Oil importers to enjoy low crude prices this year

A car pulls up to a Shell gas station in Woodbridge, Virginia, on January 5, 2016. AFP PHOTO | SAUL LOEB 

In Summary

• The regulator cited heavy government taxes and dealers’ margins, which constitute the fixed cost of fuel, as the reason why the local changes in pricing are often lower than what are experienced in the international fuel market.
• “Opec reaffirmed its market share strategy at its December 2015 meeting and exports from the Islamic Republic of Iran are expected to rise sharply as sanctions that had hampered oil sector investment and exports have been lifted,” the report says.

By IMMACULATE KARAMBU
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Global crude prices will average $37 a barrel this year, giving hope for prolonged low fuel prices in oil importing countries such as Kenya.

The new crude price estimate is contained in the World Banks’ latest Commodity Markets Outlook report. The forecast is a significant climb down from the average of $51 a barrel predicted in October last year.

In reviewing the crude prices, the World Bank cited prospects for continued abundant supplies and weak demand. It said oversupply of crude oil is expected to be sustained during the year as members of the Organization of Petroleum Exporting Countries (Opec) have declined to reduce output to protect their market share.

The global lender also says supply will be heightened by Iran’s comeback into the crude market following lifting of sanctions imposed by the West.
At the same time, the bank says global demand for crude oil will decline during the year in response to slowing economic growth in China, one of the largest consumers globally.

Overall, World Bank report estimates that the annual average crude prices will remain below the $100 a barrel mark last attained in 2013, in the period to 2025 when it projects the average price to be $82.6 a barrel.

“Opec reaffirmed its market share strategy at its December 2015 meeting and exports from the Islamic Republic of Iran are expected to rise sharply as sanctions that had hampered oil sector investment and exports have been lifted,” the report says.

Oil prices fell sharply starting mid 2014 following increased production by the US from its shale resources leading to a glut. US production has since been falling, albeit slower than expected, from the peak it attained in April last year, according to the Bretton Woods institution.

Locally, however, the fuel pricing formula has come under heavy criticism as it has not led to a significant drop in pump prices in tandem with the sliding global crude costs.

During the last fuel price review, Energy Regulatory Commission (ERC) reduced the cost of diesel and super petrol by less than Sh2 per litre despite crude prices falling to about $30 a barrel.

HEAVY GOVERNMENT TAXES

The regulator cited heavy government taxes and dealers’ margins, which constitute the fixed cost of fuel, as the reason why the local changes in pricing are often lower than what are experienced in the international fuel market.

In addition, ERC said the country’s pricing formula takes into account a lag of up to one-and-half months to cater for the time between when petroleum products are ordered and their actual receipts at local depots.

Super petrol is currently retailing at Sh88.64 per litre in Nairobi while diesel and kerosene sell at Sh76.70 and Sh46.13 per litre respectively.
Consumers Federation of Kenya (Cofek) has threatened to sue ERC over it terms “cartel-like behaviour by fixing pricing instead of regulating the cost of fuel products as it is mandated by law”.

“It’s obvious that there are people within ERC who are defrauding consumers by not willing to pass the full benefits of the reduction in oil prices globally,” said Cofek’s secretary general Stephen Mutoro.

Two weeks ago, Energy and Petroleum cabinet secretary Charles Keter directed ERC to review its pricing formula and reduce the margins allowed for oil marketing companies in order to match pump prices with the global cost of oil which has dropped by more than 60 per cent since 2014.

“The cost of crude oil has gone down, (yet) the price of petroleum products is still high. There is need to review the calculation of oil pricing in the country. We know it can be done if you are keen to do it,” Mr Keter told ERC board.

According to the World Bank, the pricing formula used by ERC has denied consumers full benefits of the reduction in crude prices.
The bank has warned that although low oil prices should boost aggregate demand for petroleum products, there is a threat that most of these benefits may not be passed on to consumers.