Big fuel price cut set to relieve pressure on household budgets
A motorist refills his car at the KenolKobil station on Nairobi’s Koinange Street. PHOTO | FILE
What you need to know:
The Energy Regulatory Commission (ERC) on Wednesday announced sharp cuts in pump prices of petrol, diesel and Kerosene (paraffin), offering consumers a relief from inflationary pressures.
The immediate benefit will be felt by motorists, households (in form of lower electricity bills), commercial transporters, and large-scale farmers who use diesel or petrol to fuel cars, buses, trucks, and tractors.
The lower costs reduce operating costs and household budgets, freeing up extra cash for consumption which in turn boosts production.
Kenyans are set to feel the biggest impact yet of the falling global oil prices following the reduction of local retail costs to a 48-month low, in a move that could lift economic growth by boosting consumers’ spending power.
The Energy Regulatory Commission (ERC) on Wednesday announced sharp cuts in pump prices of petrol, diesel and kerosene (paraffin), offering consumers a relief from inflationary pressures.
The overall price of super petrol dropped by the biggest margin of Sh9.13 per litre as per the ERC’s announcement Wednesday, while diesel will cost Sh7.5 less and kerosene will retail lower by Sh5.78 until February 14.
“The lower fuel prices, particularly diesel which powers industries bring a relief to manufacturers, making them more competitive,” said Betty Maina, the CEO of the Kenya Association of Manufacturers.
Petroleum products play a central role in the economy and the major drop in their prices — expected to deepen in the coming months — will potentially save households and businesses billions of shillings.
The immediate benefit will be felt by motorists, households (in form of lower electricity bills), commercial transporters and large-scale farmers who use diesel or petrol to fuel cars, buses, trucks and tractors.
Petrol will retail at Sh92.80 per litre in Nairobi, diesel Sh83.30 and kerosene Sh65.50.
The lower costs reduce operating costs and household budgets, freeing up extra cash for consumption, which in turn boosts production.
The ERC has been under heavy pressure to pass on to consumers the benefits of the collapse of global oil costs by cutting local pump prices.
The two-month lag between local and international oil prices, which is occasioned by the duration it takes to import fuel products, has meant that local costs remained high even as they dropped sharply globally.
Joseph Ng’ang’a, the ERC director-general, termed Wednesday’s prices as the “lowest in four years,” since the regulatory body started controlling the cost of fuel in December 2010.
Mr Ng’ang’a said the latest prices reflected international crude prices as of November, signalling a further cut next month by noting that global costs were on a free fall in subsequent weeks.
The Consumer Federation of Kenya (Cofek), however, criticised the margin of reduction, saying it does not reflect the extent of fall globally.
“Cofek will send a petition to the National Assembly and the Senate seeking to amend the Energy Act with a general view of improving governance, restructuring the ERC and relieving it of the responsibility of tariff setting,” said Cofek secretary-general Stephen Mutoro.
International crude prices have more than halved from $100 per barrel in July last year in the wake of a glut brought about by intense rivalry among oil producing nations.
Members of the Organisation of the Petroleum Exporting Countries (OPEC) cartel have failed to agree on reduction of output levels, as individual oil producers engaged in a race to the bottom.
The Motorists Association of Kenya (MAK), a lobby, welcomed the price changes, saying it will cushion motorists from the high cost of living and free up cash for other needs.
“We were expecting double-digit drops but we are all the same comfortable given that the ERC has said the drops will continue going forward,” said Peter Murima, the association’s chairman.
Households relying on kerosene to light their homes and cook also form part of the group of consumers that will make direct savings from the lower prices.
The broader economy is also expected to gain as the impact of the relatively cheaper fuel feeds through multiple production and distribution systems of a wide array of goods and services.
This could in turn lead to large overall savings that consumers and businesses can use to ramp up their investment and consumption.
The secondary benefits could be particularly evident in lower prices of electricity which is used by households and industries to power machinery and numerous appliances.
Kenya continues to rely significantly on emergency power producers that use diesel to fire their plants, loading consumers’ electricity bills with fuel cost charges that form part of the pass-through charges.
Lower diesel prices are, therefore, expected to make electricity cheaper, cutting operating costs for households and industries.
Ms Maina said the reduced costs of producing goods and offering services will in turn offer businesses a chance to book larger margins or pass on the savings to consumers.
She added that firms may consider cutting their prices if the lower fuel prices are sustained in the short to medium term, noting that electricity and fuel are just part of the overall operating costs.
The savings on multiple fronts are expected to be distilled in the macroeconomic data through lower inflation rates and stable or lower cost of credit with its attendant positive impact on investments and aggregate demand.
A reduced import bill will also help ease pressure on the shilling that has depreciated against major world currencies in recent weeks.
The country spent Sh272 billion to import petroleum products in the nine months ended September 2014, accounting for 23 per cent of the total import bill.
This signals the large national savings from the lower fuel prices, with a 50 per cent drop yielding over Sh150 billion in saving on an annual basis.
The cost of living dropped to a new low of 6.02 per cent last month, reflecting the impact of the ongoing global oil price crash that had started reflecting locally in lower pump prices and fuel cost adjustments on power bills.
Kenya only imports refined products, meaning that it takes months to capture gains from the ongoing fall in global crude prices.
Saudi Arabia, one of the largest oil producers, has vowed not to cut its output despite the falling prices in what is seen as a strategy to protect its market share from new challengers like the US.
The price war has benefited oil-importing nations like Kenya whose spending on petroleum products amounts to a quarter of its annual import bill.
The ERC projection of even lower fuel prices means inflation could in the coming months approach the central bank’s lower bound of five per cent.
