Kenya’s fuel subsidy that has kept pump prices unchanged for four months in a row has been crippled in the wake of the Russia-Ukraine war that pushed crude oil prices to a 14-year high.
Government sources say the Treasury will struggle to pay oil marketers more than Sh25 billion over the next two months to keep pump prices unchanged despite a jump in the cost of shipping the commodity.
The current fuel being consumed in Kenya is based on the average crude oil prices of $82.03 a barrel, and the monthly review set for next Tuesday at $92.
On Monday, it jumped to $139 a barrel, the highest level in almost 14 years, as the US hinted at a ban on buying Russian energy, a pointer that the full impact of the rally will be felt in Kenya from April.
Officials at the energy regulator—the Energy and Petroleum Regulatory Authority (Epra) -- reckon that the Treasury would require at least Sh10 billion this month and another Sh15 billion in April to compensate oil marketers and keep local pump prices unchanged.
With the fund supporting the subsidy exhausted, the Treasury will struggle to pay the marketers billions of shillings at a time when it’s faced with rising spending pressure from critical items like the August General Election and Covid-19 vaccines.
“The subsidy will be very expensive if the government opts to maintain it in the new review. I doubt if the government will manage,” said Martin Chomba, the chair of Petroleum Outlets Association of Kenya (POAK).
The subsidy scheme has been supported by billions of shillings raised from fuel consumers through the petroleum development levy, which was increased to Sh5.40 a litre in July 2020 from Sh0.40, a 1,250 percent rise.
The levy cushions consumers from volatility in fuel prices but has also seen motorists lose out when paying the Sh5.40 for a litre at the pump.
But the sharp rally in crude oil prices in recent months has depleted the fund and made it unsustainable, prompting the State to raise the red flag last month.
“The huge deltas to be compensated between the stabilised prices and actual prices compared to the low collections are posing a serious challenge to the subsidy,” Andrew Kamau, the Petroleum principal secretary.
Epra retained the price of diesel at Sh110.60 a litre in Nairobi for the month running to March 14 despite a jump in the cost of shipping the commodity.
Consumers would have paid Sh23.29 more for a litre of diesel in the absence of the subsidy, which cut kerosene and super petrol costs by Sh15.88 and Sh14.53 respectively.
Kenya introduced the subsidy on April 14 last year as part of efforts to defuse simmering public anger over the high cost of basic items.
On Monday, the Treasury and the Energy ministry declined to comment on who is responsible for the subsidy scheme.
“Please ask Ministry of Petroleum and Mining,” Treasury Principal Secretary Julius Muia told the Business Daily on Monday when asked about the future of the subsidy scheme.
But Mr Kamau said that only the Treasury and Epra could respond to questions regarding the subsidy.
“Both these questions should be directed to Epra and National Treasury,” Mr Kamau said.
Fuel prices have hit a new record high at the pump in many countries, tightening the squeeze on consumers.
The pump prices are driven largely by the wholesale price of energy, which has shot up amid fears of global economic shocks from Russia’s invasion of Ukraine.
The spike in crude oil prices to $139 a barrel came amid market supply fears as prospects for a swift return of Iranian crude to global markets also receded.
Global oil prices have risen more than 60 percent since the start of 2022, along with that of other commodities, raising concerns about economic growth and stagflation.
US Secretary of State Antony Blinken said on Sunday the United States and European allies were exploring banning imports of Russian oil, while the White House was coordinating with Congress committees to move forward with a US ban.
Analysts at Bank of America said if most of Russia’s oil exports were cut off, there could be a five million barrel per day (bpd) or larger shortfall, pushing prices as high as $200.
JP Morgan analysts said oil could soar to $185 this year, and analysts at Mitsubishi UFJ Financial Group Inc (MUFG) said oil may rise to $180 and cause a global recession.
This has the potential to drive Kenya’s pump prices upward and overwhelm the current State-backed subsidy that has kept pump prices unchanged for the fourth month in a row.
The costs of energy and transport have a significant weighting in the basket of goods and services that is used to measure inflation in Kenya.
Producers of services such as electricity and manufactured goods are also expected to factor in the higher cost of petroleum.
In Kenya, the majority of households rely on kerosene and LPG for cooking, making crude price a key determinant of the rate of inflation.