Shale oil to ease impact of major oil price spikes | Sunday Observer

Shale oil to ease impact of major oil price spikes

Although Sri Lanka should watch out for a dynamic change in its fuel import bill in 2018 with the rising trend in crude oil prices according to certain global experts, the potential increase in the supply of shale oil (also referred to as tight oil) could mitigate any major adverse impact from the rise in prices.

Recent data from the Central Bank shows that the benchmark price of Brent in the last two years has doubled from around US$ 32.23 per barrel in January 2016 to US$63.92 in December 2017. Consequently, Sri Lanka’s fuel import bill, during the first ten months of 2017 compared to the same period in 2016, witnessed a drastic increase by 40% from US$ 1.93 billion to US$ 2.69 billion.

“Rising oil prices is a key risk to look out for this year. If the rising trend persists, businesses should take in to account the country having a higher oil bill which can have an impact on the country’s Balance of Payments as well,” Chief Economist of the Ceylon Chamber of Commerce, Shiran Fernando told Business Observer.

However, he agreed with the view brought out by global experts on shale oil. The view is that when the price of oil touches around US$ 60 - 80 a barrel, the supply of shale oil, unconventional oil produced from oil shale rock fragments, becomes activated into the market mitigating further upward pressure on Brent prices.

On the other hand, experts believe that although US shale production is more responsive to an increase in oil price than to its decrease, the asymmetric short-run effects do not seem to be persistent in the long run.

According to the Central Bank, the price of Brent on Friday (January 12) as at 2.30 pm stood at US$ 69.14 per barrel while Singapore market prices of Petrol, Diesel and Kerosene per barrel were US$ 77.05, 79.63 and 80.69 respectively. During the first week of January 2018, both Brent and West Texas Intermediate (WTI) prices rose by US$ 1.3 and 1.7 per barrel, respectively.

“At the beginning of the week, WTI crude oil price rose due to strong demand while Brent price fell as the U.S. production is set to rise further. However, subsequently prices rose to their highest levels seen since late 2014 amid political tensions in Iran and due to the ongoing OPEC led production cuts. Price increases were further supported by a severe winter storm that disrupted services at refineries in the U.S. Atlantic coast,” the Bank noted.

Meanwhile, addressing a recent press conference Central Bank Governor, Dr. Indrajit Coomaraswamy said that while firmer oil prices will mean energy costs will increase, prices of other import commodities such as sugar, flour, milk foods etc will not be impacted as they are more linked to agricultural production rather than the business cycle.

“Unlike industrial raw materials like iron ore, steel, copper etc where prices are linked to the business cycle, our commodities tend to be linked to agricultural production and therefore this upturn in global prices is not directly linked to the prices of commodities we import,” he said.

The Central Bank stated that automatic pricing mechanisms for fuel and electricity are expected to be introduced in March and September 2018, respectively.

“This will go a long way towards reducing future financial losses of key State Owned Enterprises (SOEs) and avoid large ad hoc adjustments in retail prices.

Not only will this be supportive of the effective conduct of monetary policy, but it will also have a positive impact on the balance sheets of both the government and the state banks,” Central Bank Governor, Dr. Indrajit Coomaraswamy said unveiling the 2018 Road Map.