The Energy and Petroleum Regulatory Authority, the body mandated by the Petroleum Act, 2019 to set fuel prices, has just announced new retail fuel prices for the period September 15 to October 14, 2022.
The retail price for petrol has been capped at Sh179.30, diesel at Sh165 and kerosene at Sh147.94 per litre in Nairobi with the incremental being reflected countrywide and varied based on logistical costs.
These new prices have pushed the cost of fuel to their highest ever levels despite the government paying a Sh20.82/L subsidy on diesel and Sh26.25/L subsidy on kerosene.
The subsidy will potentially cost the taxpayer up to Sh280 billion per year, equivalent to the entire national government development budget yet the cost of living keeps rising to astronomical levels despite this intervention.
It defies logic to keep spending such colossal sums of money paid out as subsidy to select oil marketers amid claims of corruption in the sector yet the cost of living keeps rising exponentially. We cannot keep doing the same thing over and over again and expect different results.
It is high time that the logic, rationale and sustainability of the fuel subsidy is interrogated and a determination made whether it represents value for money for Kenyans and whether it is the panacea for bringing down the cost of living. But why is the fuel subsidy not the solution for bringing down the cost of living?
Kenya, like most of its East African neighbours, depends on imported refined petroleum products mainly from the Middle East. Official records show that in 2021 the country imported 6.149 billion litres of refined petroleum worth $3.48 billion.
The imports came mainly from the UAE ($1.41 billion) and Saudi Arabia ($1.14 billion). Other sources included India, the Netherlands and Kuwait. Ordinarily, the oil marketers would set retail prices purely based on prevailing market forces and sometimes international variables influencing logistics and determining viability of source markets.
But oil is an essential commodity for Kenya’s economy. It is vital in transport and industrial production, electricity generation and water provision. Its availability and pricing are critical in determining the cost of living, industrial growth and viability of the entire economy.
Turbulence in fuel source markets and their value chains from time to time has often forced oil marketers to set prices beyond levels affordable by the economy.
In 2008, as the world grappled with high oil prices, Kenya introduced price controls to cushion the blow for its citizens and the economy in general. In 2011 the government implemented a maximum price cap managed by EPRA because marketers had raised the price of fuel in response to increases in international crude oil prices between 2007 and 2008, but didn’t reverse them when international prices fell at the end of 2008.
In 2020 during the travel and movement restrictions occasioned by Covid-19, fuel prices dropped to an average of $40/barrel and the government introduced a fuel stabilisation fund that would see collection of fuel levy as long as the oil price remained below an agreed anchor point.
Petroleum Development Levy was hence raised from Sh0.4 per litre to Sh5.4 per litre on diesel as proposed through Legal Notice No 124 of 2020. The anchor oil price point was set at $50/barrel. If as an example the international oil price was $40/barrel, motorists would pay Sh5.4 at the pump that would go to the fuel stabilisation fund.
In a situation where the price went above $50/barrel, EPRA would then hold prices at an affordable level, and compensate the oil marketers on the cost differential forfeited at the pump price through the accumulated stabilisation fund.
The framework of the oil stabilisation fund appeared good on paper, but the real test came when the oil price rose above $50/barrel in January 2021. The intended timely compensation of oil marketers started taking a lag from weeks to months, given the competing government budgetary needs.
The anchor point of $50/barrel was equally untenable, as the national treasury had only collected about Sh12 billion by the time this anchor point was surpassed. The situation became worse after Russia invaded Ukraine in February 2022, forcing the price to shoot up to an average of $122/barrel in June 2022.
The fuel stabilisation scheme became unsustainable and culminated in fuel hoarding by oil marketers who laid a huge financial claim on the government. To date, the government owes oil marketers about Sh66 billion, having spent Sh144 billion since the start of the subsidy programme. In the financial year 2021-22, and 2022-23, the government has allocated Sh100 billion to subsidise fuel prices. This is unsustainable in the long run.
The fundamental question that needs to be answered is; Are these billions of shillings spent on fuel subsidy value for money out of the strained government budget? The rationale of the fuel subsidy, as initially envisaged was to cushion Kenyans against the rising cost of living.
As at September 2022, both the cost of fuel and cost of living have increased concurrently. This can therefore only be a short-term quick fix and has been proven unsustainable with the huge compensation to oil marketers remaining unpaid. Setting aside money from the budget to fund the subsidy means denying Kenyans the much-needed budgetary funding for development programmes that would reduce cost of living in a sustainable manner.
In the financial year 2022-23 development budgetary estimates, food and nutrition have been allocated Sh46.8 billion while universal health coverage has been allocated Sh62.3 billion, both totalling Sh109.1 billion.
The impact of directing funds in these two sectors is enormous, sustainable and long-term. It will greatly improve the livelihoods of Kenyans, particularly those at the bottom of the pyramid. Spending the same amount on fuel subsidy amounts to misdirecting resources to largely a short-term fix that our economy cannot sustain in the long run.
With the new government sworn in last week under the leadership of President Dr William Ruto, the commitment to transform the livelihoods of Kenyans is strong and believable. The step to end the fuel subsidy is in the right direction, and will bear fruit in the medium and longer term.
Kenyans need to be patient and allow the government to instal sustainable solutions as opposed to knee-jerk, rosy unsustainable programmes. Going forward, a review of the petroleum subsector will be the right thing to do, to address the supply and cost inefficiencies in the value chain.
This should include a re-examination of the role of the National Oil Company in sourcing products more competitively, and negotiation of government-to-government supply contracts. Let us subsidise production for consumption to benefit in a sustainable manner.
Economist, management consultant and strategy expert
