President William Ruto’s administration has denied motorists a Sh10.94 reduction per litre of petrol in a bid to slow down the runaway cost of living by cushioning key sectors of the economy that run on diesel.
The State opted to provide a Sh18.79 a litre subsidy on diesel, with the motorists running on petrol paying half of the financial aid.
This means that petrol users will pay Sh9.94 for every litre of diesel consumed in efforts to reduce the State burden on catering for the subsidy.
Without the subsidy, the costs of a litre of diesel in Nairobi would have retailed at Sh180.82 from the current Sh162 while a litre of petrol would have dropped to Sh167.36 from the current Sh177.3 a litre.
Fuel prices have a big effect on inflation in Kenya, which relies heavily on diesel for public transport, power generation and running farm machinery.
This forced the energy regulator to offer a huge subsidy on diesel to ease the pressure on inflation and curb the simmering public anger over the high cost of essential commodities like diesel, which affects that rank-and-file Kenyans.
In asking motorists using petrol, mostly Kenya’s middle class, to pay half of the subsidies, the State was keen to ease pressure on taxes in meeting the financial aid amid warnings from policymakers that subsidy measures risk emptying the country’s coffers.
Users of petrol will pay at least Sh1.78 billion on diesel subsidy, going by average monthly consumption of 179.08 million litres in the first half of the year.
“The cross-subsidy is in line with government policy aimed at ensuring minimal impact to the economy since diesel is a major economic driver that contributes to inflation,” Daniel Kiptoo, the director-general of the Energy and Petroleum Regulatory Authority (Epra), told the Business Daily yesterday.
On average Kenyans consume 222.3 million litres of diesel monthly.
Like in other parts of the world, Kenyan inflation has accelerated, mainly due to the knock-on effects of a jump in crude oil prices. It stood at 9.6 percent in October up from 5.0 percent at the start of 2022.
A combination of global factors have seen the price of diesel surge faster than that of other fuel products and crude oil.
This has brought Kenya and other markets a unique problem where diesel is now more costly than petrol.
Petrol landed at the Mombasa port at Sh87.90 a litre and diesel at Sh112.11. Kerosene, which is used in many households for cooking and lighting, landed at Sh100.28 a litre.
In November last year, petrol landed in Kenya at Sh67.96 a litre while diesel and kerosene were at Sh63.20 and Sh58.15 respectively.
Upward pressure on prices for diesel — a workhorse fuel that is key for economic growth — has been growing for much of the year.
Diesel markets were already stretched before Russia’s invasion of Ukraine because of the closure of 3.5 million barrels a day of refinery capacity since the start of the Covid-19 pandemic.
The International Energy Agency (IEA) warns that diesel may be the next pain point in the global energy crisis, with EU sanctions on Russian exports set to increase competition next year.
Once an EU embargo on imports of diesel and other refined products from Russia is implemented in February, the market will tighten further, said the Paris-based IEA.
“The competition for non-Russian diesel barrels will be fierce, with EU countries having to bid cargoes from the US, Middle East and India away from their traditional buyers,” the IEA analysts wrote.
“Increased refinery capacity will eventually help ease diesel tensions. However, until then, if prices go too high, further demand destruction may be inevitable for the market imbalances to clear.”
Epra has dropped the subsidy on petrol for two months now, and in the latest review to December 14 slashed the cushion on kerosene by 35.63 percent to Sh17.68 per litre.
In the latest review, a litre of super petrol, diesel and kerosene has been trimmed by Sh1 for the next month to Sh177.30, Sh162 and Sh145.94, respectively.
The use of the subsidies marks a U-turn by the Ruto administration, which had in September announced its intention to scrap them, saying they were unsustainable.
Dr Ruto said in a speech after being sworn in that subsidies had been costly and prone to abuse, including causing artificial shortages of the very products being subsidised.
The regulator removed the subsidy on petrol, but retained it on both diesel and kerosene, saying those prices could have shot up even further.