The silent effect of geopolitics and its impact on fuel prices (I)

By Malaika Dela BAKAR

Geopolitics refers to the study of the effects of geography (both human and physical) on international politics and international relations.

The term embodies the concept that strategic geographic and historical factors influence political decisions and relations between states on a global scale.

Geopolitics often takes into account factors such as economic resources, territorial boundaries, demographic pressures, and cultural ties when analyzing the global political landscape. Geopolitics impacts every sphere of our lives and plays an important role in our daily lives.

In this article, I seek to analyse the impact of global geopolitical events on the price of refined petroleum products in Ghana and what this means for the future given the continued eruption of emerging events globally. Going back a few years in our recent history, with the period from 2018 onwards being a good point of reference, it is worth noting that several significant geopolitical events have shaped and continue to shape the global landscape.

These events include the US-China trade war, which saw the US impose tariffs on billions of dollars of Chinese goods, leading to retaliation from China. While this was essentially a war between two countries, the implications for global trade and the economy have been significant. Other events such as Brexit, the COVID-19 pandemic, the war between Russia and Ukraine, COP26, which was a watershed moment in climate change initiatives and agreements, which saw several countries globally commit to doing their part to reduce the impact of climate change, and the recent escalation of tensions between Israel and Gaza, have all had a significant impact on global economies.

The war between Russia and Ukraine, which began in February 2022, has had a profound impact on global energy markets, including diesel prices in Europe, with a knock-on effect on markets like ours. As one of the world’s largest producers and exporters of crude oil and refined products, the reduction in Russia’s supply to Europe due to the conflict and the sanctions that followed created significant disruptions. Following Russia’s invasion of Ukraine, the European Union and other Western countries imposed strict sanctions on Russian energy exports, which included diesel and other crude products.

In retaliation, Russia cut its deliveries to Europe, which created a significant supply deficit, forcing European countries to source from other markets, which increased pressure on oil and pushed up prices. The recent attacks on Russian refineries by Ukraine have also had a significant impact on oil prices.

The outbreak of war again led to an almost immediate spike in diesel prices across Europe. Throughout 2022 and into 2023, and even now, diesel prices remain volatile. The uncertainty surrounding the duration of the conflict has kept prices high and unpredictable. All of this has led to a sort of rebalancing of the market, with European countries increasing their diesel imports from the Middle East, Asia, and even the United States to address the deficit. It is important to note, however, that the logistics of securing and transporting these alternative supplies have increased costs, which has kept diesel prices high. It is safe to say that this has also influenced the price of the product locally.

The topic of oil and gas geopolitics cannot be addressed without including the impact of OPEC (Organization of the Petroleum Exporting Countries) and its allies (OPEC+) on this commodity. This group of member states plays a central role in shaping the global oil market, significantly influencing fuel prices worldwide and having far-reaching consequences on pump prices in countries such as Ghana.

Key examples include the 2020 price war between Saudi Arabia and Russia, two key members of OPEC+, which led to a significant drop in oil prices due to Russia’s refusal to cut production in response to falling demand due to COVID-19, angering Saudi Arabia which responded by flooding the market, causing prices to plummet.

This caused the price of Brent crude oil to fall to below $20 per barrel in April 2020. The negative impact of the price decline led OPEC and its allies to agree to a production cut of 9.7 million barrels per day to prevent oil prices from collapsing.

In 2021, following the ongoing global recovery from COVID-19, which saw oil rebound and demand surge, OPEC and OPEC+ faced pressure from the West to increase production to meet demand and stabilize prices. This led them to agree to a gradual increase in production. A significant moment came in July 2021, when OPEC+ agreed to increase production by 400,000 barrels per day each month starting in August 2021. This move was intended to help balance the market and prices, amid reopening economies and travel demand, which is fueling higher energy consumption.

As a net importer of refined petroleum products, it is safe to say that Ghana has over the years been affected by the effects of some of the events listed above.

Fig 1: Important geopolitical events from 2018 to date

When we relate this to the price of refined petroleum products at the pump, we discover interesting details that most citizens may not be aware of. For every Ghanaian who uses petroleum products in one way or another, many of us have never really taken the time to understand where the products come from, how they arrive in the country and finally, whether the price offered at the pump is fair or has any indication of the developments that continue to unfold on the world stage. Despite our current oil and gas production fields, we remain heavily dependent on imported petroleum products to sustain our economy. One of the main reasons for this is the fact that Ghana has about 18% of the country’s domestically produced oil. This is insufficient to meet Ghana’s consumption of petroleum products, which is over 100,000 barrels per day. Ghana’s current production averages about 130,000 barrels per day, across the three production fields. This, combined with the lack of efficient refining capacity, has seen GNPC export oil for direct value for money. Most of these products come through trade routes that very few of us know about.

The major routes for importing refined petroleum products into Ghana mainly involve maritime transport, given its geographical location along the Gulf of Guinea, with some sources of imports being Rotterdam, Russia, the United States, as well as the United Arab Emirates region. The ports of Tema and Takoradi play a pivotal role in these imports, with Tema having become a major oil import and handling facility, which includes storage facilities, a Conventional Buoy Mooring (CBM) system (an offshore facility for offloading petroleum products), an oil jetty, etc., and is a key distribution point for refined products in Ghana and beyond in parts of the West African sub-region. The major international trading companies that supply to Ghana are BP, Vitol, Glencore to name a few. Other names include Sibet, Nest Wise and Edurc, which are emerging names in the import market.

The next time you drive along Sakumono Beach at night, take a look at the horizon and I’m sure you’ll notice many twinkling lights not far away. These lights, a pretty sight to see, belong to the ships that bring products into the country from different places around the world.

Malaika is Senior Vice President, Energy & Infrastructure, Oil & Gas, Corporate & Investment Banking, Stanbic Bank Ghana