Kenyans are set to pay an extra Sh4.45 per litre of fuel if a proposal in a study commissioned by the Energy Regulatory Authority is adopted, raising concerns about pressure on cost-of-living measures.
The study by consultants Corrent Technologies and Channel Consulting Limited proposes increasing margins offered to oil marketing companies to Sh12.21 per litre from the current Sh8.19 per litre for retailers and increasing wholesale margin from Sh4.17 to Sh4.6.
Margins cover the costs and profits of oil traders and form part of the elements that make up the monthly review of pump prices.
“The proposed retail margin in Kenya is Sh12.21 per litre, comprising a retail investment margin of Sh7.79 and a retail operations margin of Sh4.42,” the consultants said.
This would raise the margin for oil marketers from the current Sh12.36 per litre to Sh16.8 per litre.
If the proposed margins are adopted, it would be the first time in five years that margins have been raised. This could lead to a further increase in fuel prices, a blow to consumers who have been reeling from higher petrol and diesel prices following product tax hikes.
Fuel prices currently stand at Ksh188.84 per litre for petrol in Nairobi, while diesel and kerosene are priced at Ksh171.6 and Ksh161.75 per litre respectively.
If the new margins are applied to this month’s revision, the cost of petrol will rise to Sh193.29 per litre from Sh176.05 while kerosene will rise to Sh166.2.
Fuel prices have a significant impact on inflation in Kenya, which relies heavily on diesel for transportation, power generation and agriculture, while kerosene is used in many households for cooking and lighting.
The push for higher compensation for marketers comes at a time when fuel prices in Kenya remain the highest in East Africa, partly due to higher taxes on petrol and diesel.
Over the past year, the government has increased the value-added tax on fuel to 16 percent from 8 percent and raised the road maintenance tax to Sh25 in July from Sh18 per litre.
Consultants were appointed last year to study the costs incurred along the petroleum products supply chain in Kenya and inform a new pricing formula to be implemented by the government.
The oil marketer’s profit margin is one of four major cost components included in fuel pricing. The others are landing costs, storage and distribution costs, and taxes and duties.
However, the margin adopted may be lower than what was proposed, as happened in 2019. The councillors selected at the time proposed a retail margin of Sh8.61, but state officials settled on a compromise of Sh8.19.
The two companies have been appointed by the Energy and Petroleum Regulatory Authority (EPRA) to conduct a Cost of Service Study in the Supply of Petroleum Products (COSSOP).
The push for the study came amid pressure from oil marketing companies who claimed their costs had risen rapidly over the past five years when current margins were set.
Fuel is one of the most important commodities in the country’s economy, and rising prices of the product affect other key sectors including transportation, aviation, agriculture, hospitality, construction, power generation and manufacturing.
Fuel prices have risen sharply over the past 18 months due to an increase in the global price of the product, a weaker shilling, higher taxes, and a shift to a restricted import model based on three Gulf companies from the previous open tender that was open to all traders.
A litre of petrol cost Ksh177.3 in Nairobi in January last year, while diesel and kerosene cost Ksh162 and Ksh145.94 per litre respectively.
Prices of the three fuel products have since risen by 6.3%, 5.9% and 10.8%, respectively.
The consultants also recommended that the government set a cap on wholesale fuel prices to prevent exploitation by small retailers by amending the Petroleum Pricing Regulations 2022.
“If wholesalers cannot manipulate and raise wholesale prices, there will be less incentive to stockpile products at times of the month when cash is not needed,” they claimed in their draft report.
Among the recommendations that could make consumers pay a fairer price for fuel is a proposal to end the controversial arrangement between governments to import fuel from three Gulf-owned oil companies.
The G-to-G deal is due to expire in December this year. Consultants revealed that consumers are paying Sh2.70 more per litre of fuel under the G-to-G system than they would have paid under the open tender system.
They added that “the pricing mechanism through monthly competition and awarding supply contracts ensures price competition among suppliers, which in turn ensures that supply premiums remain competitive. Therefore, the pricing mechanism through contracts through individual suppliers is preferable.”