Economy

MPs approve diesel subsidy amid public outcry

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Parliament during a past session. FILE PHOTO | NMG

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Summary

  • The National Assembly Committee on Delegated Legislation approved the Petroleum Development Levy Order, 2020 (Legal Notice No. 124 of 2020).
  • The regulations give the Petroleum Cabinet Secretary powers to cut diesel prices and cushion motorists from sharp spikes in the cost of the product when crude oil crosses $50 per barrel.
  • Crude oil crossed the $50 a barrel mark in January, but the legal hitch denied motorists the subsidy despite the State having collected more than Sh12 billion from consumers since July.

A parliamentary committee has approved regulations that will allow motorists to enjoy a diesel subsidy amid soaring fuel prices that have caused public outrage.

The National Assembly Committee on Delegated Legislation approved the Petroleum Development Levy Order, 2020 (Legal Notice No. 124 of 2020), paving the way for Parliament to pass it into law and allow motorists to get cuts on the price of diesel.

The regulations give the Petroleum Cabinet Secretary powers to cut diesel prices and cushion motorists from sharp spikes in the cost of the product when crude oil crosses $50 per barrel.

Crude oil crossed the $50 a barrel mark in January, but the legal hitch denied motorists the subsidy despite the State having collected more than Sh12 billion from consumers since July.

“The committee has since dispensed with the matter by approving the order [Petroleum Development Levy Order, 2020],” William Kamket, who chairs of the Committee on Delegated Legislation, told the Business Daily Wednesday.

Motorists in Nairobi are paying Sh122.81 for a litre of super petrol from Sh115.18, representing a Sh7.63 increase, and Sh5.75 more for a litre of diesel at Sh107.66.

Petrol is retailing at a level last seen in November 2011 while diesel is selling at the highest price since December 2018.

The sharp rise in fuel prices since the start of the year shifted the spotlight on the delayed fuel subsidy plan despite the State collecting more than Sh12 billion from households and businesses to stabilise diesel prices.

Under the subsidy scheme that excluded petrol and started in July Kenyans were not expected to bear the costs of diesel prices above $50 a barrel.

The subsidy has been supported by billions of shillings raised from 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 fund 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.

Local diesel prices have since July been based on crude costs of below $50 on reduced global demand in the wake of the coronavirus outbreak.

The price of oil has recovered to its pre-pandemic levels having hit an all-time low last year.

The fuel that Kenya consumed in December was based on the barrel at $49.57 before the average crude jumped to $55.27 in January and $61.61 in February, which is the basis for current super petrol and diesel prices.

For $49.57 a barrel, local diesel prices were at Sh90.70 a litre, a pointer that the State would need to grant a subsidy of up to Sh17 a litre.

The costs of energy and transport have a significant weighting in the basket of goods and services that is used to measure inflation in the country.

Producers of services such as electricity and manufactured goods are also expected to factor in the higher cost of petroleum, unleashing pricing pressure across the economy with ramifications on the cost of living measure.

The economy also uses diesel for transportation, power generation and running of agricultural machinery such as tractors, with a direct impact on the cost of farm produce.

Inflation rose from 5.8 percent in February from 5.7 percent in January, largely driven by cheap fuel and food prices.

Petrol prices have jumped Sh15.82 a litre over the past two months, making it one of the biggest jumps over the period since 2007 when official data on fuel prices are available.

Kerosene prices rose to Sh97.85 a litre in Nairobi, up from Sh92.44 in February, reflecting a Sh5.41 rise.

Crude prices have soared to pre-virus levels in recent weeks, driven by the production cuts by the Opec nations and the mass rollout of Covid-19 vaccines in many high-income countries.

While demand for oil is still lower than normal, there are hopes of a speedier than expected economic recovery as vaccines are rolled out.