Weaker shilling hits homes as petroleum rises to Sh118

Motorists face more pain at the pump beginning this morning following a Sh2.38 rise in the price of petrol that the energy sector regulator attributed to recent exchange rate movements and higher cost of crude in September.

Nairobi motorists will now pay Sh118.11 for a litre of petrol — the highest price in the history of petroleum consumption in the city – that is expected to further disrupt household budgets that have recently been hit by higher taxation and growing inflationary pressure.

The Energy Regulatory Commission (ERC) said the price surge had resulted from the increase in crude prices over the import period.

“The Free on Board (FoB) price of Murban crude oil lifted in October 2018 stood at $82.30 per barrel, an increase of 2.43 per cent from $80.35 per barrel in September 2018,” the ERC said.

Over the same period, the regulator said, the mean monthly dollar to shilling exchange rate depreciated by 0.28 per cent from Sh100.88 in September to Sh101.16 in October.

Diesel, which fuels buses, trucks and farming tractors, is up by Sh3.11 to Sh112.83 and kerosene by Sh2.99 to Sh111.83, according to fresh retail prices that the ERC released yesterday.

The higher cost of fuel, especially diesel, increases the cost of transport, spreading its effect to all sectors of the economy.

It is therefore expected to raise the general cost of living at a time when higher taxes are already hurting consumers.

The latest prices also reflect the eight per cent VAT levy that was introduced in September, raising the share of taxes and levies per litre of petrol to Sh46.21.

Motorists in Mandera will now pay Sh130.97 per litre of petrol and Sh125.69 for diesel — the highest cost for fuel in the country — while those in Mombasa will pay the lowest at Sh115.48 and Sh110.21 per litre of petrol and diesel respectively.

Petroleum prices vary across Kenya due to transport costs that reflect how far a location is from the Mombasa port where imported consignments land and are stored.

Kenya relies on imported petroleum products after it shut down the Mombasa-based refinery in September 2013.

Now that the country imports refined product, there is usually a time lag of between 30 and 45 days between the placement of import orders and delivery of the commodity at the port of Mombasa, meaning local prices do not immediately reflect global market trends.

Effectively, this has cost Kenyan motorists the chance to immediately enjoy the drop in price of crude in the international markets.

The country imported the latest fuel consignment when the price of crude was close to a four-year peak (of $86 per barrel in early October), meaning that motorists can ideally expect a fall in the next review given that in the last one month the price per barrel has fallen by 23 per cent to around $66.

There has also been a reduction in the add-on costs at the pump related to demurrage fees paid to oil shippers, after the Kenya Pipeline Company constructed new storage tanks with a capacity of 133 million litres at its Nairobi Terminal at a cost of Sh5.3 billion.

Kenya Pipeline managing director Joe Sang said the additional storage, which went online in June, has cut demurrage fees by 50 per cent, to about Sh1 per litre.

“In June this year, just before the tanks became operational, the country’s demurrage costs were at a monthly average of Sh154 million. In October, this monthly average has significantly come down to Sh79 million,” said Mr Sang yesterday when he appeared before the National Assembly’s Departmental Committee on Energy to give an update on the progress of key projects.

Of concern though is the continued depreciation of the shilling, which if sustained will erode some of the price advantages that motorists would enjoy due to the lower price of crude.

The shilling was exchanging at an average of 102/50 to the dollar yesterday, having come under pressure in recent days due to demand side pressure from importers in the energy and manufacturing sectors.

This depreciation amplifies inflationary pressure since Kenya is a net importer of goods.

Other knock-on effects of the higher price of fuel combined with a weakening shilling will be felt on electricity bills, where the fuel cost charge and forex adjustment remain key levies.

For manufacturers, this increases the cost of production, translating to higher price of locally made goods, which makes them uncompetitive in the export market.

Projections in the international market, however, point to a possibility of lower crude prices in the near future, due to oversupply from the US, Saudi Arabia and Russia, partly due to market share battles among them.

The International Energy Agency has predicted that global supply will outpace demand through 2019, meaning that prices are unlikely to move up significantly, absent of a concerted supply cut from the large oil producers globally.