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Let’s leave it to the market to steady runaway fuel prices

FINANCIAL STANDARD
By XN Iraki | September 21st 2021

Rubis' attendant Kennedy Mutua fuels a car along Koinange Street, Nairobi. [Boniface Okendo, Standard]

The rise in fuel prices when we are travelling less except for funerals in the middle of a pandemic is not a paradox.

Why do I say this? One, the situation can be blamed on increased vaccination of the masses against Covid-19. As vaccination becomes widespread, the prospects of returning to normalcy rise.

This means increased demand for goods and services. Fuel is an input in the provision of goods and services; think of transport or raw materials in the chemical industry. Take heart, though. The rise in fuel prices is a global phenomenon. The UK and the US are reporting a rise in fuel prices too.

China early this month released some of her strategic oil reserves to stabilise the rising prices as reported by CNN.

China is the world’s largest oil importer. The fact that the effect of the delta coronavirus variant was not a devastating as expected, raises further prospects of a return to normalcy. 

Two, with the collapse in prices during the Covid-19 pandemic, inventories were reduced, while investment in exploration and oil extraction was reduced. This has squeezed the prices further.  

Three, the Organisation of Oil Exporting Countries (OPEC), has reduced output, pushing the prices up.

The oil producers came together after oil prices collapsed in the wake of the Covid-19 pandemic. At one time, oil prices were negative because of low demand and lack of storage space.  

Three, in Kenya, fuel prices have a big tax component at about 50 per cent. The higher the prices, the more the tax revenues.

It makes one wonder if demand for fuel will not go down as the prices go up. In economic jargon, fuel has a low price elasticity of demand, meaning that a rise in price does not necessarily lead to a fall in demand, as fuel is a necessity.  

Four, it has been suggested that taxes are a better alternative to debt. Haven’t we been complaining about debt? Maybe we should celebrate our ability to finance the government with more tax!  

Six, price controls give the controller incentives to extract the maximum from consumers. It was assumed that price controls would stabilise prices and protect consumers. They have not. 

Which price controls have worked without unintended consequences? Many Kenyans today did not live through price controls before the economic and political liberalisation in the early 1990s. 

The rise in fuel prices in the middle of a pandemic is not a paradox. [File, Standard]

Seven, oil is yet to have enough competition. We still have too few electric cars, while gasohol -  a fuel consisting of a blend of ethanol and unleaded gasoline - has never gained popularity in Kenya.

Liquified petroleum gas is also not yet a popular car fuel in the country. Our life is complicated further by the lack of a good public transport network, which makes private cars popular and increases demand for fuel.  Eight, and more ominous is that the rise in fuel prices has come just after the government declared the prevailing drought in the country a national disaster.

An increase in food and fuel prices would reverberate through the economy, leading to a sharp rise in the cost of living.

Add the joblessness and economic stagnation because of the Covid-19 pandemic. The build-up to the 2022 general election does not augur well for our economy under these circumstances.   

What’s the solution to the rise in fuel prices? Politicians are quick to make hay while the sun shines.

They are demanding a reduction in fuel prices. They are not suggesting an alternative source of tax revenues accruing from fuel. Interestingly, they are behind the fuel price controls that do not seem to be working. The Energy and Petroleum Regulatory Authority (EPRA) sets fuel prices every month as stipulated in the Energy (Petroleum Pricing) Regulations, 2010. 

Did I hear that we can’t benefit from the fuel subsidy because there are no regulations to implement it?

Politicians know that next year’s polls are not far away. An angry electorate is the last thing politicians want to see.  

Perhaps a better question is why the fuel price was controlled in the first place. Why was the market not allowed to do its work?

My hunch is that the price of fuel would be lower if the controls were removed.

Just allow anyone who can import fuel to do so. Competition would result in lower prices. If we do not control the cost of Intensive Care Unit (ICU) services, a matter of life and death, why do we control the price of fuel?  By controlling fuel prices, we seem to have given a political solution to an economic problem. This is not unique to fuel prices. Remember capping school fees? 

Since the price controls have not worked, let’s try the market. With the pandemic still on and economic activities subdued, the price of fuel should be lower than it is. Prove me wrong!  

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