Economy

CS gets powers to slash fuel prices in new rule

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Petroleum Cabinet Secretary John Munyes. FILE PHOTO | NMG

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Summary

  • Petroleum Cabinet secretary has received powers to cut fuel prices and cushion motorists from sharp spikes in the cost of the product from a subsidy fund.
  • The minister will determine the amount of subsidy fuel consumers will be offered when prices rise by large margins.
  • The subsidy will be supported by billions of shillings that will be raised from fuel consumers through the Petroleum Development Levy, which has been increased to Sh5.40 a litre of fuel from Sh0.40, representing a 1,250 percent rise.

Petroleum Cabinet secretary has received powers to cut fuel prices and cushion motorists from sharp spikes in the cost of the product from a subsidy fund.

The minister will determine the amount of subsidy fuel consumers will be offered when prices rise by large margins.

The subsidy will be supported by billions of shillings that will be raised from fuel consumers through the Petroleum Development Levy, which has been increased to Sh5.40 a litre of fuel from Sh0.40, representing a 1,250 percent rise.

The fund is meant to cushion consumers from volatility in fuel prices but it will also see motorists lose out when paying the Sh5.40 for a litre at the pump.

“The Cabinet Secretary may by writing to the administrator, request for a draw down from the Petroleum Development Levy Fund to stabilise local petroleum prices where he deems necessary,” the subsidiary legislation, which is currently under review by the National Assembly’s committee on Delegated Legislation, states.

Development Levy Fund to stabilise local petroleum prices where he deems necessary,” the subsidiary legislation, which is currently under review by the National Assembly’s committee on Delegated Legislation, states.

“The levy shall also be used for matters relating to development of the oil industry including to stabilise local petroleum prices.”

The levy is expected to raise nearly Sh30 billion annually, up from the Sh2.28 billion it collected last year.

The Kenya Revenue Authority (KRA) will be the custodians of the billions raised through the levy.

The Energy and Petroleum Regulatory Authority (EPRA) has since 2010 been setting maximum fuel prices, which are determined every 15th day of the month and remain in force until the 14th day of the following month.

Now, the Cabinet Secretary in charge of petrol will have a role in approving cuts triggered by the subsidy.

The ministry reckons that the fund — which is modelled as a hedging tool — would ensure local firms and motorists do not suffer steep price increases caused by global market changes.

Critics have, however, argued that hedging is unnecessary, saying that the country should instead invest in larger storage facilities to allow importation of large cargo in times of lower prices and enjoy price stability.

“We had a low of $25 per barrel in March and $42 per barrel in July, what are the chances that it could go to $100? We want to cushion particularly those who use diesel because the fuel is used widely in the economy and when prices spike we can help limit the effects to the economy,” Petroleum Principal Secretary Andrew Kamau told the Business Daily.

Under the scheme, oil marketers will be paid the equivalent of the subsidy from the levy, which was first crated in 1991 and will for first time be used to stabilise prices.

Volatility in local fuel prices due to global changes became clear this year when motorists enjoyed big cuts in petrol costs that were followed by spikes.

Last month, fuel prices jumped by the biggest margin since 2007 when official data on pump costs are available.

Motorists in Nairobi are paying Sh11.38 more for a litre of super petrol at Sh100.48.

But the price of petrol dropped by Sh38.60 a litre between March and May, easing pressure on transport costs and inflation. The energy regulator said the current fuel prices are based on the crude cost of $36.34 in June, representing an increase from $23.55 posted in May and $17.64 April.

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

But reduced tension between China and Saudi Arabia, backed by increased road traffic in some of the some of the world’s major cities in June, sparked a rally in crude oil prices.

“The fund is necessary where volatility in global prices is a major risk for economic planning,” said Mr Kamau.

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 goods manufacturers are also expected to factor in the higher cost of petroleum, unleashing pricing pressure across the economy with ramifications on the cost of living measure.

In Kenya, the majority of households rely on kerosene and gas 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.