Tough year for Kenyans with sharp rise in global oil prices

Kenyan households should brace for a tough year with a sharp price increase in the cost of basic products following a sustained climb on the price of crude oil that was most remarkable yesterday.

Any rise on the price of petroleum has a huge spillover effect to many sectors including transportation and manufacturing, and the broader economy through the amount spent to pay for fuel imports. Crude oil prices crossed the Sh6,000 ($58) mark a barrel yesterday to shatter an 18-month record, with further increases expected.

Major oil producers under the umbrella lobby called OPEC have a working production agreement that took effect on January 1 seeking to cut output to support higher prices. Traders forecast that the production pact will hold, to help in draining the glut that at one time pushed the prices to below $30 per barrel in January 2016 – to hurt production prospects in countries like Kenya.

A global oversupply kept prices low throughout last year where the refined products were at the cheapest levels since the financial crisis of late 2008 and early 2009, granting a huge relief to millions of Kenyans in the process.

The full impact of the expensive crude oil would start hitting home next month when the current prices on the international markets will be factored in the prices of kerosene, petrol and diesel. Already, the price of diesel rose by more than Sh5 per litre in the December review by the Energy Regulatory Commission – which projected that the all products will get costlier in the subsequent reviews.

thermal electricity

In the pricing formula applied in arriving at the pump prices, the cost of the individual products from the source make up about a half of the published prices with taxes making up most of the rest. It is also projected that there would be higher reliance on thermal electricity generation following the fall in the water level in dams. A bigger mix of thermal generation in the national grid means consumers will pay more for electricity for compensate for energy requirement that is fulfilled by diesel power generators.

A significantly weaker Kenyan currency would exacerbate the price increase for the products considering that they are paid for using the US dollar. Lower crude oil prices cushioned the economy from external shocks through a smaller import bill.

Kenya imported Sh92.7 billion worth of fuel and lubricants by June 2016 down from Sh140 billion the same period in the preceding year.