DESIGN: LISA WAMUGUNDA AND ANDREW ANINI
Petrol in Kenya would cost as low as Sh55
per litre if the fall in crude oil prices were reflected in ...
refined products such as petrol and diesel, a review by Nation Newsplex and the Institute of Economic Affairs (IEA) finds.
The analysis also reveals that taxes comprise by far the largest component of fuel prices in Kenya after fixed international costs, with a much smaller portion going to fuel marketers.
refined products such as petrol and diesel, a review by Nation Newsplex and the Institute of Economic Affairs (IEA) finds.
The analysis also reveals that taxes comprise by far the largest component of fuel prices in Kenya after fixed international costs, with a much smaller portion going to fuel marketers.
INTERACTIVE: Components of Kenya’s fuel prices
If
the average ratios of refined products prices to crude oil prices from
2005 to January 2016 were maintained, petrol would now cost Sh55. The
prices of diesel and kerosene would also fall to Sh50 and Sh40
respectively.
Currently, of the super petrol price of
Sh88, Sh41 (46 per cent) goes to international buying and freight costs,
while Sh32 (37 per cent) goes to taxes and levies. Eight per cent (Sh7)
goes to wholesale marketers while five per cent (Sh4) goes to retailers
at the fuel pump.
The finding of modest margins for
marketers comes as Kenyans react unfavourably to small drops in fuel
prices. Motorists were angry when the Energy Regulatory Commission
(ERC) recently reduced the prices of petrol and diesel by less than Sh2
in mid-January, after global crude oil prices plunged to a 12-year low
this year.
From 2004 to January 2016 the price of Brent
crude fell 24 per cent, from an average price of US$38 to US$29 per
barrel, even if it peaked in 2011, at US$111 per barrel. On the other
hand, over the same time, a litre of super petrol sold in Kenya
increased 33 per cent from Sh66 to Sh88 per litre.
Increased
oil production across the world, rising fuel efficiency and collapsed
consensus among oil producers have all contributed to the collapse of
oil prices.
REFINED PRODUCTS STEADY
A review of pricing ratios shows that prices of petrol and in
Kenya diesel do not reflect the drop in crude oil prices, even after
taking the exchange rate into account. Kerosene is an exception to this
rule.
For example, in December 2005, a litre of petrol
cost 2.5 times the price of a litre of crude oil. This ratio was
declining until December 2008, when the same amount of petrol cost more
than four times the price of crude, due to a sharp decline in crude oil
prices.
From June 2009 to June 2014, petrol prices
stayed below 2.5 times crude oil prices. However, from December 2014 to
Jan 2016, the price of a litre of petrol increased sharply to reach
almost four times the price of a litre of crude oil.
If
the price ratios of petrol, diesel and kerosene to crude oil had been
maintained at 2.4, 2.2 and 1.8 times that of crude oil, (the average
ratios for the period 2005-2016), then the current retail prices would
work out to Sh55, Sh50 and Sh40 per litre for petrol, diesel and
kerosene respectively.
Energy Cabinet Secretary Charles
Keter has urged the ERC to lower oil prices, by cutting
marketer’s margins, showing he was unwilling to reduce the taxes which
account for the largest share of the price. In fact, the planned
imposition of 16 per cent VAT means the tax burden will weigh even
heavier on fuel prices.
As at January 18, Kenya had the
cheapest diesel in East Africa at Sh77 a litre, 10 per cent below the
world average price of Sh85. Compared to Kenya, the cost of diesel was
higher by Sh1 in Tanzania, Sh9 in Uganda, Sh36 in Rwanda and Sh37 in
Burundi.
Kenya also had East Africa’s second-cheapest
petrol. At Sh88 per litre, petrol costs 11 per cent less in Kenya than
the world’s average price. According to globalpetrolprices.com, petrol
is Sh4 cheaper in Tanzania at Sh84 per litre, but more expensive by
Sh18, Sh25 and Sh27 in Uganda, Rwanda and Burundi respectively.
While
prices in Kenya and Tanzania are closer together, Uganda, Rwanda and
Burundi have higher prices, mainly because of the high transportation
costs they incur due to being landlocked.
