Record high fuel prices to worsen cost of living for Kenyans

A display of the current fuel prices at Rubis Petrol station along Koinange street, Nairobi on September 15, 2023. [Elvis Ogina, Standard]

Kenyans will have to dig deeper into their pockets to purchase basic commodities as inflation is tipped to edge up on Thursday's historic surge of fuel prices.

Families already hammered by a high cost of living face even more pain from the massive blow of soaring fuel prices to record highs from Thursday midnight.

Yesterday different industry players including transport operators, food producers, and farmers warned they will have no recourse but to raise the cost of their services and produce in response to the record fuel price hikes.

In its latest price review, Thursday night, the energy regulator raised fuel prices by Sh16.96 for Super Petrol, Sh21.32 for Diesel, and Sh33.13 for Kerosene for the September-November pricing cycle, explaining that global fuel prices had also recorded a similar surge.

This means the pump prices per litre will retail at Sh211.64 for Super Petrol, Sh201 for Diesel, and Sh202.13 for Kerosene in Nairobi, said the Energy and Petroleum Regulatory Authority (Epra) in a statement on Thursday night.

Analysts said yesterday the rise in prices could take a bite out of projected economic recovery, forcing lower consumption and industrial output, and even triggering political unrest.

The sustained high fuel prices are expected to have 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.

Fuel costs have a direct bearing on inflation, being one of the items in the basket of goods and services whose pricing is tracked to measure the cost of living. High diesel prices have raised the cost of transport, mechanised farming, and industrial production.

The economy also uses diesel for electricity generation, meaning that higher prices of fuel automatically result in higher fuel cost charges on power bills.

Producers of manufactured goods are also expected to factor in the higher cost of power in their factories and diesel for the transportation of goods, which are expected to be passed on to the consumer.

Food costs are already elevated due to supply constraints, with higher transport charges expected to be loaded onto the final price.

Matatu Owners Association (MOA) yesterday said its members would increase fares by about 20 per cent. Albert Karakacha chairman MOA said the cost of fuel has a direct impact on their business operations and that the matatu operators could not absorb such a huge hike and had to pass it to consumers.

Edwin Mukabana chairman of Federation of Public Transport Operators said that PSV operators had no option but to hike fares unless the government intervened.

"It is like we have been hit by a huge rock. With the latest hike, fuel is now going to constitute 50 per cent of our operating cost. This is just a month after another increase in fuel prices, which also had the impact of increasing our operating costs," he said.

"We will appeal to the government to cushion the sector from collapse, noting that hustlers have no ability to pay higher fares. Failure to which we will not have an option but to call all members to discuss the best way forward and most likely to increase fares by at least 30 per cent."

Mukabana added that the state has wrongly lumped PSVs with private motorists in its decision to remove fuel subsidies, noting that public transport is a productive sector that should get state support.

"Use of fuel by private motorists is a consumption activity but in public service, it is a production activity. It needs to be cushioned. It is not right that subsidising fuel is subsiding consumption," he said.

"Public transport service serves the socially excluded such as children, senior citizens, the disabled, and the urban and rural poor. It facilitates commercial activities for the hustlers and it is an essential service and therefore a public good like education and health, which should be funded from the exchequer but it is not."

He noted that in other markets, public transport is provided by the state but in Kenya, it is the private sector that offers the service with little government support.

He noted that the higher fuel cost would make worse the situation for the industry that is being suffocated by other challenges. These, he said, include high interest for loans that matatu operators have taken, with auctioneers calling on many players who are unable to keep up with repayments and higher cost of spare parts owing to the weak shilling.

Ken Gichinga chief economist at Mentoria Economics said the higher fuel cost could result in an economic slowdown with companies reducing consumption of diesel. This he noted could also lead to high unemployment.

"The almost immediate impact on higher fuel costs is reduced economic activity because fuel permeates across all sectors - food systems, our transport system, energy - things that we need to produce. It means production goes down, economic activity goes down and threats of unemployment become higher. When businesses produce less, naturally they start reducing the staff complement," he said.

He added that even with the expected rains that could help in production might be eroded by the higher fuel costs.

"Good rainfall leading to good harvest will moderate food prices but the cost of taking food from the farm gate to the market can quickly erode those gains," he said.

"On the one hand, you can have a bumper crop which can result in lower prices but the cost of taking the produce to the market can wipe out any gains that have been made on things like fertiliser subsidy and other efforts to increase production... they risk being undone by high fuel prices."

