Ideas & Debate

Higher fuel pump prices are definitely coming soon

fuel

The new petroleum VAT is one of the fiscal and financial policy conditionalities imposed on Kenya by the IMF and include the reversal of the controversial law on interest rate capping. FILE PHOTO | NMG

We are sandwiched between two approaching realities, both of which will increase oil pump prices. Global oil prices are creeping towards $ 75 and when these are punched into the ERC price formula we shall see higher pump prices. Currently the pump prices reflect oil import costs of about $70.

The other factor is the indication in the 2018/19 budget proposals that petroleum products will from September this year bear a 16 per cent value added tax (VAT). This will apply on gross consumer prices which currently include other taxes and levies. For example pump prices of Sh100 per litre will automatically become Sh 116.

There is no indication that cooking gas and kerosene will be spared of VAT which means higher domestic energy costs. There are other unrelated proposals by petroleum authorities to increase kerosene import taxes to discourage adulteration of petrol and diesel with lower taxed kerosene.

The new petroleum VAT is one of the fiscal and financial policy conditionalities imposed on Kenya by the IMF and include the reversal of the controversial law on interest rate capping . Petroleum VAT was postponed two years ago, but this time around the Treasury may not be able to dodge it.

The petroleum VAT is intended to boost government revenues to rebalance the public debt, while also providing essential funding for the Big Four socio-economic agenda .

The combined impacts of the higher products import costs and VAT on consumers and the economy will be increased producer and consumer inflations . On the positive side, higher prices will definitely encourage energy use efficiency and conservation as discretionary consumption goes down especially among motorists.

Oil consumption in Kenya has increased by an annual average of 7.3 per cent since oil prices dropped from over $100 to a low of $25 in 2014 and back to above $70 in 2018 . The looming price hikes will likely reverse this trend as consumers change their consumption behaviour. If imports decrease, the strain on Kenya’s balance of payments and trade will be lessened.

The firming up of global prices is due to varying factors which include genuine supply/demand shifts, geopolitical activities, and the ever-present commodity trade speculation. The main influence today is however the self-imposed curbs on oil production by OPEC oil producers and a number of non-OPEC countries including Russia.

Today, about one-third of total global oil production is by USA, Saudi Arabia and Russia with each producing an almost equal amount of about 10 million barrels per day. However the USA shale oil has become the swing supply and key influence on global oil prices.

At prices above $ 70 , the oil exploration and production activities which were hitherto abandoned or slowed down when prices slumped in 2014 , are now being resuscitated as break-even prices justify new investment decisions. This includes the onshore and deep-sea prospects and discoveries in Kenya.

The high prices will continue to encourage more investments and production. This will gradually depress prices with the consequence of reduced investments and production which will subsequently trigger price spikes.

The high global prices we are seeing today are part of this repetitive cycle. It is a roughly five-year cycle which has happened as far back as I can remember. It is this cyclic pattern that OPEC and its allies are trying to influence to create stability to oil revenues and their national budgets .

But other permanent structural shifts are taking place in global oil demands. Technology advancement is replacing oil demands with renewable energy, a trend that appears irreversible because of good economics and support for the wider climate change agenda. The renewable energy will continue to influence global oil demand, supply and prices.

Back to Kenya. We expect political debate on the impacts of the 16 per cent VAT on petroleum and why IMF should be dictating Kenya’s economic policies.