How to transform the oil and gas sector

Opinion and Analysis

Joseph Kieyah 

By JOSEPH KIEYAH

At its conceptualisation, the Vision 2030 development blueprint attracted scepticism from local and international policy makers.

The dream of becoming a middle income country by 2030 was farfetched and without empirical evidence support. Unexpectedly, but quite pleasantly, this aspiration has been reaffirmed by the rebasing statistics.

Rebasing of the economy has increased the size of the economy by 25 per cent. This remarkable configuration instantly shot Kenya into middle income status before 2030 as previously envisioned.

Moreover notwithstanding the dipping of international oil prices, the unexpected discovery of oil and gas will boost local economy.

Earlier, Kenya’s 50 years search finally bore fruit with the discovery of oil that was followed by a series of other discoveries, including gas. The proven commercial viability of one billion barrels of oil and counting holds a promise of wealth creation that will generate economic opportunities for local enterprises.

While one billion barrels reservoir is beyond the threshold of commercial development, it might not be significant by any international standard. However, it will be a game changer for the transformation of the local economy.

At the current average annual consumption rate of about one million barrels of oil, such a reservoir can support domestic consumption as well as exportation.

With right policy choices, the government can overcome pitfalls like the Dutch disease and transform the oil and gas sector into a wealth creation engine.

Taking cognisance of the complex activities likely to sweep the sector, it should urgently set up policies before production activities begin.

Conventionally, the Gross Domestic Product (GDP) is used as a proxy measure of a nation’s wealth. It is the value of all goods and services within the aggregate demand and supply framework of a country in a given year.

Thus, the aggregate demand and supply framework becomes a good tool of analysis to assess how the sector will generate wealth that will unlock economic opportunities.

On one hand, aggregate demand is total demand of all goods and services that encompasses the market for consumers’ consumption goods and services, and business for private investment including government expenditures as well as export market.

Production of oil and gas for local consumption will directly affect GDP through export market. Kenya has been consistently running a trade deficit that has been impeding economic growth.

The deficit is attributable to the high import bill driven by the importation of crude oil among other factors.

Local oil production will do away with crude importation, hence reverse the trends of the trade deficit or at the very least, mitigate its impact.
 

On the other hand, aggregate supply embodies the overall total costs of producing goods and services. In Kenya, oil is a major driver of production costs, especially the energy and transportation costs.

Therefore, local oil production will increase domestic supply that will reduce these costs. Granted Kenya’s market-based economy, reducing production costs will enable the county to credibly attract domestic and foreign capital.

Such attraction of foreign capital in form of relocation of international firms will not only generate more economic activities, but increase GDP with lower inflation rates.

This analysis is consistent with the government development strategy of reducing production costs to enhance its competitiveness regionally and internationally, with the overall goal of enriching Kenyans.

Prof Kieyah is a principal policy analyst at Kenya Institute of Public Policy Research and Analysis. Views expressed in this article are author’s alone