Taxes, appetite for huge profits dash hope for low pump prices in East Africa
Saturday April 25 2020
International oil prices have slumped by about 80 percent this year, as coronavirus pandemic has spread across the world, infecting over 2.7 million and killing more than 192,000 people. FILE PHOTO | NMG
Lower your expectations, international crude oil futures have dipped to negative territory but what you pay at the petrol station is not likely to change significantly.
Government taxes, the lack of oil refinery capacity, weak currencies and profit margins for petroleum dealers across East African countries means pump prices will only fall to a certain level and then stabilise, denying motorists the benefit of the international markets crash.
US crude oil futures sank below $0 last week, for the first time in history, as the global coronavirus pandemic suppressed demand for petroleum.
“The impact on fuel prices will diminish as almost 40 per cent is taxes and then there are margins. I do not expect there is much room for significant price drops given the last cuts that happened,” said Patrick Obath, an energy consultant and associate director at Adam Smith International Africa.
“Also the huge decline is mainly in West Texas intermediate (WTI). Brent Crude price has also declined but to a lesser extent and ADNOC (which is the reference for the Indian Ocean rim) even less affected. So, by and large a minimal change,” added Mr Obath, a fomer Shell executive and a member of the Petroleum Institute of East Africa (PIEA).
A litre of super petrol in Kenya attracts Excise duty (Ksh20.5), Road Maintenance Levy (Ksh18), Petroleum Development Levy (Ksh0.4), Import Declaration fee (3.5 percent), Railway Development Levy (2 percent) and Remission (Ksh0.45), in addition to value added tax (VAT) which is charged as a percentage of the total cost.
Slight variations
This cost structure, which accounts for nearly Ksh40 ($0.40) for every Ksh100 ($1) paid on a litre of petrol, is replicated with slight variations in other East African Community (EAC) countries. Oil marketing companies are then allowed to add import costs and profit margins onto the final retail price.
Brent prices last week feel to the lowest since 1999, as the market struggled with a massive glut occasioned by a halt in local and international travels to curb spread of the Covid-19 disease.
Brent crude hit a low of $15.98 a barrel, its lowest since June 1999.
International oil prices have slumped by about 80 percent this year, as the pandemic has spread across the world, infecting over 2.7 million and killing more than 192,000 people, routing financial markets and triggering what is expected to be the worst economic meltdown since the Great Depression of the 1930s.
The price of super petrol dropped by Ksh18 ($.18) per litre in Kenya as per the review announced on April 14, but analysts have warned that this is not likely to fall much further.
The cost of Petrol decreased by Tshs116 per litre (equivalent to 5.28 per cent) to Tshs 2,206 in April prices announced by Tanzania’s Energy and Water Utilities Regulatory Authority (EWURA) which regulates pump charges.
Rwanda says the fall in global oil prices could take longer to reflect at the pump, as old stocks in the country were not consumed thanks to the Covid-19 lockdown that paralysed transport and industrial production.
Tariff cut
The Rwanda Utilities Regulatory Authority (RURA) maintains that a tariff cut will only reflect in costs of petroleum products being purchased on the current crude oil rates, which normally take two to three months to reflect in the local market.
The Consumer Federation of Kenya (Cofek) contends that the taxes need to be reviewed while the Energy and Petroleum Regulatory Authority (EPRA) should re-negotiate profit margins for dealers and oil marketing companies (OMCs) to pass more benefits to consumers.
“Until EPRA re-negotiates margins for dealers and OMCs there will be little impact since taxes and levies gobble a whopping Ksh45 per litre. In May review taxes and levies could easily move from current 50 percent per litre to 65 percent. This calls for a policy shift in which taxation on any fast moving consumer commodity shouldn’t exceed 30 percent.” Said the Cofek Secretary General, Stephen Mutoro.
PIEA, the lobby group for Kenya’s oil marketing companies, acknowledged that the decline in fuel prices will be minimal.
“There is no doubt that the drop in global crude prices will result in significant reduction in local fuel prices even though not precisely at par, because petroleum and petroleum products are international commodities that are traded using international currency, in this case the American Dollar,” said Wanjiku Manyara, PIEA General Manager.
“So if the (local currencies) continue to weaken they erode the extent/rate at which the local prices come down,” she added.
Kenya and Tanzania review fuel prices every month in line with changes in the international costs of crude oil and the strength of their currencies against the US Dollar.
The Rwandese energy sector director General Patrick Nyirishema told The EastAfrican that changes in prices will also depend on whether or not the lockdown gets lifted, and the market performance thereafter.
“It is something we are monitoring together with the ministry of trade and industry and we shall respond accordingly,” he said.
Petroleum dealers in Rwanda estimated their combined oil stocks at about 100 million litres after imports declined by more than 50 per cent owing to disruptions caused by the covid-19 pandemic.
Retail costs applicable to the reserves are based on a pump price structure revised on March 4 to Rwf1,088 and Rwf1,073 on gasoline and diesel respectively, a fall from Rwf1091 and Rwf1084 respectively in January.
Rwandese pump prices undergo a review every two months.
The Rwanda Ministry of Trade and industry puts the country’s annual petroleum consumption at more than 600,000 cubic metres having grown from 360,000 cubic metres in 2016.
Growth in demand
A 2018/19 annual report by the utilities regulator attributes an increase in imports for petroleum products largely to the growth of demand of fuel used in transport, the rapid expansion of RwandAir as well as high demand of Heavy Fuel Oil in thermal plants for electrical generation.
The agency projects the current level of demand will increase even further in the next five years, requiring additional 198 million liters in reserves by 2024, from the current storage depot of 112 million litres.
Tanzania’s Energy and Water Utilities Regulatory Authority (Ewura) in public notice last, week said it will take two months before any changes are realised in local petrol, diesel and kerosene prices. It sated that this depends on whether oil markets in the Middle East relax their prices.
The regulator’s notice says that falling prices of crude oil will not affect Tanzania because only crude oil prices in the US market were quoted. Tanzania’s oil market relies on refined oil products procured from the Middle East which is also its major supplier.
“The relief on oil price will come if the world oil market which is the Middle East relaxes prices. It will take two months before we feel the benefits on those prices,” the statement said.
Ewura issues new oil prices every Wednesday of a respective month when prices fall.