How petrol prices are fixed in Kenya

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

11 January 2015

Ever since world oil prices started dropping, Kenyans have complained that we are not seeing similar drops in the local market. Many have voiced their disappointment with the Energy Regulatory Commission (ERC) – some even calling for its disbandment! Interestingly, none of the complainants have made any reference to the Petroleum Pricing Formula.

Now, a few weeks ago, I wrote in these columns that “in a free market, the price of an item has absolutely no relationship with its cost.” The oil market in Kenya is not free: it is tightly controlled by the government through the ERC. So, it is fair to expect that when the cost of crude oil drops, the price at the pump should also follow. But, crude oil is not the only factor that goes into making the petrol you fill in your car!

For what it’s worth, I am proud to report that I participated in a small way in the development of the Petroleum Pricing Formula. I sent in suggestions for improving the initial draft and was later invited to the stakeholders’ forum to refine the formula. I attended in my personal capacity as a private citizen who owns one car!

The formula is very comprehensive; it accounts for all the costs incurred in the process of making petroleum available at the pump. The starting point for the calculation is the landed cost of the imported product. From there, the following costs are added:

Exercise duty; road maintenance levy; petroleum development levy; petroleum regulatory levy; Kipevu Oil Storage Facility charges; Losses at the depots; Kenya Pipeline Company charges; and the wholesale profit margin. Altogether, this produces the wholesale price.

After this, the next stage is calculation of retail prices. Here, only two more factors are added; the retail profit margin and the transportation cost from the nearest depot.

For petrol, diesel, and kerosene, the wholesale profit margin is fixed at Sh6 per litre and the retail margin is Sh4 per litre. Therefore, no matter how high the price at the pump, the wholesalers and retailers make the same profit! The only point at which an oil dealer can make some extra money is in the importation stage.

But the importation is done on a tender system where dealers bid to import products to meet the country’s requirement for one month. Unfortunately, I am not privy to the details of that process but I assume it is done competitively and the bidder offering to supply at the lowest price wins.

Nevertheless, data from ERC shows clearly that the pump prices of petroleum in Kenya have closely followed the same trend as those in the international market of refined products. It is therefore clear that we are paying is the fair price.