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Higher fuel costs: What it means for you

BUSINESS
By Brian Okoth | April 14th 2021
Inflation is strongly experienced in developing economies when oil prices go up. [File, Standard]

Kenya’s fuel costs are expected to rise higher today (Wednesday, April 14), when the Energy and Petroleum Regulatory Authority (EPRA) will review energy prices for the April-May period.

The high fuel costs would be occasioned by the increase in crude oil prices.

EPRA, in estimates early this week, suggested the price of petrol will rise by Sh4.30 to Sh127.11 per litre in Nairobi while diesel is expected to jump from Sh107.66 to Sh109.96.

Should the prices increase as suggested, then petrol costs will have risen by Sh20.12 a litre over the last three months, while diesel will go up by Sh13.56 over a similar period.

It is expected by midnight today that the barrel (159 liters of crude oil) will go for $65.41 (Sh6,985), up from $61.61 (Sh6,580), hence the estimated rise in fuel prices in Kenya.

The country’s fuel costs are often higher than the prices charged by her neighbours because Kenya has seven taxes charged on fuel compared to the other nations in the region. The taxes account for at least 48 per cent of the overall fuel price tag.

With indicators showing that there would be an upward review of fuel, what does that mean to the common mwananchi?

High oil prices, especially in developing nations, have inflationary impact on the economy.

With Kenya’s manufacturing industry heavily reliant on fuel for production, then the high prices would be pushed to the consumer.

The oil price’s rises over the past three months have largely coincided with market swings.

For instance, the price of cooking oil went up by several shillings, with some brands hiking the price by tens of shillings. Mechanical machines in these factories rely on fuel to operate. When the oil prices go up, then the production cost rises, consequently pushing up the prices set on consumer goods, such as food and oil products.

Inflation is strongly experienced in developing economies when oil prices go up, Reuters reports.

“The impact of commodity price rises is greatest in developing economies,” said the publication in a previous report.

“Commodity prices generally are a large part of the CPI (Consumer Price Index) basket in emerging markets,” Richard Batty of Standard Life Investments told Reuters.

The high fuel costs, however, do not have major inflationary impact on developed countries’ economies.

“Developed economy wage rates are a much more important driver of inflation and inflation expectations than commodity prices as they exert a higher influence on the CPI basket, than say oil or food prices,” said Batty.

One reason, he said, was that oil intensity in an economy like Britain or the United States was around one third of what it was 25 years ago.

Economic models suggest that for each sustained $10 (Sh1,000) rise in the price of oil, Gross Domestic Product will contract by around 0.25 percent in developed economies.

Consumers can still feel very sensitive to higher oil prices, especially in the United States, where they feed straight through to pump prices. In contrast, the impact for British drivers is masked by high taxes.

For those who take the long view, commodities will always be an inflation hedge and a portfolio diversifier.

In Kenya, the higher fuel costs are also likely to push up transport costs as sector operators would seek to recoup the extra money surrendered to the State at fuel pumps.

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