Oil prices and petroleum: The curious case of Kenya

 

By SCOTT BELLOWS
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SUMMARY

• Meanwhile in the media, pundits and analysts largely pillory the jump in petrol prices to historic levels.
• Oil prices play a crucial role in the global as well as our national economy.
• The prices of many products are often tied in some part to oil prices either because of oil components or reliance on petroleum to move the goods.

Over the past two weeks, Kenyans collectively throughout social media, around office work conference rooms, and over family dinner expressed shock and dismay at the erosion of our consumer purchasing power due to the sharp increase in petroleum super, diesel, and kerosene prices.

Meanwhile in the media, pundits and analysts largely pillory the jump in petrol prices to historic levels.

Oil prices play a crucial role in the global as well as our national economy. The prices of many products are often tied in some part to oil prices either because of oil components or reliance on petroleum to move the goods. Inasmuch, as oil prices increase, inflation often grows, thus harming consumer spending power and eventually hurting gross domestic product economic growth.

Like in other African nations, our Kenyan Energy and Petroleum Regulatory Authority (Epra) sometimes subsidises prices due to the potential knock-on effects the price fluctuations can have on the economy.

The most expensive petroleum super allowed in the country, according to Epra between September 15 and October 14 is Elwak near the Kenya-Somalia border at Sh145.42 while the cheapest location is Mombasa at Sh132.46 a litre.

Defenders of recent price increases highlight the rise in crude oil as the underlying reason. According to this logic, petroleum prices in Kenya should fluctuate much like commercial lending rates do based often on LIBOR (London Interbank Offered Rate) plus the markup. Unfortunately, our Kenyan commodity price fluctuations are much more complicated.

Let us delve into the data. In comparison, according to the US Energy Information Administration, when Covid-19 struck the world and shocked commodity markets, the prices of West Texas Intermediate and Brent Europe crude oil prices plunged about 171 percent before quickly recovering to around 52 percent lower. In tandem, petroleum super prices in the US for vehicle drivers dropped around 70 percent before recovering to 36 percent lower.

However, in Kenya, our prices at the pumps dropped by only about 29 percent before recovering to roughly 12 percent lower but commodity supply of Murban oil from Abu Dhabi dropped 73 percent before recovering to 36 percent down.

Further, global oil prices across categories of oil were higher in 2008, 2011 through 2014, and in 2018 than now in 2021, but prices for super, diesel, and kerosene are at their highest levels in Kenyan history.

One must ask, why do our petroleum prices in Kenya shoot up dramatically in line with global oil prices but do not decrease in nearly the same proportion to global oil price drops?

The significant correlation is much stronger for price rises than for price declines.

The Epra removed temporary fuel subsidies earlier this month and paid petroleum providers compensation for keeping prices low for five months.

But in purchasing regulated commodities, as Kenyans, we must place equal demand on regulators and their price caps to proportionally drop prices when the underlying commodity declines in value with the same vigour that we register our indignation over price increases.

Throughout most of 2020, our petroleum prices should have been 24 percent cheaper like in other countries and based on lower oil prices, but few advocated that our retail prices drop commensurate with global markets.

But when our prices jump, we quickly blame global markets. One cannot have their cake and eat it.

Join the global discussion about recent petroleum price rises through #PetrolPriceHike on Twitter.

scott@ScottProfessor.com or @ScottProfessor