Kenya plans fuel fund to weather price shocks

Wednesday November 14 2018

A female petrol pump attendant. Kenya is planning to establish a special fund to cushion the country from the effects of rising crude prices on the international market. PHOTO | REUTERS


Kenya is planning to establish a special fund to cushion the country from the effects of rising crude prices on the international market.

Even as things calm down after the United States backed down on tough Iranian sanctions — which would have impacted global supplies and sent prices skyrocketing — Kenya is planning a fund that will ensure rising prices don’t have dire consequences for the local market.

Last week, the US granted waivers to eight countries to continue importing crude from Iran, averting a possible global supply crisis and ensuring crude prices at the international market settled at $71 per barrel.

The waiver, which allows Iran to continue supplying 1.7 million barrels per day to the global market, eases anxiety over international prices reaching $100 per barrel by year-end after hitting a four-year high of $84.78 a barrel in early October.

“The world is experiencing oversupply amid a slowdown in economic growth. This means crude prices are likely to stabilise at $70 per barrel,” said George Wachira, an oil industry expert.

Kenya is considering the adoption of a fund mechanism that ensures local fuel prices are not significantly affected when crude prices increase at the international market as witnessed in 2014 when prices reached a historical high of $112 per barrel.


Stabilisation fund

The plan, which is contained in a report presented to the Energy Regulatory Commission, recommends the establishment of a Petroleum Price Stabilisation Fund whose core mandate will be ensuring macroeconomic stability and protecting low-income consumers from international oil price fluctuations.

The government will be required to finance at least 40 per cent of imports if the prices of crude increase by more than three per cent but less than seven per cent.

“The idea of a price stabilisation fund is to enable the government to moderate transmission of global oil price volatility to the domestic market with little or no budgetary cost,” says the report by consultancy firm Kurrent Technologies.

It adds that countries that are dependent on petroleum imports implement price stabilisation mechanisms to maintain macroeconomic stability.

The report said that although global oil prices are currently trading at $60-70 a barrel, the fact that price levels have hit over $100 a barrel in the past shows that this situation could arise again in the future.

With prices of fuel at the pump in Kenya now being high following the introduction of value added tax at a rate of eight per cent and tripling of the road maintenance levy, the possibility of prices of crude rising to 2014 levels would spell doom for consumers and the economy.

Retail consumers are currently paying $1.18 per litre of petrol in Kenya compared with $1.14 in Uganda, $1.01 in Tanzania and $1.28 in Rwanda.

The establishment of the stabilisation fund will involve introduction of a new variable levy in the pricing formula, which will be collected through petroleum product sales.
According to the Economic Survey 2018, Kenya imported 6.34 million tonnes of petroleum products in 2017, up from 6.32 million tonnes in 2016.