Factoring in
the purchasing power parity of the different countries would reveal an
even wider gap between the prices of petroleum products in Kenya and the
four countries, given Kenya’s stronger economy, according to the IEA.
PRICES AROUND AFRICA
When
countries from outside East Africa, including South Africa, Ethiopia,
Mozambique, Zambia and Zimbabwe are included, the cost of fuel in Kenya
remains in the middle of the pack. Of the selected countries, fuel is
cheapest in South Africa, where super petrol costs the equivalent of
Sh75 and diesel Sh61.
According to IEA, prices are
lower there partly because the presence of low-cost coal has a downward
effect on oil prices. Coal makes up 77 per cent of South Africa energy
consumption.
Prices of the two products are also
slightly cheaper in Ethiopia, where diesel costs Sh74 per litre and
petrol Sh83. Ethiopia also produces a small amount of crude oil and has
a lower fuel tax rate than Kenya.
In Zambia, diesel
costs the same as in Kenya, while petrol costs Sh1 more per litre. Fuel
is more expensive in Mozambique and Zimbabwe, where diesel costs Sh78
and Sh117 respectively, while petrol costs Sh100 and Sh130 respectively.
WHAT BELONGS TO CASESAR
The
price of petroleum products in Kenya is not set by market interactions
but by a formula that is set by the ERC. This formula has set the profit
margin that every petroleum dealer may take for each litre of petroleum
fuels.
According to the price controls, which have
been questioned by the World Bank, the percentage of tax goes up as the
price of crude fuel falls, thus denying consumers the full benefits of
dropping global prices.
In Kenya, taxes as a share of fuel prices are highest for petrol and lowest for kerosene.
Of
the super petrol price of Sh88, Sh41 (47 per cent) goes to
international buying and freight costs while Sh32 (37 per cent) goes to
taxes and levies. Eight per cent (Sh7) goes to wholesale marketers,
while retailers at the pump get five per cent (Sh4).
From
the diesel price of Sh79, 52 per cent (Sh41) goes to international and
freight costs, 29 per cent (Sh23) goes to taxes and levies, 14 per cent
(Sh11) to wholesale and retail margins and five per cent (Sh4) goes to
distribution.
From the kerosene price of Sh54, 75 per
cent (Sh41) goes to international and freight costs, one per cent (50
cents) goes to taxes and levies, 17 per cent (Sh9) to wholesale and
retail margins and five per cent and seven per cent (Sh4) goes to
distribution.
This means that on average, 33 per cent
of Kenya’s fuel (petrol and diesel) price goes to taxes. The average
fuel tax rate in Kenya is close to that of Ethiopia (33 per cent)
Tanzania (40 per cent) and South Africa (41 per cent).
In
Ghana, where fuel is quite expensive despite the country being a
petroleum producer and having access to the sea, about 70 per cent of
the fuel price goes to taxes.
PROFIT MARGINS
After determining that pump prices of petroleum fuels in Kenya are lower than in other countries, Newsplex and IEA sought to determine the profit level of major firms in Kenya.
Using
the data provided in the financial report of Total Kenya Limited, for
the period ended June 30, 2015, IEA calculated that the return on
capital for that trading period was less than nine per cent. The
publicly quoted company has the largest market share among petroleum
marketers in Kenya.
This, together with the fact that
the overall profit before taxation had dropped by five per cent for that
year, makes it difficult to support the claim of price gouging and
super-normal profits by formal petroleum dealers in Kenya. That year’s
return on capital barely matched the Treasury Bill rates that obtained
in Kenya the same year. The profit margin is close to the right per cent
that ERC allows for wholesale marketers.
Compared
to other major sectors of the economy the profit made by oil marketers
is low. Data for US companies many of which have global operations,
shows that on average in 2015, the profit margin across the oil industry
was expected tobe 2.1 per centafter the collapse in oil prices, compared to 21 per cent for health technology.
Pharmaceutical
companies, on the other hand, are well known for attaining eye-watering
margins. In 2013, for example, the US drug company Pfizer made profit
margins of42 per cent.
Additional reporting by Vincent Ng’ethe
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