Pain at the pump as ERC fails to pass on drop in global oil prices

Motorists Thursday got only little reprieve at the pump after the energy sector regulator went out of tune with the huge drops in global crude oil prices and a stable shilling to cut fuel prices by small margins.

The Energy Regulatory Commission (ERC) reduced petrol, used to run private cars, by Sh1.42 to Sh88.64 a litre while diesel, which is used to power industrial machinery, trucks and buses, fell Sh1.81 to Sh76.70 a litre in Nairobi.

The pump prices will be in place for the next one month.

Kenya bought its current petroleum stocks last month as crude prices tumbled to an 11-year low of $37 a barrel, down from $43 in November, reflecting a 14 per cent drop.

There is a one-month lag between the placing of supply orders and the actual delivery of consignments at the Mombasa port, meaning local prices do not immediately reflect global market trends, but are at least one month behind.

Consumer lobby groups Thursday expressed disappointment arguing the recent drop in crude prices deserved nothing less than double-digit cuts in pump prices.

“This is totally unacceptable. There is absolutely no reason why consumers should get a one shilling drop yet oil prices are at rock-bottom,” Consumer Federation of Kenya (Cofek) secretary-general Stephen Mutoro said.

The ERC, however, said that the import cost of refined petroleum varied from that of crude, hence the disparity.

Kenya buys refined petroleum products after its sole refinery in Mombasa was closed in September 2013, denying the country the full benefits of the lower crude oil prices.

ERC director-general Joseph Ng’ang’a said the import cost of super petrol fell by 4.32 per cent per tonne of the consignment last month, diesel by 7.63 per cent while kerosene import cost fell by 17.05 per cent.

Kerosene, used by low-income homes for cooking and lighting, has dropped by the biggest margin of Sh7.14 to Sh46.13 a litre.

READ: Disappointment for motorists as fuel prices fall only marginally

The shilling in the review period shed 0.03 per cent to the US dollar —the currency in which the purchases are made in the global market.

Diesel users were, however, denied bigger pump price cuts after the higher excise tax that came into effect last month was captured.

“This review has now fully taken into consideration the increase in excise duty of Sh2.061 per litre on diesel which became effective on December 1, 2015,” the ERC said in a statement.

Consumers and the World Bank have in the recent past faulted the ERC’s monthly pricing of petroleum, arguing that price controls have denied consumers full benefits of the plummeting crude prices.

Manufacturers had also expected deep price cuts, especially on diesel that is predominantly used to power industries — lowering production costs and sharpening their competitive edge in regional markets.

Mr Mutoro insisted that the ERC’s price setting mechanism favoured oil marketers at the expense of consumers and should be reviewed or stopped.

The energy sector regulator started controlling fuel prices in December 2010 to shield consumers from cartel-like behaviour in the petroleum retail market.

But consumers have more recently complained that the controls are being used to block them from enjoying the fruits of a competitive market.
Petroleum prices have a bearing on inflation because they affect operation and production costs of manufacturing, agriculture and transport.

Producers often respond to the cost movements by adjusting retail prices of their products and services.

Lower prices will help tame inflation, which shot past the government’s preferred ceiling of 7.5 per cent to stand at 8.01 per cent in December.

Global forecasts show crude prices will this year stay below the current 12-year low of $30 a barrel, driven by oversupply and cooling demand.

Cheap oil helped cut Kenya’s import bill 4.4 per cent to Sh1.2 trillion between January and October last year, offering much-needed support to the shilling and cushioning consumers from a steep rise in commodity prices.

The commodity accounts for about a fifth of the country’s import bill.

READ: Lower oil prices set to ease Kenya’s import bill in 2016

The World Bank holds that cheaper oil prices could help power growth but has faulted the ERC’s price caps for being high compared to global trends.

Mr Mutoro reckons that petroleum prices should be left to the market forces of demand and supply.

The ERC has insisted its reviews are transparent and guided by global prices and forex exchange.

The regulator says it uses Platts — a US-based source of global oil information — to benchmark local prices for refined petroleum as opposed to crude prices.

This is because Kenya imports all its refined petroleum following the closure of the country’s only refinery, the Kenya Petroleum Refineries Ltd, in September 2013, denying the country the full benefits of the lower crude oil prices.

Fuel attracts multiple charges which consumers pay for at the retail pump.

Excise duty on petrol is Sh19.89 a litre while the levy on diesel is Sh10.3. kerosene is zero-rated. Petrol and diesel also attract a road levy charge of Sh12 a litre that is not applied to kerosene.

Added to the fuel charges are profit margins for oil marketers, which the ERC has set at Sh7 a litre for wholesale and Sh3.89 for retail.