Brace for fuel price spike as crude oil hits four-year high

Trucks on a queue at the loading area of the Kenya Pipeline Company, Eldoret Depot. [File, Standard]

Kenyans are staring at yet another hike in retail prices of fuel as the cost of oil in the global markets hits a four-year high.

This might mean another round of price increases for various basic household items and electricity charges as manufacturers and traders pass on the high cost of doing to consumers.

This is as the eight per cent Value Added Tax (VAT) on petroleum products continues to hit homes, with different producers of basic items adjusting prices on their goods to factor in the impact of the additional levy.

A barrel of Brent crude oil was Friday going for Sh8,400, the highest that it has reached since November 2014. There are projections that this will reach Sh10,000 before the end of this year.

The rally has been driven by various factors including increased demand as well as geopolitical factors such as continued sanctions by the US on Iran.

Plans to increase production by major oil producers such as Russia and Saudi Arabia appear to slow the rally, which has seen prices this year alone go up by more than 25 per cent.

A Reuters report last week noted that “crude oil prices could rise to Sh9,000 per barrel by Christmas and to Sh10,000 by the New Year”.

“Higher oil prices would hurt household incomes and consumer spending…. Energy prices often carry a heavyweight in consumer price gauges, prompting policymakers… to focus simultaneously on core indexes that remove volatile energy costs,” notes a Bloomberg report.

“But a substantial run-up in oil prices could provide a more durable uptick for overall inflation if the costs filter through to transportation and utilities.”

Kenyans are already feeling the impact of high fuel prices after recent adjustments following the imposition of VAT on petroleum products.

The Government imposed an eight per cent VAT on all petroleum products in September, which although lower than the 16 per cent rate that had come into effect early September has had pushed up transportation costs.

A litre of petrol in Nairobi went up to Sh116 per litre, an incremental rise from Sh99 in September last year.

In August, before the inclusion VAT, a litre was on average going for Sh113 before shooting up to Sh128.7 per litre on the imposition of the 16 per cent VAT. It later dropped when the VAT rate was reduced to eight per cent by the Finance Act 2018.

According to the Kenya National Bureau of Statistics (KNBS), the fares by public service vehicles plying long routes have gone up 19.2 per cent by end of September compared to prices over a similar period last year and 6.7 per cent when compared to fares in August this year.

The statistics body noted that the hike in fuel prices has resulted in higher costs as transporters increase charges for moving people and goods across the country.

Further hikes in the cost of transportation and other basic items should be expected should global oil prices stick to the predicted pattern.

“The transport index increased by 7.99 per cent (in September) compared to the previous month and 17.29 per cent compared to the same month (September) in 2017,” said KNBS. “This was mainly on account of increase in pump prices of petrol and diesel which triggered an increase in prices of other transport components.” Hard-hit is households that use kerosene for cooking and lighting. The cost of the fuel has more than doubled since early 2016 when it retailed for Sh47 per litre to the current levels of Sh109 per litre.

Retail price

The rise is attributed to the fight against oil adulteration, with the Government increasing taxes levied on the fuel with a view of matching the retail price with that of diesel, making it unattractive to lace other fuels with kerosene to push up volumes.

Treasury increased excise duty on kerosene in July this year to Sh10.31, from an earlier Sh7.21 per litre. It further introduced the anti-adulteration levy of Sh18 per litre, which effectively brought the retail price of kerosene to the same level as that of diesel.

At Sh117, the average cost of a litre of petrol is comparable to prices in November 2014, when petrol retailed at Sh124, a historical high that had been driven by high cost of oil in the world market.

A barrel of Brent crude oil had in 2014 reached Sh12,300.

Another surge had been experienced six years earlier and reached Sh13,700 per barrel in June 2008 while local retail prices reached Sh103 per litre.