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Sunday, 24 August 2008

Oil prices - how does Zambia compare?

Portfolio has an interesting interactive online map with gas prices around the world. Zambia has the highest gas prices in Africa. (Thanks to Random for the tip!).

25 comments:

  1. Makes one wonder whether Zambia might be better off just importing refined fuels instead using its Indeni refinery. Is the problem the small economies of scale at Indeni?

    Also jet fuel price is higher discouraging tourist trade and horticulture exports:

    http://english.peopledaily.com.cn/200507/29/eng20050729_198933.html

    Refined fuels are part of business cost inputs, reducing these costs will make more money available to expand business. Also Zambia should look more at ethanol projects for both fuel and as an electricity source like Mozambique:

    http://allafrica.com/stories/200807160900.html

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  2. thanks... wanted to look for something like this for some time now. Prices in Lusaka are around 3USD/L.

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  3. Mosi,

    So its even higher than the price being quoted for June 2008!

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  4. Kafue001,

    Its definitely due to inefficiency of Indeni.

    Poor management if you like.

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  5. I was wondering about the reasons.

    It cannot just be unefficiency of the refinery. After all, most African countries are in the same situation. May be the absence of fuel subsidies, or additionnal taxes or transport costs are playing a part too..

    It deserves some digging.

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  6. They mixed up Ivory Coast and DRC and they're using old flags for Rwanda and South Africa.

    Someone is doing a bad bad job.

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  7. I think it has to do with the size of the refinery (I have a faint recollection from the past that it is a 20,000 bpd refinery). Refineries in bigger markets such as South Africa would probably process hundreds of thousands of barrels per day, producing much cheaper fuel. Also Indeni is an old refinery with many repairs and upgrades, government might be trying to recoup those upgrade and repair costs by charging higher prices. Zambia might just be better of buying refined fuels from the cheapest supplier.

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  8. But look at the other countries.. DRC, Ethiopia (!!!), Ivory Coast, Mali...

    It can't just be the refinery.

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  9. Check this out:

    http://www.mbendi.co.za/indy/oilg/ogrf/af/p0005.htm

    "Many African refineries have been forced to close a result of low worldwide refining margins, small local markets, high operating cost (due to small size), and poor yields."

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  10. Now I have time to answer this. Zambia's costs are high for several reasons.

    1. High transport costs...Random will remember our discussion regarding the OECD report here

    2. Indeni is old..very old....and therefore largely inefficient...infact so old that government is busy looking for another partner see here...incidentally that article also hints at cutting down on transport costs by relying on oil from Angola, but to do that Zambian needs to make the $150m additional investment to be able to handle Angola's crude...

    3. Poor alternatives to Indeni...by that I mean very little oil comes through other channels. Perhaps with more stable neighbours and more government encourage of private suppliers this might change?

    The article above suggests that Indeni can produce about $20,000 barrels a day...would be interesting to know what the level of consumption is at peak times...

    4. The size of Indeni as Kafue001 says, is partly an issue, but also there are difficulties with the pipeline, which I gather is fraught with difficulties and can only take a certain quantity....someone perhaps can expand on this..lol!

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  11. Maybe the Central African countries can get together and form a private-public consortium a la SADC and build a new pipeline and huge refinery which can produce fuel at low per unit costs. Zambia would be an ideal location for such a refinery due to its central location for distribution of the refined products.

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  12. The article above suggests that Indeni can produce about $20,000 barrels a day...would be interesting to know what the level of consumption is at peak times...

    CIA World factbook: Oil - consumption: 14,000 bbl/day (2005 est.)

    2. Indeni is old..very old....and therefore largely inefficient...infact so old that government is busy looking for another partner

    1973 ? By African standards, it's not that old.

    But yeah, now that think about it, Congo-Brazzaville, which has a refinery as old and as small as Zambia probably gets cheaper fuel because it's an oil producer, it has a fuel subsidy and it has cheap transport costs.

    I wonder if the ones who closed down or never built their refineries aren't better off.

    Maybe the Central African countries can get together and form a private-public consortium a la SADC and build a new pipeline and huge refinery which can produce fuel at low per unit costs. Zambia would be an ideal location for such a refinery due to its central location for distribution of the refined products.

    Actually it won't be the ideal location. Some coastal place would work better, unless someone is ready to spend billions on a pipeline..

    But yeah, some consolidation would be a great idea. Especially if we end up with more than one big refinery.

