Economy

State in a dilemma over today’s fuel price review

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President Uhuru Kenyatta. FILE PHOTO | NMG

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Summary

  • Top State officials face a dilemma of how to honour the promise of cutting fuel prices today despite the sharp rise in crude prices and exhaustion of cash for the monthly fuel subsidy.
  • Fuel prices will from midnight increase to the highest level in Kenya’s history unless the Treasury provides emergency cash to subsidise the rising crude oil costs in what may further stoke public outrage over the high living expenses.
  • The officials have sought the intervention of State House to approve a plan that will lower or keep the pump prices unchanged in an effort to honour the promise of affordable petrol and defuse public anger.

Top State officials face a dilemma of how to honour the promise of cutting fuel prices today despite the sharp rise in crude prices and exhaustion of cash for the monthly fuel subsidy.

Fuel prices will from midnight increase to the highest level in Kenya’s history unless the Treasury provides emergency cash to subsidise the rising crude oil costs in what may further stoke public outrage over the high living expenses.

The officials have sought the intervention of State House to approve a plan that will lower or keep the pump prices unchanged in an effort to honour the promise of affordable petrol and defuse public anger.

The Treasury revealed that it had exhausted the Sh31 billion set aside to subsidise fuel after it diverted Sh18.1 billion to support standard gauge rail (SGR) operations under Chinese operators.

“The subsidy was not withdrawn. We have made our recommendations on this coming cycle and the powers that be will decide,” said a top official at the Energy ministry who requested anonymity.

The simmering public anger, which has caught the attention of top politicians and the National Intelligence Service (NIS), prompted a flurry of meetings involving top officials at the Treasury, the Ministry of Energy and the Energy and Petroleum Regulatory Authority (Epra) to discuss the review.

The Business Daily was yesterday unable to establish if a decision had been made to reinstate the subsidy.

Interior Cabinet Secretary Fred Matiang’i and ODM party leader Raila Odinga in early October talked of plans to reduce fuel prices.

This promise looks set to be derailed by the increase in crude oil prices to the highest levels in years, fuelled by rebounding global demand that has contributed to power and gas shortages in key economies like China.

Oil prices hit $83.65 a barrel, pointing to more pain at the pump given the current costly petrol is based on $72.34.

The shilling is currently exchanging at a 10-month low of 110.67 units to the dollar, upping the cost of imported goods such as fuel.

The energy regulator —Epra— removed subsidies of Sh7.10 on petrol, Sh9.90 on diesel and Sh11.36 on kerosene that applied on the prices of fuel sold in the month to October 14.

This increased the price of petrol by Sh7.58 a litre in Nairobi to Sh134.72 while diesel jumped Sh7.94 to Sh115.6 a litre — the highest in Kenya’s history.

The State had since March offered consumers of diesel and kerosene a subsidy, with those using petrol enjoying the benefit with the exception of the May review.

The subsidy saved consumers Sh24.44 per litre of diesel, Sh15.11 per litre of petrol and Sh30.90 per litre of kerosene in the months it has been in place.

The subsidy scheme was supported by billions of shillings 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 has also seen motorists lose out when paying the Sh5.40 for a litre at the pump.

The National Assembly’s Finance Committee wants the Treasury to use the Sh18.1 billion that was diverted to the Chinese firm operating SGR to reinstate the fuel subsidy.

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.

In Kenya, the majority of households rely 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.

Kenya’s inflation hit a 19-month high in September at 6.91 percent on the back of the rising cost of basic products such as fuel, food and electricity.

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