How the regulator will price your fuel this coming Friday

Consumers will in the next two days be waiting to know the new pump prices for petrol, diesel and kerosene in major towns for the following month.

While many will be hoping that the prices will drop, the magic formula used to determine the pump prices remains a mystery to many despite the fact the products touch virtually every aspect of their lives.

Many consumers have always expected that when the international crude prices drop by say $5, it should cascade down and lead to reduction in fuel costs locally. When this does not happen, many feel exploited and betrayed.

The questions then are: What causes the fluctuations of prices in the local market? Can one predict the possible trend in a month?

Smart Company spoke to the government agency tasked with the revision of fuel prices every mid-month to understand the formula that will either excite or disappoint motorists this Friday.

The Energy Regulatory Commission applies the formula that factors in the prices of the product in the global market, taxes involved and the returns for investors in the petroleum sub-sector.

The method, according to ERC, takes into account the cost recovery principle, which captures the landed cost of the product, the levies and applicable taxes, demurrage costs, pipeline transport charges, road bridging costs and the margins for the oil marketers.

ERC Director General Joseph Ng’ang’a said the delicate balance is done to ensure that consumers and dealers are treated fairly and in a transparent way.

“The formula is simply a cost of the product plus what it would cost to bring it to the retail dispensing machine.

What many people fail to understand is that the changes in the international crude have very little effect on the pricing formula since the taxes and levies, which are constant, take over 40 per cent of the price and they are not affected by changes in the international crude pricing at all,” Mr Ng’ang’a said.

ERC uses the Platts data on the price of Brett crude as the bench mark for international oil prices.

The prices which change in response to the global market are also used by the bidders in Kenya’s open tender system at the Ministry of Energy where suppliers bid through a competitive process and the winner is given the contract to supply the product in a particular month.

The winning bidder quotes the price they will use to deliver the product from the source to the Port of Mombasa.
They basically use the Platts system plus the cost of freight as well as insurance until it reaches the Kipevu terminal where the value is calculated in US dollars.This leaves ERC with another headache to change the price into local currency.

An exchange rate applicable is then derived from an average of three banks rates; Citi Bank, Barclays Bank and KCB to get a fair rate, according to  the regulator.

After the Kenya shillings price at the port has been deduced, transport costs to upcountry market is then calculated to the various major towns such as Nakuru, Eldoret, Kitale and Isiolo. Once this is determined, the elephant in the room now remains local taxes and levies, which are determined by the government and rarely change.

The levies and taxes are excise tax, road maintenance levy (Sh18 per litre on both diesel and petrol), petroleum development levy (Sh0.40 per litre on all the three), petroleum regulatory levy (Sh0.05 per litre on kerosene and Sh0.12 per litre on petrol and diesel) as well as railway development levy Sh0.50, Sh0.52 and Sh0.51 on every litre of petrol, diesel and kerosene respectively (according to industry data seen by Smart Company. 

In last month’s revision where Super Petrol prices decreased by Sh3.74 per litre, diesel  bySh2.05 per litre and  kerosene  by Sh3.38 per litre, the constant component of the prices in the case of petrol took 42 per cent of the Sh91.39 per litre quoted by ERC.

For diesel, Sh29.64 was meant for the taxes and levies out of the Sh82.46 quoted while only Sh8.46 out of the Sh59.10 quoted for a litre of kerosene was in taxes and levies explaining why crooks have found the use of Kerosene in the adulteration of petrol lucrative.