Kenya is staring at higher inflation from elevated fuel pump prices after oil benchmarks in the global market shot up to four- year highs on Monday on concerns that the deepening conflict in the Middle East will hurt global supply of the commodity.
Benchmark crude prices crossed the $120 per barrel mark for the first time since June 2022, with markets fearful of a prolonged closure of the Strait of Hormuz which carries about 30 percent of global oil supply.
The conflict between Iran and the US-Israel duo has now gone on for a week, with both sides taking a hardline stance. Iran has also responded to the US and Israeli attacks by launching strikes of its own on neighbouring Gulf countries, hampering their ability to export oil.
Besides raising costs for motorists, a surge in pump prices in Kenya would have a wide impact on household budgets due to the pass-through effect of transport charges on the prices of basic goods, and higher electricity prices due to the thermal power component on monthly bills.
Kenya has enjoyed low and stable inflation of between 3.45 percent and 4.58 percent over the last 12 months, with the latest headline number standing at 4.3 percent in February.
Inflation has sat below the midpoint of the Central Bank of Kenya (CBK) preferred range of five percent plus or minus 2.5 percentage points since July 2024.
The shilling’s exchange rate versus the dollar has also remained stable at the 129 level in the period, backing the low inflation and giving the CBK room to cut its base rate by a cumulative 4.25 percentage points since August 2024 to the current 8.75 percent.
“Risk of oil-driven inflation is emerging. Higher imported inflation could filter through to local pump prices and surge transport and food costs,” said analysts at NCBA Investment Bank in an economic note published on Monday.
“Following significant potential second-round inflationary effects from this, we now see Kenya’s monetary policy committee (MPC) exercising caution on further policy easing in the April meeting.”
Murban Oil from the Abu Dhabi National Oil Company (Adnoc), which is the main source of Kenya’s refined petroleum imports, was up 17 percent at opening of the market on Monday morning to $120.75 (Sh15,597) per barrel, before easing to $114 (Sh14,725) a barrel in the afternoon.
Similarly, the global benchmark Brent crude rose 24.5 percent to $116.70 (Sh15,074) per barrel in early trading, before falling to $103 (Sh13,304) in the afternoon after G7 finance ministers held discussions about releasing strategic oil reserves to ease the supply shock.
Before the first strikes on Tehran on February 28, Murban Oil was trading at $74.24 per barrel, while Brent was trading at $73.21 a barrel.
These prevailing lower crude prices in the lead-up to the outbreak of the Iran conflict had supported a cut in Kenya’s pump prices in the last review on February 14.
The maximum price of super petrol in Nairobi was cut by Sh4.24 per litre to Sh178.25, diesel by Sh3.93 to Sh166.54 per litre, and kerosene by Sh1 per litre to Sh152.80.
The landed cost of super petrol fell by 2.69 percent to $576.34 per cubic metre in January —when the February consignment was shipped in— while that of diesel declined by 6.37 percent to $586.80 per cubic metre.
Fuel is the second largest item in the inflation basket after food, meaning that a change in its price has a significant effect on the overall cost of living indicator.
Pump prices, especially that of diesel, also filter through to the food basket due to the charges levied by transporters to transport food items.
Farmers also factor in the impact of diesel prices during ploughing and harvesting when pricing their produce at the farm gate, with all these additional costs passed on to the final consumer.
