Why it’s premature to discontinue monthly oil price regulation formula

Opinion and Analysis

A petrol station attendant adjusts prices. PHOTO | FILE 

By GEORGE WACHIRA

In Summary

• If the government introduces price stabilisation fund, it will deny the consumer immediate benefits of reduction in cost of fuel.

There have been murmurs from consumer organisations and even politicians in respect of last month’s petroleum price increases.

They argue that the prices should have continued to come down. Pump prices calculated by the Energy Regulatory Commission (ERC) have been dropping since August last year, but showed a surprise increase mid last month.

From what I have gathered, there appears to be three issues which should not be mixed up. Firstly, were the March prices correctly calculated as per the price formula detailed in the price regulations?

Secondly, should oil prices continue to be controlled? Thirdly, is there a better method for controlling prices?

I have perused the details that led to March price increases, and they look consistent with the price formula provisions. They reflect the global price movements for petroleum products in the period prior to March 15.

What actually happened in March was a sudden crude oil price recovery from a low of $46.4 in February to an average of $56.6 in March.

However, with our Mombasa refinery closed, crude oil no longer features in the ERC price formula. The formula is currently 100 per cent based on imported products.

It is the international prices (Platts) for products that count because our actual imports are paid for on basis of Platts listings.

Like crude oil, the petroleum products prices also hit the bottom in February and then rebound in March. It should, however, be noted that product prices do not always follow the same exact trend as crude oil.

Other factors like global refining capacity, product stocks, and product winter/summer demands fluctuations all impact product prices differently. However, it is the crude price movements that we normally see in the media, not products price trends.

The ERC price formula was intended to be transparent, predictable (in method and timing), and reflective of actual product cost increases in the past month. The formula was meant to be free from “political” discretionary inputs.

The formula objectives were consumer protection, while ensuring reasonable investor profitability to permit continued sector investments.

The application of the formula is very straightforward since the inputs are from accredited global sources. In fact, the formula is so free of discretionary decisions that in a number of countries the price formula calculations are contracted out to independent audit firms. The Kenyan price formula is modelled on the South African formula.

The only government inputs are when gross margins for the marketers and retailers require to be revised to reflect justifiable marketing cost increases.

There have been only three updates of gross margins since 2010, and these were to mainly reflect increased cost of working capital financing.The last margin update was a year ago in February 2014.