More pain at the pump as study pushes for higher fuel prices

An attendant fuels a vehicle. file PHOTO | NMG   

By NEVILLE OTUKI

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Summary

• A new study says an upward mark up review is necessary to reflect rising costs.
• The report suggests that margins for petroleum traders be increased to Sh11.66 per litre of petroleum, from the current Sh10.89 in what will lead to the additional charges being transferred to motorists.
• The Energy Regulatory Commission (ERC) commissioned the study to determine the impact of the current formula.
• The ERC has not reviewed the dealers’ profit margins for over five years.

Fuel prices will rise by about a shilling per litre if the energy regulator adopts proposals to increase the profit margins of oil dealers.

The report suggests that margins for petroleum traders be increased to Sh11.66 per litre of petroleum, from the current Sh10.89 in what will lead to the additional charges being transferred to motorists.

This will be a boon to oil marketers who have been pushing for a raise in their markup, citing rising costs, under the price control regime.

It will, however, force motorists to dig deeper in their pockets to buy the commodity, which last month rose to near four-year high.

Kenya introduced petroleum price controls in 2010 based on a formula influenced by the cost of doing business and the dealers’ profit margins.

The Energy Regulatory Commission (ERC) commissioned the study to determine the impact of the current formula.

Wholesalers are currently allowed a margin of Sh7 per litre on prices of petrol, diesel or kerosene, and retailers can mark up by Sh3.89 for every litre of fuel sold, representing the full margin of Sh10.89.

READ: Mombasa motorists to pay more in petrol price plan

The report wants the retail margin doubled to Sh8.61 per litre as the wholesale margin drops to Sh3.05, the net effect being an increment in pump prices by Sh0.77 a litre.

“In South Africa, there was a historical margin over-compensation for the wholesale business at the expense of retail business, which has since been corrected to recognise the larger marketing investments and costs in the retail segment,” says the study that used South Africa as one of the case studies.

READ: Fuel prices hit 40-month high in latest review

“Kenya has a similar margin imbalance, which this study will focus on correcting so as to reflect the correct levels of investments and costs in the two marketing segments,” it adds.

The ERC has not reviewed the dealers’ profit margins for over five years.

The study, conducted by UK firm Economic Consulting Associates and its local partner Kurrent Technologies, also proposes that oil marketers recover their costs incurred in setting up petrol stations through pump prices.

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