Two private advisers have recommended that the government cap the margins enjoyed by wholesalers in Kenya’s fuel sector as part of a strategy to control stock shortages and rising consumer prices.
UK-based Channel Consulting Ltd and Nairobi-based Current Technologies Ltd said the recommendation would address the high and unregulated margin of petroleum wholesalers who outbid retailers at the last mile leading to periodic stock-outs of petroleum products in remote areas.
Wholesalers in the fuel value chain in Kenya source imported refined petroleum products in bulk from the Kipevu oil storage facility in Mombasa, then transport them to their own independent warehouses before contracting with transport companies to deliver the product to retail outlets for resale.
“By institutionalizing the publication and regulation of wholesale margins, this could foster a more transparent and equitable market environment, ensuring that rural and underserved areas have consistent access to petroleum products at fair prices,” the two consulting firms contracted by the Energy and Petroleum Regulatory Authority said in a joint report.
If this proposal is adopted, it would mean that the British Petroleum Authority could resume setting maximum wholesale margins in the same way it does with maximum retail margins in the monthly pump price review.
Adopting this recommendation would require amending the 2022 Petroleum Pricing Regulations, requiring the Petroleum Authority to set a ceiling on wholesale margins in the same way it sets a ceiling on retail margins, the consultants note.
“To enhance regulatory oversight and fair pricing practices, it may be necessary to amend the Petroleum Pricing Regulations 2022. Specifically, such amendments should include provisions requiring the publication and regulation of wholesale margins. These provisions would set a maximum price that wholesale prices cannot exceed while allowing discounts below the ceiling,” the consultants said in their report.
Article 3 (1) of the Petroleum Pricing Regulations 2022 states that “the Authority shall determine and publish the maximum wholesale and retail prices for petroleum products on the fourteenth day of each calendar month.”
The state has lifted restrictions on wholesale fuel prices after nearly two years of subsidising pump prices to address public anger over runaway prices.
Industry records show that wholesale fuel prices have traditionally been about 8 shillings per litre lower than retail prices for super and diesel over the years, allowing smaller players to enjoy margins on sales and remain competitive.
However, the introduction of subsidies on pump prices has led Ebra to stop imposing restrictions on wholesale fuel prices, causing inconvenience to small traders.
The lifting of ceilings on wholesale prices comes in light of the cash flow challenges for oil traders due to the delay in their compensation from the state, and the low exchange rates of the dollar used to compensate them compared to the prices of purchasing the dollar from commercial banks.
The removal of caps on wholesale price margins means that small independent traders are left alone to negotiate wholesale prices with the oil majors amid concerns that some have been getting stocks at the retail prices set, driving them out of business due to limited returns.