Plunging oil prices good for now, bad for our future

NAIROBI: Yesterday, US crude oil prices crashed below $50 (Sh4,540) a barrel while benchmark price tumbled under $53 (Sh4,812.4). This is the biggest drop in more than five and a half years.

Since June last year, oil has lost around 55 per cent of its value on a production glut, weak demand and a strong US dollar.

However, Kenyan consumers are yet to see any meaningful drop at the pump because even public transport operators who are usually fast to hike fares every time oil prices increase have been slow to react.

Ordinarily, plunging oil prices should be a gift in more ways than one. It means spending less on what has now become a basic need, leaving more cash in people's pockets.

This should have been good news considering that we have just emerged from a long holiday season during which people spent a lot, but this is not the case.

In its review on December 14, 2014, the Energy Regulatory Commission (ERC) cut fuel prices by about three per cent.

In the changes, kerosene, super petrol and diesel decreased by Sh4.94, Sh4.79 and Sh3.67, respectively. In Nairobi, Super petrol is now retailing at Sh102.01, diesel Sh90.85 and kerosene Sh71.37.

Even with the five-month back-to-back decline in fuel prices, the public service vehicle (PSV) operators are yet to pass the benefits to consumers in form of lower fares.

Instead, commuters paid nearly double to travel upcountry for Christmas and New Year festivities.

With the price of crude oil more than halfway down where it was a year ago, and likely to fall further, we expect the new realities to be factored into Kenya's pricing module. This should significantly bring down the cost of oil.

In reality, Kenyans should be saving more everyday compared to a year ago. These savings should be pumping up the economy as people spend less on oil and more on the other items that they need.

Falling prices should also be a gift to companies that rely heavily on energy for production like manufacturing. This should result in reduced prices for consumers.

But for Kenya that has pegged its future prosperity on newly-found oil wealth, the sharp drop in crude oil prices also comes with burden.

At some point, our country's economy is expected to rely heavily on prospective oil revenue, but the prevailing circumstances may put a damper to all that. Falling prices are also not favourable to prospectors.

It all sounds good and bad for Kenya, but in the short-term we should be able to enjoy the benefits. We expect the ERC to stop handing hefty profits to oil marketers at the expense of consumers.

Analysts say consumers should be paying about Sh80 for a litre of petrol in Nairobi and we hope the regulator will soften the blow to Kenyans' pockets during the next oil price review by factoring in the new crude prices.

When in 2010, the ERC instituted price capping for retail prices of petroleum products, the key rationale was to protect investors and consumers. It would increase and lower prices in line with what happened at the international markets.

The regulator is now being criticised for seeming to have abandoned the spirit of the price capping regulations.

Analysts say the current price drop has only benefited the industry players, while hurting consumers. What is more worrying is the fact that ERC insists that Kenyans should not expect any significant drop in fuel prices until February.

But we need to see a deeper cut during the next review on January 14, to reflect trends in the international market. We should enjoy it while we can. Oil prices are volatile, so we could soon be complaining at the pump, again.