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Fuel: Why retail fuel prices will stay high even as crude oil costs drop

A pump attendant at empty Total Petrol (Gas) Station along Kimathi Street, Nairobi.  [Elvis Ogina, Standard]

This time last year, Kenyans were grumbling about the high cost of fuel.

At Sh115 per litre of super petrol, the situation was so dire that the matter ended up being investigated by Parliament.

It was a charged show when the Committee on Finance and National Planning grilled senior officials from the National Treasury, Petroleum ministry and other State agencies.

In a subsequent report, the committee then chaired by Homa Bay Woman Representative Gladys Wanga recommended a raft of measures including reduction in taxes and levies but it never made it anywhere, making the whole inquiry appear like theatrics.

Looking at the prices then, what was causing alarm might seem like child’s play. Motorists and industrialists could see that period as the better days that might never come back.

At Sh115 a litre for petrol and Sh102 for diesel, the prices then would appear a like a bargain compared to the current Sh159.12 and Sh140 for the two fuels respectively.

What is of more concern is that the pump prices at the moment are not even the actual prices, with consumers benefiting from heavy subsidies.

Without government support, motorists would be forking out Sh214 per litre of petrol and Sh206.17 for diesel.

Analysts warn that the good old days where prices floated around Sh100 per litre may not come back anytime soon and, if anything, Kenyans should brace themselves for tough times.

The government is set to start withdrawing its subsidy and, worse, factors such as a weak Kenya shilling will only aggravate the situation.

Even with crude oil prices coming down due to declining demand as developed markets stare at recessions, local pump prices will remain high.

Murban crude oil traded at $100 (Sh12,000) per barrel on Friday and has in the course of August traded at a low of $92 (Sh11,040) a barrel from highs of $122 (Sh14,640 at today’s exchange rate) per barrel in July.

Mentoria Economics Chief Economist Ken Gichinga said that while the lower crude oil prices should with time reflect on local retail prices, this is unlikely to happen in the coming months.

He said among the factors at play that could keep prices higher include the shilling’s weak position to the US dollar. The local currency has over the months weakened to trade at Sh120 to the dollar from Sh108 on average last year July.

The government is also set to withdraw the fuel subsidy that has since April 2021 cushioned Kenyans from high fuel prices.

“If you look at it from a global perspective, crude oil prices have gone below $100 per barrel in the recent past,” Mr Gichinga told Financial Standard.

“There are fears that some of the big economies such as the US might go into recession. When the such markets slow down, oil prices will come down and we should in turn expect a reprieve.”

He said there is usually a lag before the benefits of lower crude oil prices are experienced locally.

“The impact of low crude oil price today might only reflect around October but it is also the month when the government is set to start reducing the subsidy on petroleum products.

“The two factors will clash in October and the lower landing costs might be offset by the government’s withdrawal of petroleum subsidies.”

Withdraw subsidy

The government expects to withdraw the subsidy over time, with motorists eventually expected to shoulder the entire burden of high fuel charges.

The subsidy has cushioned Kenyans from high pump prices since April 2021 with Treasury saying it had spent Sh101.85 billion as at the July-August pricing cycle.

This amount substantially went up over the August-September cycle, when the government shouldered the biggest burden since it started the programme and is estimated to have subsidised fuel to the tune of Sh26 billion over the month alone.

The government has over time argued that the subsidy is not sustainable. It uses funds from the Petroleum Development Levy (PDL) where motorists pay Sh5.40 per litre of diesel and petrol. 

According to Treasury, collections through the levy stood at Sh26 billion over the year to June 2021. This is against the annual spending of over Sh100 billion, making the subsidy unsustainable.

Over the August-September cycle, the government is paying Sh74 as a subsidy for a litre of kerosene, Sh54.91 per litre of petrol and Sh66.17 for diesel.

In scrapping the subsidy, the government is also yielding to demands by the International Monetary Fund (IMF), which has in the past said lowering the cost of certain products offers benefits to few Kenyans and the government should instead focus on areas that benefit the masses.

IMF, however, said the vulnerable segments of the society might continue enjoying some level of subsidy.

This could mean that Treasury might to some extent continue subsidising kerosene, which is largely used by the poor for lighting and cooking, and possibly diesel that is is heavily used in production processes as well as transport industry.

“The Kenyan government is in the process of reviewing the country’s fuel pricing formula…the review should assess the impact on the vulnerable for whom the mission advised extending a more targeted support programme,” said IMF in a recent report. Mr Gichinga also noted that the weakening of the shilling against the US dollar also spells doom for the country as it meant spending more money for the same quantities of petroleum products.

“The shilling also continues to depreciate against the US dollar and this brings about imported inflation. It means that while the dollar price of petroleum products might have come down, we are using more of the local currency to buy the fuel and in turn keeping the local prices up,” he said.

The benefits of lower global oil prices might not be felt in Kenya.

This could be confusing to the person on the street where they hear that crude oil prices have come down but the retail cost is high because of the weak shilling and the government reducing or withdrawing the subsidy altogether.

“When fuel prices go up, the cost of everything else goes up as is already being experienced,” Mr Gichinga said.

“If the trend continues, we might see a second round effect which will be people, especially in the public service, agitate for higher wages to cushion them from the high cost of living.”

Computation of prices

A senior official with a major oil marketing company offered some insights as to why local pump prices might not immediately go down following the recent drop in cost of crude oil.

“The price of fuel is based on the three-month average price of crude oil and that is why pump prices might not respond to current price of crude oil,” he said.

“Again, when prices are low, we might not be importing.”

He said that while crude oil prices are an indicator of the direction that local pump prices should take, there are other factors that contribute to computing retail prices that might see them differ from crude oil prices.

These include refining costs that go up and down depending on seasonal global demand of petroleum products and also shipping charges that have gone up as markets recover from the effects of Covid-19 that depressed demand.

“The price of refined petroleum does also not always follow that of crude. It will always be slightly different,” the official said.

“This is because there will be the cost of refining, which is also determined by such factors as timing during the year.

In summer, for instance, there is huge demand for fuel as people in Europe and North America travel more, and with it a lot of consumption of petrol, diesel and jet fuel. During this time, the refineries operate at full capacity and hence the refining margins are high.”

“When these markets are going through winter, the opposite is the case; there is less demand for fuel as people mostly stay indoors and instead use natural gas for heating.”

This year might however be different owing to the acrimony between Russia and Europe and there might be increased use of fuel oil for heating, he said.

The refinery, shipping and other costs incurred before petroleum products get to Mombasa have generally gone up and resulted in the landed cost more than doubling over the last year.

The landed cost is the price of the product when it gets to the port before taxes, oil marketers’ margins and other costs are loaded.

It stood at Sh129.65 per litre of petrol in the August-September pricing cycle compared to Sh60.46 per litre of petrol in the same period last year.