Economy

Petrol to hit record high minus subsidy

PETROL-PRICES

A customer attendant at Total petroleum station on Kimanthi Street, Nairobi. NMG PHOTO

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Summary

  • Estimates from the Energy ministry indicate that the price of petrol will increase by at least Sh3 a litre in the absence of a subsidy, pushing the cost of the commodity to Sh130 in Nairobi— which will be the highest in Kenya’s history.
  • But the State has over the past three months offered consumers of diesel and kerosene a subsidy, with motorists on petrol enjoying the benefit in the April review.
  • It offered a petrol subsidy of Sh4.40 a litre in April and has in the past three months spent Sh13.22 on kerosene and Sh7.28 on diesel.

Petrol prices will from midnight increase to the highest level in Kenya’s history unless the State subsidises the rising crude oil costs in what may further stoke public outrage over the high cost of living.

Estimates from the Energy ministry indicate that the price of petrol will increase by at least Sh3 a litre in the absence of a subsidy, pushing the cost of the commodity to Sh130 in Nairobi— which will be the highest in Kenya’s history.

But the State has over the past three months offered consumers of diesel and kerosene a subsidy, with motorists on petrol enjoying the benefit in the April review.

It offered a petrol subsidy of Sh4.40 a litre in April and has in the past three months spent Sh13.22 on kerosene and Sh7.28 on diesel.

This has seen the State keep diesel and kerosene prices unchanged since April on fears an upward review could fuel public anger.

Without the subsidy, diesel prices are expected to increase by at least Sh2.50 a litre from midnight, with kerosene set to rise a minimum of Sh3.50.

Costly fuel would unleash pricing pressure across the economy and have ramifications on the cost of living measure.

The jump in fuel prices is linked to costly crude attributed to signs of demand growth as the global economy recovers from the Covid-19 economic fallout.

The current pump prices are based on the barrel at $67.71, up from $63.94 previously, and an estimated $73.10 for the review that kicks off midnight.

The subsidy has come from a cut on the oil marketers’ margin, which has been regulated by the State since 2010, with the dealers receiving compensation estimated at nearly Sh2 billion.

The subsidy has been supported by billions of shillings that has been raised from fuel consumers through the Petroleum Development Levy, which was increased to Sh5.40 a litre in July last year 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.

The State is tapping into the fund despite the absence of regulations to manage the subsidy scheme, having collected about Sh15 billion from motorists since July last year.

Kenyans on social media have recently raised concerns over reduced cash flow, fewer employment opportunities and mounting public debt, which triggered a petition to the International Monetary Fund (IMF) to stop giving the country more loans.

Kenya was hit hard at the onset by the pandemic, but its economy has been picking up after posting a slight contraction of 0.1 percent in 2020, the IMF said.

Policy makers and politicians are taking notice of the online campaigns by ordinary Kenyans concerned about how the State coffers are handled as politicians start campaigning for next year’s elections.

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.

The energy regulator raised foreign exchange and fuel adjustment surcharges it levies in March electricity bills, hitting household budgets.

In Kenya, for instance, the majority of the population relies on kerosene and LPG for lighting and cooking, making crude price a key determinant of the rate of inflation.

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.

A litre of diesel is retailing at Sh107.66 in Nairobi from Sh74.57 June last year while petrol is up Sh38.04 to Sh127.14 over the period.

Inflation rose to a 16-month high in June largely on the back of increased cost of basic foodstuffs and fuel.

It increased 6.32 percent from 5.87 percent a month earlier, signalling pain for homes and businesses already battling Covid-19 pandemic knocks on earnings.

Crude prices in June soared to levels last seen three years ago, driven higher 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.

Crude oil prices plunged after a fallout between Saudi Arabia and Russia over production cuts in the wake of the Covid-19 pandemic, which has also reduced demand for energy on slow economic activities.

The prices plunged $17.64 April last year, ushering an era of cheap petrol in the months to last August.