BY Michael Duncan
A report by the World Bank has faulted government for failing to ensure that local consumers fully benefit from the drop in international oil prices experienced during the second half of last year to February.
Consequently, the global lender has warned that this could lead to a surge in inflation as the cost of most factors of production that use oil as an input will remain unchanged, thus affecting the price of manufactured goods.
The World Bank criticised the trend in local oil prices in its latest issue of the Kenya Economic Update report that was released last month.
“Declining oil prices should lower prices and boost aggregate demand. Declining oil prices will boost the domestic economy through both first and second round effects. There is a threat that most of these benefits may not be passed on to consumers,” reads the report.
Between September 2014 and February 2015, the World Bank notes that crude prices have fallen by 48 per cent. However, the local price of petrol has fallen by just 18 per cent while that of diesel declined by 19 per cent.
The energy regulatory commission (ERC) has since December 2010 been setting maximum pump prices for diesel, petrol and kerosene on a monthly basis to be applied across major towns in the country.
According to ERC director-general Joseph Ng’ang’a, the price relied upon by the energy regulator in determining fuel prices takes into account a two month lag to cater for the period between which there is a change in pricing at the international market and the time the products are received at the local depots.
A breakdown of the ERC fuel pricing formula seen by the Nairobi Law Monthly also includes government taxes and levies, freight costs, dealers’ margins, refining costs and ocean losses (losses due to evaporation while shipping) as among other variables that are considered.
“Taking the lag effects of price transmission to the domestic economy into account, prices should have fallen by 39 per cent,” says the report.
World Bank’s criticism of the local fuel pricing comes at a time when the ERC has come under the spotlight over its recent move to increase the price of petroleum products citing an increase in the cost of crude.
In its latest price review, ERC increased the price of super petrol by Sh4.75 in Nairobi while that of diesel and kerosene went up by Sh0.68 and Sh4.75 a litre respectively. Prices in other towns were adjusted accordingly.
“Global prices of crude oil rebounded in February 2015 leading to an increase in the prices of refined petroleum products in international markets,” says Mr Ng’ang’a.
Crude oil traded at an average of $46 (Sh4232) a barrel in December while the same surged to $58 (Sh5336) a barrel last month representing an increase of about 21 per cent.
While ERC also attributes the upward price review to the weakening of the shilling, going by its pricing formula which indicates that the stock purchased in February could take about two months to land in the country, it was expected that a reverse in the oil prices could be witnessed around May.
ERC cut the price of fuel by up to Sh9 per litre, the largest in the last four years during the price review carried out in January.
The review brought the cost of fuel products to below Sh100 a litre for most parts of the country except in Wajir, Mandera, Lokichogio and Loboi where consumers paid between Sh100.32 and Sh106.69 per litre of Super petrol.
The Consumers Federation of Kenya (Cofek), however, termed the review unsatisfactory and deceptive.
“The so-called ERC formula has too many absolute and fixed value inputs including non-scientific margins for wholesale and retail oil marketing companies,” said Cofek’s secretary general Stephen Mutoro in a statement. Cofek has since written to the clerk of the National Assembly requesting a probe into the affairs of the ERC.
ERC has faulted the World Bank’s criticism of its pricing formula saying that it failed to consider the price of refined petroleum products.
“This report relied on crude oil prices rather than the price of refined products whose market dynamics are different. Kenya has not been importing crude since September 2013. In addition, the landed cost of petroleum products experiences a delivery lag of between 30-45 days. The lag accounts for the difference between changes in international prices and changes in the calculated local pump prices,” says ERC in a statement posted on its website.
Kenya is entirely dependent on imported oil. Government data shows that about a quarter of the country’s import bill is attributed to oil which makes its critical in shaping the path for economic growth.
The drop in international oil prices was expected to be felt through a drop in the cost of transport, electricity and the cost of manufactured goods, among others.
Between August last year and February, the fuel cost surcharge included in the price of electricity has dropped by 65 per cent from Sh7.22 per unit of power to Sh2.51, attributable to both the drop in fuel prices and a reduction of reliance on thermal generators due to injection of additional geothermal power to the national grid network.
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