regarding broken supply chains and overreliance on other states.
Government Assistance Funds
Many governments assist low-income communities with grants, development programs and direct investments in renewable energy sources and energy-efficient systems to bring lower energy costs and increased public welfare. Examples of such world programs include the Department of Health and Human Services’Low Income Home Energy Assistance Program (“LIHEAP”) and theDepartment of Energy’s Weatherization Assistance Program (“WAP”). If invested in a sustainable way, these funds are likely to develop alternative energy sources, particularly solar, which can serve both as alternative sources and drive energy prices down.
Diversifying supply source
This is done by widening the geographic range of suppliers and maintaining adequate storage facilities and inventories of natural gas. On the other hand, introducing different energy sources and increasing the share of energy generated from each source to avoid a sole dependence on a single energy resource is a crucial strategy for achieving energy security. This also includes the liberalisation of markets to allow easy entry of private sector players. The competition from various market players is great for driving prices down and, at the same time providing innovative solutions. The government also does not need to worry about funding in such cases, and private sector finance shall be utilised.
Financing rural energy
Rural residents often pay more for commercial fuels, especially kerosene, LPG, diesel and gasoline, than urban dwellers. Therefore, they require assistance through easy access to credits which allow rapid service improvements to be achieved at a minimal cost and without the need for counterproductive subsidies. Furthermore, the government should offer help in covering the high initial costs of transitioning to instruments necessary for their use that are ultimately less expensive. Government should also encourage public-private partnerships as a means of attracting private finance for rural energy infrastructure. This way, the financing risk can be passed to the private sector while the government retains ownership of such infrastructure.
Raising income levels
This will increase the people’s purchasing power, thus enabling the low-income households to manage the costs that people face on an everyday basis. To raise income levels, the government needs to create a conducive environment for businesses to thrive, create job opportunities and grow the economy to provide room for increased earnings. The higher the disposable income, the better options citizens have when it comes to energy security.
Output-based aid (OBA) is a form of results-based financing (RBF) that facilitates access to basic services for low-income communities through the payment of subsidies that are disbursed against independently verified results. They lead to increased access to basic services, such as water and sanitation, energy, health, and education and would therefore ensure easy affordability and accessibility of gas to low-income communities.Global Partnership on Output-Based Aid (GPOBA) is an example of an OBA world group that helps low-income communities in developing countries mobilise public and private sector funding and develop innovative financing solutions that link funding to actual results achieved. The states should package proposals that reflect the needs of their population, the gap and what OBA could be of help to ensure energy access, affordability, and security.
Using Local Government, Community-based, NGO and Privately Funded Programs
Local and community low-income energy programs often focus on opportunities for stimulating economic development, creating livable-wage jobs, meeting local environmental and sustainability goals, and increasing prosperity by expanding and deepening local collaborations and initiatives. These, if properly utilised, are likely to aid in raising funding for energy in the communities to facilitate energy access while reducing the prices of acquisition.
Providing tax credits, especially to investors, will stimulate investments in the natural gas sector, network, and storage, which reduces the risk of supply disruptions. This will ensure an equal and continuous supply of gas to all regions, especially to low-income communities. Tax credits have been an effective tool to attract private investors in various sectors, energy being one of them.
Tax removal or exceptions in the gas sector
The government should address high taxation rates on gas or put up policies that will cushion already burdened citizens, such as exempting low-income communities from paying gas taxes. One example is when the government ofKenya removed the tax in 2016, LPG uptake doubled to 326,000 tonnes last year from 151,000 tonnes, highlighting the impact of removing the tax. Waivers or exemptions are key in driving prices of gas downwards.
Governments in low-income economies should put in place policy frameworks that ensure all energy efficiency targets and measures address all groups equally, including vulnerable groups that are more difficult to reach, such as low-income households.
The lessons learnt from the war in terms of gas prices are that low-income economies are over-reliant on other economies for their gas supply chain. This is not likely to change even after the war dies down and world order is restored. It is therefore important that governments in low economy nations address this issue through sustainable means.
The views, thoughts, and opinions expressed in the article belong solely to the author, and not necessarily to their employers, organizations, committees or other groups or individual to which they are affiliated.
About the Author
Mr. Oliver Dundo is an Advocate of the High Court of Kenya, Commissioner for Oaths, Certified Public Private Partnerships Professional and a Project Finance Expert.
His experience spans across corporate and commercial law with experience in commercial transactions including public private partnerships (PPPs), mergers and acquisitions (M&A), energy and infrastructure projects, Project Finance, Islamic Finance, Public Procurement, Public Policy and Sustainability.
Managing Editor: Naman Anand
Editors-in-Chief: Jhalak Srivastav and Akanksha Goel
Senior Editor: Hamna Viriyam
Associate Editor: Aribba Siddique
Junior Editor: Sukrut Khandekar
Preferred Method of Citation
Oliver Dundo, “War and its Price: Discussing Affordability and Accessibility of ‘Gas’ to the Low-Income Communities in Africa” (IJPIEL, 6 May 2022)