Chirchir warns fuel prices could hit Sh300

A frustrated Kenyan reacts to the high cost of living that has hit many households. [Getty Images]

Kenyans have been asked to brace for a possible record increase in fuel prices due to the current Israeli-Palestine conflict exacerbating the already tightened global oil markets. 

This is despite the Central Bank of Kenya (CBK) data pointing to a decline in international prices of crude oil.

The CBK Weekly Bulletin dated November 3, 2023, showed that international oil prices declined during the week ending November 2, due to the dissipating impact of the war between Israel and Palestine.

“Murban oil price declined to $87.24 (Sh13,086) per barrel on November 2 from $90.23 (Sh13,500) per barrel on October 26,” noted the CBK bulletin.

Energy Cabinet Secretary Davis Chirchir said yesterday the Middle East conflict is likely to spark a fresh rally in global fuel prices over the next few months, dimming Kenyans’ hope of lower prices at the pump in the near term. 

Mr Chirchir informed the National Dialogue Committee (NDC) that the international fuel prices might surge to $150 (Sh22,500) per barrel due to the Israel-Hamas war. “Because of the Israel-Hamas war, the international prices (of fuel) could go up to $150,” Energy CS told the NDC. 

Petroleum products

Yesterday, a spot check by The Standard showed the price of Saudi Arabia’s Murban crude oil, which constitutes a significant portion of Kenya’s imported refined petroleum products, was at $87.23 (Sh13,180) per barrel. 

Analysts say the risk of higher global oil prices lies in the possibility of involving significant Middle East oil producers and in a much wider conflict causing disruptions in the flow, thus posing significant upward risks to the price.  

Currently, there is no evidence of such escalation. This explains why the price of oil remains close to its pre-Hamas attack level, add experts. 

Mr Chirchir fears however echo similar concerns by the World Bank. 

The World Bank recently warned the conflict in the Middle East could cause the price of oil to sail past $150 per barrel — nearly double today’s price — and if sustained would threaten global food security, amid fears that the Israel-Hamas war may expand to other countries in the crude-rich region. 

In its recent latest Commodities Market Outlook, the Washington-based multilateral lender had said “a large disruption” compared to the 1973 Arab oil boycott would create supply shortages that would cause the price of oil to rise to between $140 (Sh21,000) and $157 (Sh23,550) a barrel, possibly marking a new record.  

The previous record — unadjusted for inflation — was $147 (Sh22,050) a barrel in 2008 during the global financial crisis. The World Bank warned that even a “small disruption” could see prices back at $100 (Sh150,000) a barrel. “The outlook for commodity prices would darken quickly if the conflict were to escalate,” explained the World Bank. 

“The effects would depend on the degree of disruption to oil supplies,” states the report. In a “small disruption” scenario, the global oil supply would be reduced by 500,000 to two million barrels per day—roughly equivalent to the reduction seen during the Libyan civil war in 2011. Under this scenario, the oil price would initially increase between three per cent and 13 per cent relative to the average for the current quarter—to a range of $93 (Sh13,950) to $102 (Sh15,300) a barrel,” explains the report.”

According to the World Bank, a “medium disruption” scenario that is equivalent to the Iraq war in 2003 could see the global oil supply cut by three million to five million barrels per day. This would drive oil prices up by 21 per cent to 35 per cent initially—to between $109 and $121 a barrel.

Murban - which is preferred by Kenya - is a flagship grade produced in Abu Dhabi in the United Arab Emirates and is also typically consumed in Asian markets, such as China, India and Japan. Murban differs physically from Brent, WTI or other oil produced elsewhere in the world.

Record-breaking fuel prices have already adversely affected the living standards of millions of Kenyans. Super petrol is retailing at Sh217.36 per litre in Nairobi while diesel is retailing at Sh205.47 per litre. Kerosene is selling at Sh205.06 per litre. 

Despite the implementation of the fuel stabilisation mechanism by the government, aimed at protecting consumers from rising prices, and the government’s efforts to reduce forex demand through an oil deal, pump prices have still increased.  

Mr Chirchir said the government has renegotiated certain aspects of the Gulf deal, such as freight and premium costs, through a government-to-government (G-to-G) arrangement. 

“The G-to-G arrangement has reduced the monthly demand for US dollars and hence alleviated the depreciation of the shilling,” he said. 

Sustained high fuel prices have been having a knock-on effect on the cost of living and doing business in the country, with the price of goods, household energy bills, and transport. 

This has posed an economic and social headache for President William Ruto at a time when hard-pressed Kenyans want his administration to address the cost of living. Fuel costs have a direct bearing on inflation.

High diesel prices have raised the cost of transport, energy, mechanised farming, and industrial production. 

Producers of manufactured goods and energy factor in the higher cost of power and pass it to the consumer. 

The overall change in the global oil price as well as the weakening of the Shilling against the US dollar is expected to be felt strongest on the landed cost of fuel; the biggest cost component of the final price that motorists pay at the pump. 

It is now feared that rising fuel prices could dampen economic growth prospects as firms shelve expansion plans, including plans to hire.