Oil prices predictions in Kenya

Fuel Price Dynamics and its Effects on Economies

“A century ago, petroleum - what we call oil - was just an obscure commodity; today it is almost as vital to human existence as water. ~ James Buchan.”

Being a frequent road user, I have a habit of checking different petrol stations comparing fuel prices across brands and looking out for discounts. This has led me to query on what factors truly influence fuel prices, and what is the impact of these factors on economies?

The Overall Effect of Oil Prices on Economies

The impact of oil prices affects both importers and exporters in distinct ways. Low oil prices benefit importers by increasing customer spending and trade balances, while on the other hand high prices benefit exporters by increasing revenues critical for economic growth (Negi, P. (n.d.), 2015). Oil prices volatility highly affects economic performance particularly in nations which are heavily reliant on oil exports the likes of the BRIC nations i.e Brazil, Russia, India and China which are heavily affected due to their dependence on natural resources and energy consumption.

High oil prices contribute to increased costs, inflation, and reduced economic growth. The repercussions of oil price fluctuations vary based on a country’s status as an importer or exporter and the underlying factors driving these price changes. A comprehensive understanding of how oil prices impact economic growth is crucial when formulating effective economic policies, especially in major energy consuming and producing countries.

A 2007 African Development Bank study estimated that doubling oil prices could shrink the economy of a net oil importing country by almost 6%. (African Development Bank, 2008). This substantial impact on Gross Domestic Product (GDP), (a key measure of economic activity), outlines the heavy influence of oil prices on overall economic health.

The Impact of High Kerosene Prices on Low-Income Households in Kenya

In 2023, kerosene usage in Kenya dropped by 39.45%. Data from the Energy and Petroleum Regulatory Authority (EPRA) reveals that kerosene usage decreased from 114.84 million litres in 2022 to 69.53 million litres in 2023 (Mutua John, 2024). This was the most significant drop among all petroleum products.

EPRA’s data also indicates that kerosene prices had the highest increase in 2023, ending the year at Ksh.203.06 per litre in Nairobi, up from Ksh.145.94 at the beginning of the year.

The record high prices of kerosene have left many low-income households struggling to afford this essential energy source, indicating the severe financial strain imposed on low-income households during hard economic times who rely heavily on kerosene for cooking and lighting.

Kerosene prices in Nairobi for 2023

A Cost Breakdown of Fuel Prices in Kenya

The Energy and Petroleum Regulatory Authority (EPRA) is mandated to oversee the importation, refining, exportation, transportation, storage, and sale of petroleum and petroleum products, excluding crude oil. Every month, on the 14th, EPRA announces the new prices for diesel, petrol, and kerosene for the upcoming month.

The price of oil in Kenya comprises four main components:

• Product Costs/Landing Prices: The cost at which the product lands in the port.
• Taxes & Levies: Designed theoretically to discourage consumption.
• Margins: Marketing costs allocated to wholesalers, importers, and dealers.
• Distribution and Storage Costs.

In September 2024, the breakdown of costs for Super Petrol, Diesel, and Kerosene in Nairobi was as follows:

• Super Petrol: Taxes were 43.4%, while the landed cost was 47.5%.
• Diesel: Taxes were 39.9%, while the landed cost was 50.1%.
• Kerosene: Taxes were 35.2%, while the landed cost was 54.6%.

A look at this data, it is clear that taxes constitute around 40% of the fuel prices in Kenya.

Fuel Distribution

Comparing Fuel Prices in East Africa; Kenya, Uganda, and Tanzania

Prices of fuel vary significantly across East Africa, with Kenya being the most expensive and Tanzania the cheapest. As of September 2024:

For Super Petrol:

• In Tanzania: Petrol was Tsh. 3,140 ($1.15) per litre in Dar es Salaam. While regions with the highest Petrol prices like Karagwe and Kyerwa, prices reached Tsh. 3,372 ($1.24) and Tsh.3,378 ($1.24) respectively, about Kshs. 159.46 and Ksh.159.75 per litre respectively, roughly Ksh.31 less than in Kenya, where prices were Ksh.190.31, 190.33, 190.49 and 190.48 in areas like Nyeri, Narok, Namanga, and Kitui respectively compared to Ksh.188.84 in Nairobi.
• In Uganda: Petrol was Ush. 5,190 per litre, approximately Ksh.180.74, which is lower than Nairobi by Ksh.8.

Remember, Uganda is a landlocked nation thus faces challenges in establishing refinery plants and pipelines, which greatly impacts fuel costs for its citizens.

For diesel:

• Uganda: Diesel cost Ush. 5,050 ($1.36) per litre, around Ksh.175.86, Ksh.4.26 higher than Kenya's Ksh.171.6 (Ush. 4,927.61) per litre in Nairobi.
• Tanzania: Diesel was Tsh. 3,070 per litre in Dodoma, equivalent to Ksh.156.38, while in Kenya it cost up to Ksh.180.22 and 180.46 in areas like Lokitaung and Kibish respectively.

Conclusion

The rise in kerosene prices has placed a heavy burden on low-income households in Kenya where kerosene is essential for daily living. This shows the vulnerability of the households to global oil price fluctuations and local tax policies. Addressing this challenge requires targeted interventions such as government subsidies and alternative energy sources, alongside broader economic policies aimed at stabilising fuel prices and supporting low-income households.

Kenya’s position as the most expensive fuel market in East Africa highlights the importance of localised solutions and regional cooperation to harmonise energy policies across borders. Navigating global oil market trends and adapting regulatory frameworks will be crucial in promoting long term economic stability and growth of economies.

References

Negi, P. (n.d.). Accounting Standards and Practices in India. Indian Accounting. https://indianaccounting.org/downloads/13. Pushpa Negi.pdf

African Development Bank. (n.d.). Economic Research Working Paper Series No. 93. https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/27968413-EN-ERWP-93.PDF

Mutua, John. (2024, June 24). Kerosene use dips 39pc as high prices choke homes. https://nation.africa/kenya/business/kerosene-use-dips-39pc-as-high-prices-choke-homes-4668000

Energy and Petroleum Regulatory Authority. (2024, September 14). Pump Prices - 15th September to 14th October 2024. https://epra.go.ke/pump-prices-15th-september-14th-october-2024

EWURA. (2024, September 4). Cap Prices for Petroleum Products Effective 4th September 2024. Energy and Water Utilities Regulatory Authority. https://www.ewura.go.tz/wp-content/uploads/2024/09/Cap-Prices-for-Petroleum-Products-effective-4th-September-2024-English.pdf

Chimpreports. (2024, September 6). Uganda Fuel Prices Drop as Govt Tightens Sole Importation Mandate. https://chimpreports.com/uganda-fuel-prices-drop-as-govt-tightens-sole-importation-mandate/