The State has partially withdrawn a fuel subsidy imposed last year, sending diesel and petrol prices to an all-time high in the first increase since October.
The Treasury will pay marketers an estimated Sh9.75 billion to curb a sharp rise in fuel prices in the wake of the Russia-Ukraine war, which has triggered a rally in commodities like crude oil and crippled the subsidy scheme.
The weakened subsidy plan pushed the energy regulator to increase diesel and petrol prices by Sh5 a litre to Sh115.60 and Sh134.72 respectively — the highest level in Kenya’s history — in its monthly review on Monday.
Without the subsidy, a litre of super would have increased to Sh155.11 while diesel would have retailed at Sh143.16 per litre of diesel.
But the Treasury has struggled to meet the cost of the subsidy due to the sharp rise in fuel prices that followed the Russian invasion of Ukraine, prompting the partial withdrawal.
The State would have required Sh11.7 billion in the month to April 14 and another Sh15 billion to meet the full subsidy, which was introduced in April last year to defuse public anger over the high cost of living.
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 government will utilise the Petroleum Development Levy to cushion consumers from the otherwise high prices,” Energy and Petroleum Regulatory Authority (Epra) Director-General Daniel Kiptoo said on Monday in reference to the partial subsidy.
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,” said Andrew Kamau, the Petroleum principal secretary.
Under the subsidy scheme, compensation to oil marketers per litre of diesel in the month to April 14 will stand at Sh27.56, up from Sh23.29 in the previous review. It has increased to Sh20.39 for a litre of super petrol, from Sh14.53, while for kerosene it has increased by Sh1.02 to Sh26.90.
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.
Oil prices soared after Russia invaded Ukraine, with the price of Brent crude oil -- the global benchmark for prices -- hitting a near 14-year high of $139 per barrel at one point.
However, in the past few days, the price of oil has dropped as fears that the European Union would follow the US and Canada in banning Russian oil have eased. Brent crude was down at $109 per barrel early on Monday.
US Secretary of State Antony Blinken said 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.
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.