There are already indications that the high cost of petroleum products has been weighing heavily on consumers, who reduced their usage of super petrol over the first quarter of this year while consumption of diesel registered a marginal increase.

A July report by the Petroleum Institute of East Africa (PIEA) shows that consumption of super petrol dropped one per cent over the three months to March when compared to a similar period last year, which it attributed to the high cost of fuel in the country.

The lobby for oil marketing companies noted that there was a "drop in volumes of PMS (super petrol) by two per cent.... as high prices choked demand for super, diesel, and kerosene," said PIEA in the report.

Gichinga noted that in the absence of adequate funds from the Petroleum Development Levy Fund to stabilise retail prices as has been the case in the past, the government may have to consider reducing taxation to prevent the economy from grinding to a halt.

"A lower tax regime (on petroleum products) will greatly boost production," he said.

The move by Epra came at a time when the Kenya Kwanza administration was facing mounting pressure to address the high cost of living. The government has also recently increased taxes through the Finance Act 2023 but has also made proposals to increase

President William Ruto's government faces the uphill task of stabilising government finances and bringing the cost of living under control as unprecedented levels of inflation hurt consumers globally.

Petroleum prices currently vary across Kenya due to transport costs that reflect how far a location is from the Mombasa port where imported consignments land and are stored.

The latest figures point to tough times ahead even as millions of Kenyans have had to squeeze their household budgets to afford basic commodities that have become more expensive compared to last year.

Many households, especially in the low-income segment have been forced to reduce their shopping baskets. This will further push up the cost of living for many poor households that use kerosene for cooking and lighting in both urban and rural Kenya.

The government's withdrawal of subsidies was among the factors that resulted in the sharp increase in pump prices. Other factors that pushed up costs include higher landed costs due to the further weakening of the shilling.

The local currency has over the last year been on a free fall and recently traded at over Sh150 against the US dollar. EPRA used the rate of Sh148.98 to the US dollar, which it said was the average exchange rate in the month of August. This is in comparison to Sh123.88 to the US dollar in September last year.

The cost of crude oil, the other factor that heavily influences the direction that local retail prices for fuel will take, has declined in the last year and averaged $75.61 (Sh11,250) per barrel in August. This is in comparison to a high of $105.96 (Sh15,890) per barrel in September last year.

However, in determining the local retail prices, Epra uses the S&P Global Platts benchmark that tracks prices of refined petroleum products such as petrol and diesel.

This has been going up in recent months, with a metric tonne of super petrol rising to $947.67 (sh142,000) up from $785.96 (Sh117,900) in May. The cost of diesel and kerosene has also gone up in a similar trend.

An energy expert explained that the higher cost of refined petroleum products has been due to an increase in demand as Europe and North America approach when the need for heating goes up.

Other factors at play include the high temperatures experienced that resulted in the shutdown of some refineries in the US, pushing the country to increasingly rely on oil produced in other regions including the Middle East.

There have also been jitters as some of the major oil-producing countries in the world, including Saudi Arabia and Russia reduced production. was in addition another reduction in July by members of Organisation of the Oil Producing Countries (Opec) in July. Such cuts by the oil producers usually have the effect of pushing up prices.

The announcements to cut production by Russia and Saudi Arabia this week saw crude oil prices reach $90 (Sh13,500), the highest in nearly one year.

This is the latest in the series of hikes in fuel prices that have taken place in the recent past. Pump prices shot up on July 1 as the government implemented the Finance Act 2023, which increased Value Added Tax (VAT) on petroleum products to 16 per cent from the earlier eight per cent.

On July 1, the cost of super petrol went up Sh13.49 a litre to Sh195.53 in Nairobi. Diesel went up to Sh179.67 per litre - an increase of Sh12.39 - while kerosene will now retail at Sh173.44, going up by Sh11.96 per litre. A litre of petrol went up to Sh207 in the far-flung towns of Elwak and Sh209 in Mandera.

The government however reinstated subsidies on fuel in the August-September pricing cycle preventing the retail price of super petrol going over Sh200 at the time.

Reinstating the subsidy was a u-turn by President William Ruto's government which had scrapped the cushioning mechanism, dismissing it as unsustainable and tended to distort the market. Instead, his government opted to subsidise production through initiatives such as the fertiliser subsidy as a measure to reduce food prices.

Scrapping the subsidies on petroleum products was a move supported by the International Monetary Fund (IMF) which has been pushing the government to look for mechanisms to grow tax collections.

Epra has clarified that the cushioning mechanism was not a subsidy but rather a price stabilisation that was facilitated by the Petroleum Development Levy (PDL).

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