Economy

Motorists close to fuel subsidy as oil hits $50

Fuel

Fuel at a pump station. Ministry of Energy reckons that Kenyans will not bear costs of diesel prices above $50 a barrel in a subsidy scheme that excludes petrol. FILE PHOTO | NMG

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Summary

  • The subsidy will be supported by billions of shillings raised from fuel consumers through the Petroleum Development Levy, which was increased to Sh5.40 a litre in July from Sh0.40, representing a 1,250 percent rise.
  • The Kenya subsidy scheme is meant to cushion consumers from volatility in fuel prices but it will also see motorists lose out when paying the Sh5.40 for a litre at the pump.
  • Under the scheme, oil marketers will be paid the equivalent of the subsidy from the levy, which was first created in 1991 and will for first time be used to stabilise prices.

Motorists are on course to enjoy a State subsidy on fuel after global crude cost rose above $50 per barrel, a level that allows diesel users to get rebates from the government.

The Ministry of Energy reckons that Kenyans will not bear costs of diesel prices above $50 a barrel in a subsidy scheme that excludes petrol.

The subsidy will be supported by billions of shillings raised from fuel consumers through the Petroleum Development Levy, which was increased to Sh5.40 a litre in July from Sh0.40, representing a 1,250 percent rise.

Oil prices increased to the highest since March to hit the $50.36 per barrel on Friday buoyed by hopes that more countries will soon roll out a coronavirus vaccine, accelerating economic growth and travel that will fuel demand for fuel.

This looks set to see the government tap into the fund, which collects about Sh2 billion monthly, next year if crude prices remain above $50 per barrel.

Promising vaccine trials have helped lift some gloom over record increases in the number of new coronavirus infections and deaths around the world.

Crude oil prices plunged after a fallout between Saudi Arabia and Russia over production cuts in the wake of the Covid-19 pandemic and depressed demand for energy on slowed economic activities.

But reduced tension between the two, backed by increased road traffic in some of the world’s major cities in June, sparked a rally in crude oil prices.

Kenya quoted average crude prices in February at $56.10 and fell $17.64 in April before starting a marginal increase that saw it at $44.28 in November, which is the basis for the current pump prices.

The Kenya subsidy scheme is meant to cushion consumers from volatility in fuel prices but it will also see motorists lose out when paying the Sh5.40 for a litre at the pump.

Petroleum Cabinet Secretary will determine the amount of subsidy fuel consumers will be offered when prices increase by large margins during the monthly reviews.

The Energy and Petroleum Regulatory Authority (Epra) has since 2010 been setting maximum fuel prices, which are determined every 15th day of the month and remain in force until the 14th day of the following month.

The ministry reckons that the fund — which is modelled as a hedging tool — would ensure local firms and motorists do not suffer steep price increases caused by global market changes.

Under the scheme, oil marketers will be paid the equivalent of the subsidy from the levy, which was first created in 1991 and will for first time be used to stabilise prices.