Stop abuse of Kenya oil market power

Deporting Jean-Christian Bergeron, the CEO of international oil marketer Rubis, is the easy part. The most pertinent questions at the heart of the fuel crisis we are suffering right now are the following.

First, do we have the political backbone to do what Uganda, Rwanda and Ghana have done, namely, allow the passing through of the full cost of high global prices to the final consumer?

Secondly, if the sky-high international prices resulting from the Ukraine crisis force us to pour more cash on subsidies, is the budget-financed subsidy going to be fiscally sustainable?

I read somewhere that since January this year, the price of gasoline in Ghana has increased by 52 percent. This is what happens when you pass the full international price increases of fuel on the final consumer.

Currently, pump prices in Uganda, Rwanda, Tanzania and the DRC are much higher than they are in Kenya because prices here are artificially kept down by the subsidy.

The way I see it, one of the major factors that have inflamed the current crisis is the emergence of a brisk parallel market in transit oil, the consequence of the wide gaps between pump prices in Kenya and in places such as Uganda and Rwanda where there are no subsidies.

The export business has become lucrative because, in those countries, an oil dealer does not have to wait for months for the government to release the subsidy. There is another advantage in the parallel transit market: you are paid in cash.

So, when the government accuses some oil companies of exporting oil to our neighbouring countries, it is right. The margins on the parallel market for transit oil have been huge. A third factor compounded the situation: uncompetitive tactics by some of the large players added to more anxiety in the marketplace.

It seems to me that one of the triggers of the brisk business in transit oil started when one of the big players in the market — perhaps to undercut the rest and boost market share — started selling below the government-decreed price.

Those tactics sent wrong signals to the marketplace because when you are a big player, your actions and tactics create reverberations in the broader marketplace.

In this case, the so-called independents and unbranded players started buying from this big player and exporting large products to the much more lucrative markets in Uganda, Rwanda and Northern Congo.

The roaring parallel market in transit oil was especially very attractive to small players. With the rapid rise of global prices, these small players, unlike the big boys, had found themselves without the cash flows to play and do business in the mainstream. The shortages worsened.

We must accept that the regime of regulation of the oil industry is not working efficiently. Instead of price controls, vessel scheduling meetings, ullage allocation committees and complex formulae for calculating “price caps”, “floors” and “ceilings”, regulation should put more emphasis on abuse of market power.

When a big player acts like its intention is to undercut other players, especially at a time when the whole market is engulfed in uncertainties and crippling shortages, it must be stopped promptly. The government should introduce tough sanctions on monopolistic behaviour and restrictive practices.

We should accept that the structure of our oil market encourages cartel-like behaviour. Under the so-called Open Tender System, one oil company is allowed to import all of Kenya’s requirements on behalf of the rest of the marketers. Because the supply is fixed in the short run, the system more or less guarantees for oil marketers sales at higher prices.

In economic textbooks, we read that collusive behaviour happens under two circumstances: One, where the product is not differentiated and has no close substitutes, and two, where players face a similar cost structure. In a number of cases, oil companies jointly own and share truck-loading facilities

We should overhaul the system for licensing oil companies.

We have recently witnessed an explosion in the number of briefcase traders that are proving to be a hindrance to the smooth functioning of the supply chain. Today, you can find a situation where Kenya Pipeline Company’s system is holding millions of litres of petrol yet pumps remain dry.

It is a sign that we have too many stations belonging to fly-by-night traders with no investment in distribution infrastructure. Let us introduce minimum capitalisation for licences and subject licensing to proof of ability to invest in petrol stations, depots, and storage tanks.

Implemented well, a cleverly-crafted regulatory regime for oil companies can make a major impact in this economy.