More pain at the pump as oil prices hit three-year high

Global oil prices rallied to a three-year high on Tuesday, signalling more pain at the pump for consumers and heightened pressure on the government to defuse public outrage over expensive fuel.

Oil prices struck $80 (Sh8,800) a barrel on Tuesday after a sixth consecutive day of climbs, a market report by Reuters showed, boosted by a tighter supply and firm demand outlook although power shortages in China which hit factory output tempered the rally.

The continued rebound in oil prices signals heightened risks of imported inflationary pressure on the pricing of consumer products and services in months to come.

The high fuel prices are presently having a knock-on effect on the cost of living and doing business in the country, with the price of goods, household energy bills, and transport going up and raising inflation to an 18-month high of 6.57 percent in August.

The Energy and Petroleum Regulatory Authority (Epra) set the price of fuel at a record high of Sh134.72 and Sh115.60 per litre of petrol and diesel respectively in Nairobi in its September 14 review -- an increase of Sh7.58 and Sh7.94 from the August review.

The September prices were calculated based on the August crude price of $72.34, given the lag of between 30 and 45 days between the placement of import orders and delivery of the commodity.

The knock-on effect on the Kenyan economy whenever crude prices go up is pronounced, with transport costs a big factor in the final price of all goods and services.

The economy uses diesel for electricity generation, meaning that higher prices of the fuel will automatically result in higher fuel cost charges on power bills.

Producers of manufactured goods are also expected to factor in the higher cost of power in their factories and diesel for transportation of goods, which are expected to be passed on to the consumer.

This is on top of the direct increase in cost for the majority of households who rely on kerosene and LPG for lighting and cooking, making crude price a key determinant of the rate of inflation.

“Within the context of the Covid-19 pandemic where people have lost jobs, wages have been slashed and most businesses from our research are operating at about 58 percent of their pre-Covid levels… Any additional cost of fuel and of doing business cannot be favourable,” Ken Gichinga, the chief economist at Mentoria Economics, said.

The economy also uses diesel for running agricultural machinery such as tractors with a direct impact on the cost of farm produce and therefore food prices.

Food costs are already elevated in the country due to poor weather conditions and supply constraints, with higher transport charges expected to be loaded onto the final price.

By the end of last month, food inflation was at a 17-month high of 10.7 percent, reflecting higher prices of tomatoes, cabbages, potatoes, cooking oil, beef with bones, and bread.

A higher petroleum import bill will also have a direct impact on the shilling’s exchange rate due to a higher demand for dollars by oil marketers.

Petroleum imports account for 18 percent of the country’s monthly import bill and are the second largest category of imports after industrial goods.

The shilling is currently exchanging at a 10-month low of 110.40 units to the dollar, weighed down by high demand from importers.

In a statement following its meeting yesterday, the Central Bank of Kenya’s Monetary Policy Committee noted that the country’s current account deficit has widened to 5.5 percent from 4.7 percent at the end of last year, partly due to higher oil import costs.

“Imports of goods increased by 22.9 percent in the period January to August 2021 compared to a similar period in 2020, mainly reflecting increases in imports of oil and other intermediate goods,” it said.

The sharp rise in fuel prices has thus shifted the spotlight to taxation of petroleum products, with Kenyans in border towns increasingly seeking cheaper fuel in the neighbouring countries of Tanzania, Ethiopia, and Uganda.

“This is why there has been an urgent plea to review the tax policy around fuel. Short-term measures such as the subsidy are welcome, but people are looking forward to long-term measures to control the high prices,” Mr Gichinga said.

Taxes and levies account for 44 percent of the pump price of a litre of petrol, 40 percent for diesel, and 37 percent for kerosene, with the government now likely to face renewed calls to review the taxes downwards or reintroduce the subsidy to mitigate the expected higher landing cost of fuel.

Investment bank Goldman Sachs has raised its forecast for the benchmark Brent crude to rise to $90 by the end of the year, indicating that there is no short-term relief forthcoming for Kenyan motorists going into the festive period and the new year.