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  13. Kafue001,

    Maybe the Central African countries can get together and form a private-public consortium a la SADC and build a new pipeline and huge refinery which can produce fuel at low per unit costs. Zambia would be an ideal location for such a refinery due to its central location for distribution of the refined products.

    I have always said that after developing agriculture, mining and manufacturing, Zambia's future will be in logistics, because of it's central location between the east coast, west coast, Southern and Central/West Africa.

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  14. It seems a bit Odd that Zambia has the highest prices in Africa, you would think that people would be up in arms.... but they are quite... I think there is more to this than meets the eye.

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  15. Anonymous,

    I think several factors are playing into this:

    1) Zambia is landlocked.

    Everything that is not manufactured locally (including fuel) has to be imported.

    2) 17 years of neoliberalsm

    Which led to very low investment in infrastructure. No taxing of the mining companies to pay for infrastructure played a big role. So did depending (waiting for) a non-existant private sector to do what the government used to do.

    3) A very small middle class.

    This both suppresses effective demand as well as supply of goods.

    4) Limited development of agriculture

    The only truly developed part of agriculture seems to be commercial agriculture of export crops. There is a lack of investment in storage depots for staple crops, underfunding of the FRA.

    5) Lack of supervision and monitoring

    This applies to all ministries, and the FRA too. Hundreds of millions of US dollars are lost through this every year, which would also add to inflation in two ways - it is money issued by the governemnt that is not matched by an equal provision of goods and services, and it makes less food available which would push down the price of food. The same for the construction sector.

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  16. The fact of the matter is that it is not only fuel which is expensive. Compare costs of various items ranging between goods and services with those in neighbouring countries.

    Try comparing the cost of electricity between Zambia and Botswana for instance.

    Is this not to a large extent the result of the kwacha exchange rate incongruity?

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  17. The monetary policies of Government appear by all fairness unlinked to the realities of doing business in Zambia.

    I find it odd that even as a layman that the cost of fuel just in neighbouring Botswana is less than half of that of Zambia. Needless to state that Botswana does not have a refinery.

    Just to paint the picture clearer, the cost of fuel in Botswana now is about P8.40 whilst in Zambia it is about K10 000.00 or P16.00 (Botswana Pula).

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  18. I don't have a side by side comparison of the breakdown of the cost of fuel in Zambia versus Botswana.

    However, I do know that Botswana exploits it's diamonds in a much more government friendly way than Zambia exploits it's natural resources. The giveaway of the mines in 1999 contrasts sharply with Botswana's government-private partnership in the form of the national diamond monopoly of DEBSWANA (the De Beers Botswana joint venture).

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  19. Anonymous,

    Might help to write another ID, for ease of identification e.g. what Kafue001 does.

    It makes it difficult to know whether the last two comments are from the same person.

    As the comments seem contradictory, I'll assume its different people :)

    "The fact of the matter is that it is not only fuel which is expensive. Compare costs of various items ranging between goods and services with those in neighbouring countries.

    Try comparing the cost of electricity between Zambia and Botswana for instance.

    Is this not to a large extent the result of the kwacha exchange rate incongruity?"


    Its unclear what you mean here by "exchange rate incongruity". I fail to see why the exchange rate should be an issue when everything is quoted in dollar prices. I mean these are costs as they are across board.

    Also I think the fact that you see other things more expensive simply illustrates Zambia's landlocked problems and the high cost of transport to get things.

    This is well documented.

    "The monetary policies of Government appear by all fairness unlinked to the realities of doing business in Zambia.

    I find it odd that even as a layman that the cost of fuel just in neighbouring Botswana is less than half of that of Zambia. Needless to state that Botswana does not have a refinery.

    Just to paint the picture clearer, the cost of fuel in Botswana now is about P8.40 whilst in Zambia it is about K10 000.00 or P16.00 (Botswana Pula)"


    Agreed. I do not think this is monetary policy issue. Its very much an efficiency and taxation problem as we have discussed above.

    In previous blog - I encourage you go to the bottom of the blog and search for "Jet Fuel". You'll see the many times this issue has come up. I have always noted that the tax structure is responsible for why jet fuel is higher in Zambia than the SADC region.

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  20. Mr K

    " The giveaway of the mines in 1999 contrasts sharply with Botswana's government-private partnership in the form of the national diamond monopoly of DEBSWANA (the De Beers Botswana joint venture)."

