THE OIL PRICE SLUMP, WILL COPPER FOLLOW?

The declining price of oil has led the Energy Regulation Board to reduce the prices of petrol, diesel and kerosene, albeit marginally. While the price reductions are welcome here, it is wreaking havoc on oil-exporting countries such as Nigeria, Russia, Iran and Venezuela.

Nigeria's finance minister presented a 2015 budget of $23 billion to parliament on Wednesday, 17th December 2014, slashed by nearly $3 billion from the original $26 billion to accommodate slumping oil prices. Growth projections for 2015 have been revised from 6.35 percent to 5.5 percent. Nigeria is Africa's largest economy and oil producer. Oil finances 75 percent of Government's revenue.

Tumbling oil prices threaten Russia's economy since sales of oil and gas are Russia's chief source of export revenue, accounting for about 45 percent of the government budget. The ruble, Russia's currency, is collapsing. This has led to a rise in inflation and an increase in interest rates to stop people from selling off the ruble. But the ruble kept declining anyway and the rate hikes are likely to slow the country's economy down even further.

In Venezuela, oil accounts for 96 percent of export revenue. Following the drop in the price of oil, the Venezuelan government has seen bond prices plunge, loan costs rise and market speculation of default emerge this year amid an economic slowdown.

Just six months ago, the price of oil was around $115 per barrel. Fast-forward to mid-December and the price is just under $60 per barrel. Just what exactly is going on with the price of oil? For much of the past decade, oil prices were high because of soaring oil consumption in countries like China and conflicts in key oil nations like Libya. Oil production couldn't keep up with demand, so prices spiked.

But beneath the surface, many of those dynamics were rapidly shifting. High prices spurred companies in the US and Canada to start drilling for new, hardto- extract crude in North Dakota's shale formations and Alberta's oil sands. The US alone has added 4 million new barrels of crude oil per day to the global. market since 2008. Global crude production is about 75 million barrels per day, so the US addition is significant. At the same time, demand for oil in places like Germany, China and the US began to slow down, thanks to weakening economies and new efficiency measures. On top of that, the conflict in Libya was slowly easing. By late 2014, world oil supply was on track to rise much higher than actual demand.

Being a non-oil producing country, a reduction in the price of crude is welcome for Zambia. However, at KSJ we see that Nigeria, Russia and Venezuela have



which accounts for about two-thirds of Zambia's exports. The chart shows the historical price graph way of repeating itself. A plunge in oil prices may also spell doom for other commodities such as copper, one thing in common with Zambia – the dependence on one commodity for export revenues. History has a of Copper from the London Metal Exchange (LME) since the beginning of the year. It shows that the price of Copper dropped to just above US$6, 400/tonne in the first quarter of the year before it rose again to levels above US$7,000/tonne during the third quarter of 2014. Since the beginning of December, the price has gone below the first quarter levels to around

US6,300/tonne. We at KSJ have not heard anyone in the mainstream media raise the alarm. If this price drop continues into 2015, Government's revenue performance is likely to be affected, even if the mining tax regime has been revised and made mineral royalties a final tax.

We have sung the diversification song for far too long without any significant increases in non-traditional exports (NTEs). NTEs have been growing over the years, albeit at a slow pace. It is time we actually reduced our dependence on copper because China, one of our chief export destinations, has begun to sneeze (the news out of China this week is that manufacturing has slowed down), and Zambia will definitely catch the cold!