Falling commodity prices on the world market

Crude oil is a commodity that does not have firm substitutes, and because it does not have reliable alternatives, consumers have no choice. Consumers cannot afford to dispense with crude oil because in the language of the economist, demand for it is inelastic. Besides, crude oil is a strategic commodity. Crude oil is strategic because it is an indispensable commodity used in almost all areas of the economies of nations – agriculture, industry, commerce, transport and construction, among others. There are some substitutes for crude oil such as solar energy, tidal waves, wind energy, biomass, electricity and biofuel but these cannot presently be produced in sufficient quantities as crude oil. Crude oil is needed to fuel automobiles, sea crafts, aircrafts, trains and machines in factories. That explains why fluctuations in crude oil prices affect prices of other commodities and services. This is because when prices of crude oil go up, cost of production of goods and services also increase and vice versa. Between 1985 and 1986, crude oil prices dropped by 67 per cent and in 2008, by 75 per cent. Falling crude oil prices have been accompanied by drops in prices of other commodities because of their correlation and the interplay of forces of supply and demand. In 2014, crude oil prices fell by 55 per cent in the last seven months. According to a World Bank report on global economic prospects released last week, crude oil prices will continue to decline in 2015 and go up slightly in 2016. The fall in crude oil prices will lead to further reduction in prices of nine key commodity-price indices. Prices of energy, metals, minerals and agricultural raw materials dropped by 35 per cent from 2011 to 2014. The fall in commodity prices has been attributed to more supplies and drop in demand for those goods and because the American dollar, the most preferred hard currency, has gained strength following America’s exit from the great global recession and strong economic growth in the US. “Global supply and demand conditions have conspired to generate lower price expectation for all the nine World Bank commodity price indices – an extremely rare occurrence,” a member of the World Bank Development Prospects Group, Ayhan Kose, has said. The World Bank report projected an average crude oil price of 53 dollars in 2015 which is 45 per cent lower than in 2014. On prices of other commodities, the report forecasted drops in the prices of fertilisers, natural gas, precious metals and food items. Prices of metals have been projected to fall by five per cent in 2015. Dramatic drop in crude oil prices and those of other commodities will exert beneficial and adverse effects on the economies of nations. Consumers of crude oil and other commodities will benefit from low prices, while producers of crude oil and raw materials will not gain. Importers of manufactured goods from the developed countries will benefit from fall in prices. Countries that depend on export of raw materials, especially those of the developing world, will be negatively affected because of a fall in prices of their produce. According to a study on the impact of falling commodity prices on developing countries, “commodity price fluctuation has a negative impact on economic growth, countries’ financial resources and income distribution, and may lead to increased poverty instead of poverty alleviation”. According to the study by a team of researchers from Overseas Development Institute, an international organisation that offers humanitarian assistance, since countries of the developing world, especially in Africa, derive more than 90 per cent of their foreign exchange earnings from commodity export, a protective mechanism is needed to lessen adverse effects of the fall in commodity prices. Such a mechanism was available in the Lome Convention which was an agreement between the European Union (EU) and the African, Pacific and Caribbean (ACP) countries. The beneficial risk-protection mechanism in the Lome Convention has now been replaced by what the study described as “a rather vague undertaking to provide additional support in order to mitigate the adverse effects of any instability of export earnings, including those in the agricultural and mining sectors within the financial envelopes of support to long-term development.” “Hardship resulting from falling commodity prices”, according to the study, “should be, as far as possible, alleviated in a balanced way without farmers in developing countries paying the price.” The study examined the impact of falling commodity prices in countries of Sub-Saharan Africa, South Asia and the Caribbean and made recommendations on how the adverse effects could be alleviated. How is Ghana, a developing country, going to be affected? Ghana produces crude oil marginally and earns much of its foreign exchange from export of minerals, such as gold, diamond, bauxite and manganese, and agricultural produce, such as cocoa, timber and fruits. According to President John Dramani Mahama of Ghana, the country is expected to earn a little over one billion dollars from crude oil but half of that amount was lost because of the drastic drop in crude oil prices in 2014. Ghana, however, stands to gain from low crude oil prices because local production is not sufficient to meet demands at home. The country spends 100s of millions of dollars in foreign exchange to import crude oil. Gains from cheap crude oil import and import of cheap consumer and capital goods could make up for the loss in crude oil earnings. However, the year 2015 appears to be a difficult one for Ghana since it is likely that prices of gold and cocoa, Ghana’s main foreign exchange earners, could go down further and reduce the nation’s earnings from export of commodities. This calls for prudent financial management and financial discipline – not the International Monetary Fund type. Kenya has applied its own financial-discipline mechanism which I believe, when adopted, could help the Ghanaian economy in 2015 and 2016. Faced with an excessively high public wage bill, the Kenyan Government reduced the wage bill drastically last year by cutting the salaries of the president and his vice by 20 per cent. The salaries of ministers and deputy ministers went down by 10 per cent and those of heads of government departments and agencies slashed by 20 per cent. Kenyan Members of Parliament had a cut in their salaries by 40 per cent in 20l3. The Kenyan Government further reduced spending by cutting down on cosmetic and ostentatious expenditures, especially on foreign travels by the president, the vice president and ministers of state.

