The petroleum fuels “subsidies” applied to retail pump prices since a few months ago appear to have stopped this month. Not surprising because the method used to implement the subsidies was not sustainable, as it was not anchored on any law or regulation.
The existing price regulations and formula, known for their objectivity, could not be effectively used to manage subsidies unless modified.
This is besides there being no obvious justification for changing the way we have for many years administered oil cost fluctuations through the monthly price formula, which has worked fairly well as it promptly and correctly reflects oil cost changes and recovery.
The term “price subsidies ” as frequently used is actually a misnomer since it incorrectly implies the Treasury is pumping cash to consumers which is not the case.
Government subsidies for oil consumption are a fiscal anathema anywhere in the world, with those countries already subsidising finding it politically difficult to extricate themselves from them.
The correct term should have been “price stabilisation” to average out up/downswings in global oil prices, and which is self-funding through a levy contributed by consumers, in this case, Sh5 per litre.
The Stabilisation Fund goes into surplus when global oil prices are low and reimburses the consumers when the prices are going up. It is a consumers’ self-funded kitty which should normally be administered by a Trust.
Whereas the collection of the Sh5 levy has been ongoing since July last year, the rules and systems for the Stabilization Fund are not in place to ensure full accountability of consumers funds held in trust. The Petroleum Act 2019 is not explicit about a Stabilization Fund.
However, my opinion all along has been that there is no strong justification for a price stabilisation process or fund, as the existing mid-month price formula has worked fairly well during times of low and high oil supply costs. Extreme price drops as we saw in 2020 and extreme upswings are more of exceptions than routine, and these can be adequately managed under existing regulations and formula.
And here I have avoided talking about petroleum taxes and other levies which are part of a political process involving Parliament and the Treasury ( and I will add the IMF).
However, the Sh5 petroleum development levy was justified and introduced by a policy originated by the Petroleum authorities, and this is why its fate (whichever way) should be followed through by the Petroleum department.
When the government commenced collecting the additional Sh5 effective July 2020, the indications were that this would fund a “petroleum development levy fund” which would compensate consumers when crude prices went above $50.
The “datum” crude price in July last year was around $40. Since then, crude oil prices have jumped through the $50s, $60s and are in recent weeks in the lower $70s. In the meantime, what to do with the Sh5 per litre petroleum levy is the homework for the Petroleum authorities.
Should the government decide that price stabilisation is indeed necessary, then the Petroleum Act 2019 should be enhanced to include a Price Stabilisation Fund with supporting regulations detailing how it will be operated.
The stabilisation procedures should then be anchored in an enhanced Pricing Formula, to ensure that the integrity of supply chain costs and margins is ring-fenced and not distorted by price stabilisation.
Going forward, market indications point to increased global oil supplies and softening prices as oil-producing countries and companies put more oil into the market to increase their market share to enjoy the high prices while they last. As more oil comes into the markets, prices can only drop.
Countries like Libya, Venezuela, Iran which have been experiencing production restrictions are planning to put more oil into global markets. USA shale oil producers are also planning to drill more oil.
Even the oil companies are increasing supply, as long as the demand is there. Climate change and the energy transition appear to have only limited impacts on oil markets.
PAYE Tax Calculator
Note: The results are not exact but very close to the actual.