    That is like comparing apples with oranges. Diamonds are more valuable than copper especially in 1999 and thus the Botswana government had more leverage in determining the deal outcome. Secondly the copper mines were rundown after years of underinvestment and the new owners had to spend money rehabilitating them.

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  21. What happened was that the government was heavily pressured by the IMF, to the point that they made false representations about the future price of copper (Edith Nawakwi was assured that the price of copper would not rise 'in her lifetime').

    There should always have been a windfall tax included in the development agreements, but there wasn't.

    Secondly the copper mines were rundown after years of underinvestment and the new owners had to spend money rehabilitating them.

    They used profits from the mine to do that.

    Which literally any owner could have done.

    There are too many mines which became nearly immediately profitable. They have been exporting the wealth of the country ever since, without the country benefiting beyond low wage jobs. All that money should have been invested in infrastructure and other economic sectors.

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  22. Mr K,

    "They used profits from the mine to do that. " (mine rehabilitation)

    Anglo American would not have withdrawn from Zambia if they were able to rehabilitate the mines from profits:

    http://news.bbc.co.uk/2/hi/business/1787219.stm

    "Part of the problem for Anglo American was that low product prices left it unable to raise extra finance it needed for Konkola, having discovered the original money invested wasn't enough, analysts have said. Anglo American said the low price of copper on world markets left it with no choice but to quit Zambia."

    Investors make decisions on mining investments based on expected metal prices (had been trending lower since the mid-seventies), taxes, incentives and mining costs. To say the IMF was misrepresenting future copper prices is incorrect, they looked at price trends in the past and assumed it would be the same in the future (like any rational investor would in making a business decision).

    http://www.encyclopedia.com/doc/1P3-140659161.html

    I doubt if any investor would have invested in any of the mines being privatised if the the government had put in a windfall tax provision, that would have been too much of a disincentive for them to invest.

    Regarding your proposal to close down the mines and have the miners do farming, that would not have been politically acceptable because the miners have considerable political leverage. In addition, mining exports provide the majority of the foreign
    exchange, without which it would be difficult to import fuel and medicines, Zambia would have reverted to a Zimbabwe type situation.

    All of the above should still be considered today, because investors still use the same factors (expected prices, incentives, taxes, costs) when deciding whether to invest or expand their investments.

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  23. Kafue001,

    First of all, we should not be using Zimbabwe as a negative example in anything, until the full facts are known.

    There are massive sanctions against Zimbabwe

    (google:

    zimbabwe democracy economic
    recovery act 2001 govtrack

    )

    although the blackmail visited on both Zimbabwe and Zambia (1991, 1999) by the IMF and World Bank is of course comparable.

    In addition (see ZDERA above), the US State Department poured $26 million per year since 2002 into the opposition in Zimbabwe, for it to undermine the government and economy.

    So to compare the situation in Zimbabwe with the loss of foreign currency by closing loss making mines in Zambia in 1999 would be highly incorrect.

    I am not saying that all the mines should have been closed, just the loss making ones. In the end, the same was achieved by Anglo-American pulling out, which had the same effect as closing their mine.

    At no time was there a need to have a fire sale of the mines, under the guise of 'privatisation'.

    Because of privatisation, the state of Zambia has lost out on billions of dollars in revenues and profits.

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  24. Mr K,

    "There are massive sanctions against Zimbabwe"

    Until recently, the sanctions were against targeted individuals and preventing loans from western influenced financial institutions:

    http://allafrica.com/stories/200807221167.html

    The economic mismanagement leading to the economic collapse and drop in exports is what has led to the shortage of foreign currency in Zimbabwe.

    Mr K,
    "In the end, the same was achieved by Anglo-American pulling out, which had the same effect as closing their mine.
    At no time was there a need to have a fire sale of the mines, under the guise of 'privatisation'. "

    Konkola was not closed due to the far reaching effects it would have had on the Zambia economy, instead, the expansion plans were put on hold until an investor was found.

    http://www.miningreview.com/archive/034/30_1.htm

    Mr K

    "At no time was there a need to have a fire sale of the mines, under the guise of 'privatisation'."

    Others would differ that it was a fire sale considering the rehabilitation work needed and debts involved:

    http://query.nytimes.com/gst/fullpage.html?res=9B02EFD71738F933A25752C1A9669C8B63&sec=&spon=&pagewanted=1

    ReplyDelete

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