Crude oil is a commodity that does not have firm substitutes, and because it does not have reliable alternatives, consumers have no choice. Consumers cannot afford to dispense with crude oil because in the language of the economist, demand for it is inelastic. Besides, crude oil is a strategic commodity. Crude oil is strategic because it is an indispensable commodity used in almost all areas of the economies of nations – agriculture, industry, commerce, transport and construction, among others. There are some substitutes for crude oil such as solar energy, tidal waves, wind energy, biomass, electricity and biofuel but these cannot presently be produced in sufficient quantities as crude oil. Crude oil is needed to fuel automobiles, sea crafts, aircrafts, trains and machines in factories. That explains why fluctuations in crude oil prices affect prices of other commodities and services. This is because when prices of crude oil go up, cost of production of goods and services also increase and vice versa. Between 1985 and 1986, crude oil prices dropped by 67 per cent and in 2008, by 75 per cent. Falling crude oil prices have been accompanied by drops in prices of other commodities because of their correlation and the interplay of forces of supply and demand. In 2014, crude oil prices fell by 55 per cent in the last seven months. According to a World Bank report on global economic prospects released last week, crude oil prices will continue to decline in 2015 and go up slightly in 2016. The fall in crude oil prices will lead to further reduction in prices of nine key commodity-price indices. Prices of energy, metals, minerals and agricultural raw materials dropped by 35 per cent from 2011 to 2014. The fall in commodity prices has been attributed to more supplies and drop in demand for those goods and because the American dollar, the most preferred hard currency, has gained strength following America’s exit from the great global recession and strong economic growth in the US. “Global supply and demand conditions have conspired to generate lower price expectation for all the nine World Bank commodity price indices – an extremely rare occurrence,” a member of the World Bank Development Prospects Group, Ayhan Kose, has said. The World Bank report projected an average crude oil price of 53 dollars in 2015 which is 45 per cent lower than in 2014. On prices of other commodities, the report forecasted drops in the prices of fertilisers, natural gas, precious metals and food items. Prices of metals have been projected to fall by five per cent in 2015. Dramatic drop in crude oil prices and those of other commodities will exert beneficial and adverse effects on the economies of nations. Consumers of crude oil and other commodities will benefit from low prices, while producers of crude oil and raw materials will not gain. Importers of manufactured goods from the developed countries will benefit from fall in prices. Countries that depend on export of raw materials, especially those of the developing world, will be negatively affected because of a fall in prices of their produce. According to a study on the impact of falling commodity prices on developing countries, “commodity price fluctuation has a negative impact on economic growth, countries’ financial resources and income distribution, and may lead to increased poverty instead of poverty alleviation”. According to the study by a team of researchers from Overseas Development Institute, an international organisation that offers humanitarian assistance, since countries of the developing world, especially in Africa, derive more than 90 per cent of their foreign exchange earnings from commodity export, a protective mechanism is needed to lessen adverse effects of the fall in commodity prices. Such a mechanism was available in the Lome Convention which was an agreement between the European Union (EU) and the African, Pacific and Caribbean (ACP) countries. The beneficial risk-protection mechanism in the Lome Convention has now been replaced by what the study described as “a rather vague undertaking to provide additional support in order to mitigate the adverse effects of any instability of export earnings, including those in the agricultural and mining sectors within the financial envelopes of support to long-term development.” “Hardship resulting from falling commodity prices”, according to the study, “should be, as far as possible, alleviated in a balanced way without farmers in developing countries paying the price.” The study examined the impact of falling commodity prices in countries of Sub-Saharan Africa, South Asia and the Caribbean and made recommendations on how the adverse effects could be alleviated. How is Ghana, a developing country, going to be affected? Ghana produces crude oil marginally and earns much of its foreign exchange from export of minerals, such as gold, diamond, bauxite and manganese, and agricultural produce, such as cocoa, timber and fruits. According to President John Dramani Mahama of Ghana, the country is expected to earn a little over one billion dollars from crude oil but half of that amount was lost because of the drastic drop in crude oil prices in 2014. Ghana, however, stands to gain from low crude oil prices because local production is not sufficient to meet demands at home. The country spends 100s of millions of dollars in foreign exchange to import crude oil. Gains from cheap crude oil import and import of cheap consumer and capital goods could make up for the loss in crude oil earnings. However, the year 2015 appears to be a difficult one for Ghana since it is likely that prices of gold and cocoa, Ghana’s main foreign exchange earners, could go down further and reduce the nation’s earnings from export of commodities. This calls for prudent financial management and financial discipline – not the International Monetary Fund type. Kenya has applied its own financial-discipline mechanism which I believe, when adopted, could help the Ghanaian economy in 2015 and 2016. Faced with an excessively high public wage bill, the Kenyan Government reduced the wage bill drastically last year by cutting the salaries of the president and his vice by 20 per cent. The salaries of ministers and deputy ministers went down by 10 per cent and those of heads of government departments and agencies slashed by 20 per cent. Kenyan Members of Parliament had a cut in their salaries by 40 per cent in 20l3. The Kenyan Government further reduced spending by cutting down on cosmetic and ostentatious expenditures, especially on foreign travels by the president, the vice president and ministers of state. (therson.cofie@yahoo.com)