By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

18 January 2015

Last week’s article did not go down well with many readers. Some claimed that I have been paid by the oil marketers to do publicity for them! Others cried out that the Energy Regulatory Commission (ERC) “must explain to Kenyans how they fix the prices”. Yet the formula was published by the Minister for Energy in 2010. What other explanation do you want?

There is a popular argument that, since the cost of crude oil has dropped by 50 per cent in the last six months (from $100 per barrel to under $50), then the pump prices should also fall by a comparable margin. Unfortunately, that kind of reasoning is wrong because it ignores the many other factors that go into bringing petrol to the retail outlet.

Most of the taxes and levies on fuel are fixed shilling amounts per litre. They are: Sh19.985 excise duty, Sh9.00 road maintenance levy, Sh0.40 petroleum development levy, and Sh0.05 petroleum regulatory levy. Altogether, these amount to Sh29.345. So, whatever the import price of the fuel, motorists must cough up Sh29.345 per litre upfront.

Two other levies are calculated as a percentage of the importation cost: import declaration fees at 2.25 per cent and railway development levy at 1.5 percent.

Currently, Kenya does not import crude oil. Our refinery was closed down due to inefficiencies! So it is wrong to use crude oil prices as a basis for estimating pump prices.

Unfortunately, the ERC does not publish the importation cost when announcing the pump prices. Nevertheless, we can find out whether our fuel prices are fair by working backwards from the current figures.

In Mombasa, super petrol is going for Sh89.57. From this figure, we can immediately remove the dealers profit margins of Sh9 (Sh6 wholesale and Sh3 for retail). That leaves Sh80.57.

Next we subtract Sh0.40 for the maximum allowed transportation cost from depot to station. We are now left with Sh80.17. From this we remove the fixed taxes amounting to Sh29.345. This brings us down to Sh50.825.

There is also the 0.5 per cent allowed for product losses at the depot. That brings the cost down to Sh50.57. Let us now factor in the two remaining percentage taxes – 1.5 per cent for railways and 2.25 per cent for import declaration. Doing that takes the cost down to Sh48.67 per litre.

There is only one other charge remaining – the Kipevu Oil Storage Facility fees – but unfortunately (again!), the rates are not published by ERC. Still, let’s convert the Sh48.67 to dollars: it is US$0.53 per litre.

Now, at $45 per barrel (159 litres), the cost of crude oil is $0.28 per litre. But a litre of crude yields about 400ml of petrol in the refining process (our refinery was giving only 112ml!). Thus we need about 2.5L of crude to get 1L of petrol. This will cost $0.71.

In short, we are getting petrol at prices below the world average. I’ve done similar calculations using previous prices and the trend is the same.