How CS will set diesel subsidy for motorists

Motorists will enjoy a State subsidy on fuel when the crude oil prices in the global market cross $50 (Sh5,420.40) per barrel.

The Ministry of Energy yesterday told Parliament that Kenyans will not bear costs of diesel prices above $50 a barrel in a subsidy scheme that excludes petrol.

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 in July 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.

Local diesel prices have for the past five months in a row been based on crude costs of below $50 on reduced global demand in the wake of coronavirus.

“We decided on a design here if the price per barrel hits past $50, then the fund pays us for every dollar above. We looked at the development levy to have more savings so that the next time we are caught off-guard, we shall have something to cushion the mwananchi,” Petroleum and Mining Principal Secretary Andrew Kamau told MPs Wednesday.

“This will be used to subsidise diesel alone but will be collected from petrol and diesel. Diesel is the most used by mwananchi.”

The economy uses diesel for transportation, power generation and running of agricultural machinery such as tractors, with a direct impact on the cost of farm produce.

Crude oil prices plunged after a fallout between Saudi Arabia and Russia over production cuts in the wake of the Covid-19 pandemic and depressed demand for energy on slowed economic activities.

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

Kenya quoted average crude prices in February at $56.10 and fell $17.64 in April before starting a marginal increase that saw it at $44.28 in July, which is the basis for the current pump 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.

Petroleum Cabinet Secretary will determine the amount of subsidy fuel consumers will be offered when prices increase by large margins during the monthly reviews.

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 Petroleum will have a role in approving cuts triggered by the subsidy.

Global market

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.

Under the scheme, oil marketers will be paid the equivalent of the subsidy from the levy, which was first created 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 and diesel costs that were followed by spikes.

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

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

But the price of petrol had dropped by Sh38.60 a litre between March and May, easing pressure on transport costs and inflation.

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.