City traffic jam thins as fears of recession mount over fuel prices

The record fuel prices in the last few months have already hit the living standards of millions of Kenyans.

The high cost of fuel is also forcing Nairobians to ditch their cars in huge numbers. 

They include John Wainaina, who plies the Thika Road-Westlands route. The city-based insurance broker says he has been forced to dump his car over the high cost of fuel.

“It was no longer tenable for me to continue fuelling my car as it has become too expensive,” says the father of four. “I have decided to use public means.”

His sentiment is shared by Wilkister Mokua who says she has resorted to sharing a car with her colleagues to work to manage the higher costs of fuel.

“We carpool as we are no longer able to fuel our cars,” she said.

Kenyan motorists are adopting new lifestyles as signs of an economic slowdown are flashing in the local fuel market.

In Nairobi’s major highways, the number of vehicles is noticeably down in the past week.

According to Paul Mutua, a petrol attendant at one of the leading petrol stations in Kiambu, the number of motorists who fuel on a daily basis has gone down.

“We have noticed the number of our clients has gone down since the prices were hiked,” he said, adding that the full impact would be recorded in the monthly turnover.

No matter how you crunch it, demand for the heavy-machinery fuel that powers everything from commercial trucking fleets to construction equipment and super petrol for motorists like Mokua and Wainaina is weakening. 

Viewed as an early signal of weaker industrial activity and reduced consumer spending, the pullback has recession watchers on high alert.

The weak demand was already being witnessed before the latest hike that has pushed fuel prices to historical highs and the increase in July following the doubling of value-added tax (VAT).

Kenyans have in the last year or so been slowing down on consumption of some of petroleum products, with the current prices expected to make the situation worse.

Data from the Kenya National Bureau of Statistics (KNBS) shows that diesel consumption over the first four months of this year declined 6.8 per cent.

Consumption between January and April last year stood at 766,710 tonnes but this came down to 714,530 tonnes.

Petrol consumption dropped 3.9 per cent to 495,920 tonnes between January and April this year from 516,310 tonnes over the same period last year.

Choked demand

A July report by the Petroleum Institute of East Africa noted that “high prices choked demand for super, diesel and kerosene,” over the first quarter (January to March) this year.

Ken Gichinga, chief economist at Mentoria Economics, told Financial Standard that 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, the gains 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.”

Mr. Gichinga said 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 taking a haircut by reducing taxation.

“A lower tax regime will greatly boost production,” he said.

The twin blow of soaring fuel prices and a crippling hike in interest rates has been the perfect storm for recession, according to analysts.

The National Treasury earlier warned that the Central Bank of Kenya’s (CBK) fight to rein in inflation could tip the battered economy into a temporary recession.

The warning came at a time when the Kamau Thugge-led CBK has made attempts to rid the economy of high inflation through the toughest round of rate increases in recent years.

Treasury Cabinet Secretary Njuguna Ndung’u said recently that despite its unintended risks of slowing the economy, the fight against inflation was a necessary evil, adding that tightening interest rates has already borne fruit.

“This has its short-run consequences, it plunges the economy into a temporary recession,” he said.

The sharp rise in interest rates threatens to choke economic growth as it has lifted borrowing costs and encouraged cutting costs or saving over spending, investing, and hiring.

If lending dries up, that could weigh down on the value of stocks, real estate and other assets besides crimping overall demand - a recipe for a painful recession.

Inflation is tipped to edge up on Thursday’s historic surge of fuel prices. Various 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 fuel price hikes.

Martin Chomba, the chairman of Petroleum Outlets Association of Kenya, said the fuel pricing cuts across all sectors and the latest would affect Kenyans in a major way.

“We are likely to see an astronomical rise in the cost of living. Petroleum is the driver of every other economic activity…everything rides on petroleum,” he said.

“Even those who do not use diesel or petrol for transport, they consume goods transported by the traders.”

He added that pump prices are likely to go higher unless the government intervenes.

Susceptible to shocks

He noted that factors such as higher demand for petroleum products globally as well as the cut in output among oil-producing nations could further see prices go up in the coming months.

“Unless the government comes up with an ingenious way (of going about the prices), we are not likely to see a reprieve in the coming months.

“We have no leverage in determining prices...we are susceptible to shocks happening all over the world,” Mr Chomba said.

The Energy and Petroleum Regulatory Authority said on Thursday that a “sharp spike” has been observed in the last three months, which it was driven mainly by production cuts by the Organisation of the Petroleum Exporting Countries (Opec).

“The Russian-Ukraine war including sanctions on Russian oil and ships have largely disrupted the petroleum demand-supply balance.”

The energy industry regulator also noted that prices have also been going up due to increased demand for heating oils such as diesel and kerosene in Europe and North America, which are approaching the winter season, as well as the limited refining capacity with many refineries scheduled for maintenance.

The expected increase in demand during winter is coming against the backdrop of record demand that was witnessed during the summer in Europe and the US.

“World oil demand is scaling record highs, boosted by strong summer air travel, increased oil use in power generation and surging Chinese petrochemical activity.

“Global oil demand is set to expand by 2.2 million barrels of oil per day to 102.2 in 2023,” the International  Energy Agency said in an August report.

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 150 against the dollar.

Epra used the rate of Sh148.98 to the dollar, which it said was the average exchange rate in the month of August against Sh123.88 to the 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 at $75.61 (Sh11,250) per barrel in August.

This is compared to a high of $105.96 (Sh15,890) per barrel in September last year.

However, in determining the 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 tonne of super petrol rising to $947.67 (Sh142,000) from $785.96 (Sh117,900) in May. The cost of diesel and kerosene has also gone up in a similar trend.

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, following another reduction in July by members of the Organisation of Oil Producing Countries (Opec) in July.

Such cuts by the oil producers usually have the effect of pushing up prices.

Related Topics