New thinking urgently needed to tame fuel price surge

The skyrocketing fuel prices at the pump are very bad news for Kenyans. Coming at a time when the economy is crippled by Covid-19, it is pushing people to desperation. 

The country is headed towards a tipping point. New thinking is urgently needed to defuse the mounting anger over the rising cost of living.

All leaders are united on this — fuel prices have shot beyond acceptable levels, and must be reduced soonest.

First, let’s break down the reasons behind the rising fuel costs. The key two factors are the international prices of crude oil, and the value of the shilling against the dollar.

Rising crude prices increase cost of landed product in Kenya, while a depreciating shilling means more of the local currency is needed for same quantity of product. The government has little control over these two.

The biggest leverage the government has are over its taxes on fuel. Taxes on fuel are a very easy and effective method of raising revenues for government. It’s literally an economy-wide tax.

The government must, therefore, go back to the drawing board and relook at the taxes it levies on fuel.

This is because this is the only dynamic over which it has full control, and where it can get immediate impact.

This is very urgent. Another price review is due in 25 days. With the prevailing anger, that will not be the time to raise prices any further, irrespective of any changes in oil dynamics.

However, a sustainable formula must replace the current one. Simply put, the level of taxation on fuel must come down.

Even the subsidy route is not sustainable. The industry regulator, the Energy and Petroleum Regulatory Authority (EPRA), said it was not allowed to subsidise the prices this time round after doing so for two straight months. The government cannot sustain an economy wide subsidy.

To tackle this, three challenges must be addressed. First, new sources of revenue must be sought immediately.

Secondly, close loopholes and leakages in government spending. There is too much wastage. We need fiscal discipline.

Thirdly, suspend expenditures on non-essential projects that can wait for the economy to turnaround post-Covid.

The money saved from such projects can be used to cover the consequent dent in revenues due to reduction of taxes on fuel.

This entails bringing down the current huge deficit in the budget to more closely align government expenditures to its revenues.

These are harsh times, and government has no alternative but to bite the bullet. The trajectory is too dangerous to be allowed to continue.

Lastly, whatever the government does, it must not eliminate the EPRA pricing mechanism, which has been a critical component in providing stability and predictability of the local fuel market.

It is now the fashionable thing by so-called “experts” to dismiss the pricing mechanism because it is institutes price controls. 

They now want the government to allow “oil companies to compete,” as the panacea for rising prices.

This is so disingenuous. Economics 101 teaches us that oligopolies, like Kenya’s oil sector, do not compete, and actually collude to keep prices artificially high.

Our oil market is an oligopoly (market with limited competition dominated by a few players).

The main players are Vivo Energy (Shell) with a 26 per cent market share, followed by Total Kenya at 23 per cent, Rubis Energy at 13 per cent, and Ola Energy and National Oil Corporation of Kenya at seven per cent each. The other 45 companies in the industry share the remaining 25 per cent.

Secondly, oligopolistic markets retain artificially high prices irrespective of reduction in costs. Further, capricious price increases based on selfish considerations are the norm. 

Kenya has been here before. There is a reason why the price mechanism was instituted in the first place.

It stabilised the market. In Uganda’s free energy market, oil companies have raised pump prices twice in the last one month.

This is extremely destabilising to businesses and the economy. Don’t go back there. — gathukara@gmail.com