Global Markets

State dilemma deepens on global oil price rally

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Fuel tankers refill at the Kisumu oil depot. FILE PHOTO | NMG

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Summary

  • High global oil prices spell bad news for the Kenyan government which has for the past two months resorted to cutting deals with oil marketers to keep fuel prices unchanged and defuse public outrage.

Global oil prices rallied to a two-year high on Monday, deepening a dilemma for the government that is desperate for options of diffusing public outrage over costly fuel amid an economic weigh down by the Covid-19 pandemic.

Oil prices struck $73.44 a barrel on Monday, a market report by Reuters showed, the highest since May 2019 buoyed by an improved outlook for demand as increased Covid-19 vaccinations help lift travel curbs.

The sustained rebound in oil prices signals heightened risks of imported inflationary pressure that would reflect on consumer products and services in months and possibly trigger more outcry by households smarting from the economic shocks of the pandemic.

Bad news

This spells bad news for the Kenyan government which has for the past two months resorted to cutting deals with oil marketers to delay collection of their sales margins and keep fuel prices unchanged to defuse public outrage over a monthly review that would have pushed costs to a historic high.

Spooked by public anger over the high cost of living, the State has controversially compensated the oil marketers through the Petroleum Development Fund in exchange for the manipulated prices. For instance, in the successive monthly reviews for April 15 to May 14 and May 15 to June 14, the Treasury paid out a total of Sh1.4 billion in compensation to the marketers after the Energy and Petroleum Regulatory Authority (Epra) cut their sales margin to keep fuel prices unchanged.

The marketers’ margin for super petrol was cut from Sh12.39 a litre to Sh7.95 over the month to May 14, representing a cut of Sh4.44. This was fully reinstated in the review running to June 14.

Latest review

In the latest review for June 15 to July 14, a litre of petrol rose by Sh0.77 to hit a record Sh127.14 yesterday though the prices of diesel and kerosene were retained at Sh107.66 and Sh97.85 per litre even as the crude oil prices rose.

This means that the supplier margins for diesel have been cut to Sh8 from Sh11.72 per litre last month while those for kerosene fell to Sh6.04 from Sh8.93 per litre.

The unchanged prices for diesel and kerosene signal that the Treasury will once again turned to the fuel subsidy kitty to compensate marketers.

Analysts, however, said the Treasury’s reliance on the Petroleum Development Fund is uncertain for now because the regulations to allow the use of cash from the kitty has not yet been approved and withdrawals would amount to a legal breach.

The fund, which is meant to cushion diesel consumers from volatility and offer subsidies when prices rise by large margins, has so far netted more than Sh15 billion through the Petroleum Development Levy, which increased to Sh5.40 a litre in July last year from Sh0.40, representing a 1,250 percent raise.

Fuel taxes

Petroleum Cabinet Secretary John Munyes on Monday urged Parliament to review taxation on petroleum as the best option of cushioning consumers from rising energy costs.

“The role we need to play now is to look at our legislation. As legislators, you should look at taxes and levies to reduce pump prices. We need to stabilise these prices because it is hurting the economy. We are raising taxes but the common person is raising concerns over high prices,” he told a committee of the Senate on Energy.

There are nine taxes and levies that account for Sh57.77 per litre of Super, Sh45.52 per litre of diesel, and Sh39.72 per litre of kerosene.

The taxes and levies are Excise Duty Tax, Petroleum Development Levy, Petroleum Regulatory Levy, and Railway Development Levy. Others are the Merchant and Shipping Levy, Import Declaration Fee Levy, Value Added Tax Anti-Adulteration Levy.

“As at May 2021, taxes and levies contributed the highest portion of pump prices of super petrol and the second greatest contributor to the prices of diesel and kerosene,” Mr Munyes told the Senate Committee on Energy chaired by Ephraim Maina.

Daniel Kiptoo, the acting director-general of Epra, said draft regulations on the operation of the Petroleum Consolidated Fund which is meant to cater for the creation and maintenance of strategic stocks had been finalised as stipulated in the Petroleum Act, 2019.

“Further, the team has also finalised draft regulations that provide a governance framework for the Petroleum Development Levy intended for among other functions stabilisation of pump prices,” Mr Kiptoo said.

The Consumers Federation of Kenya secretary-general Stephen Mutoro said the taxation on petroleum prices is unsustainable and proposed a review.

“It (taxation on fuel) is extreme, immoral, and not sustainable in terms of making the economy recover. It’s something that we cannot sustain as an economy,” he said on phone.

“It’s time we revised the taxes and levies (on fuel) because many people are unemployed, the shilling is weakening and crude oil prices are rising.”