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Ideas & Debate

Ministry was right to defend pricing formula for petroleum

attendant fuels a car
A pump attendant fuels a car in Nyeri. FILE PHOTO | NMG 

Last week, the petroleum regulator announced huge petroleum consumer price cuts, a welcome blessing to those Kenyans who can still make good use of the cheap oil in these times of restricted travel. The price decreases were indeed anticipated as Brent crude oil dipped below $30 in March/April, levels last witnessed in 1990s. The decreases were aggravated by a major oil supply glut, caused by diminished global oil demands as a result of Covid-19 pandemic.

However, the Kenyan oil marketers had a problem with the hefty price decreases. They complained to the petroleum ministry that the low selling prices would cause them financial losses as slow-moving expensive stocks (imported a couple of months earlier when import prices were higher) remained unsold. Slow moving because the Covid-19 travel restrictions had chewed up as much as 40 percent of potential petroleum demands, leaving them holding inventories of more expensive stocks.

In declining to intervene, the ministry correctly explained that consumer oil prices are calculated using a legal process which cannot be changed every time supply chain changes negatively impact an interested party. The Covid-19 socio-economic restrictions have put Kenyans and businesses in one form of misery or another without discrimination. It is therefore upto businesses in all economic sectors to craft Covid-19 business survival and continuity strategies to fit their specific challenges.

When the government re-introduced petroleum pricing regulations in 2010, it was to reign in cases of market abuses and arbitrariness by oil companies - practices that had prevailed since the early 1990s when IMF rushed Kenya into adopting a free market economy.

Typical consumer complaints then were that marketers were quick to hike consumer prices when global prices were on the rise, but slow to implement full price reductions when global prices were falling. Indeed, one particular marketer was known for “leading” the others in the timing and quantum of price changes, with the others merely matching. The responsible free market competition that the IMF desired had indeed not been achieved.

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The pricing regulatory principles adopted in 2010 have remained relevant - a pricing formula that is transparent, predictable, and which passes through genuine supply chain cost changes every mid-month. All this while safeguarding fair returns for sector investors, and protecting consumer interests.

In the ongoing unusual Covid-19 situation, there will be specific unpredictable business losses by oil marketers, which cannot be guaranteed for recovery or compensation by the pricing formula. And this is the economic reality of the Covid-19 emergency.

It is important to note that the pricing regulations allow for periodic reviews of the pricing formula to reflect genuine emerging structural shifts in the petroleum supply chain, and this provides an opportunity for expert formula reviews with stakeholder inputs.

For how long will the low prices remain, many are asking. It all depends on how soon the world regains its capacity to consume petroleum. This in turn depends on when countries around the world will rollback Covid-19 induced socio-economic restrictions. Global oil markets are continuously observing and calibrating the impacts of socio-economic normalisation and will continue adjusting prices accordingly.

On the demand side, China’s economy, which has a major impact on global oil demands and prices is already registering positive growth, as USA and Europe commence opening up their economies. In respect of the excessive oil supply, producers around the world are either willingly cutting back production, or forced to do so by lost market demands. With Brent crude oil having climbed out from below $30, and currently heading towards $35, the recent consumer price decreases in Kenya will start reversing from June onwards.

Analysing oil demands in Kenya, it is the cessation of travel to and from Nairobi and Mombasa that are most eroding petroleum products demands.

Large volumes of aviation fuels sales have also been lost by cessation of international passenger flights, which have equally reduced tourism associated oil demands.

At the right time, the government will make an informed decision on when to rollback travel restrictions, and oil demands in Kenya will naturally rebound. In the meantime, we should let the price formula be the fair arbiter of price changes resultant from ongoing supply cost fluctuations.

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