East Africa's fuel pricing variance exposes region to global shocks, expert says

Fuel price board in Nairobi showing petrol at Sh214.20 and diesel at Sh242.90 per litre. [Boniface Okendo, Standard]

Petroleum product pricing across East Africa varies significantly due to different procurement contracts and formulas, leaving regional markets unevenly exposed to international volatility, an industry analysis reveals.

Unlike in Kenya, Tanzania and Rwanda, where pump prices are regulated monthly, Uganda operates under a completely deregulated system.

“Kampala has the highest PAM prices because the prices are not fixed. It’s not regulated like in the other three countries,” explained oil industry expert Peter Loch Ochieng.

As of the end of last week, with revised prices in Kenya effective May 15, the impact of these regulatory differences was clear. 

For premium petrol, Kampala recorded the lowest price in the region at Sh200 per litre, followed closely by Dar es Salaam at Sh206.

Nairobi’s pump price stood at Sh214.28, while Kigali registered the highest at Sh259 per litre.

For diesel, Kampala was again cheapest at Sh197 per litre, with Kigali close behind at Sh195 per litre. Dar es Salaam stood at Sh212, while Nairobi recorded the highest diesel price at Sh242.92 per litre.

However, Ochieng noted that a subsidy of Sh14.51 has been applied to diesel in Kenya, "meaning the price would have been Sh257.43 per litre without the subsidy".

The variance between Nairobi and Kampala for diesel stood at Sh45.68, while between Nairobi and Dar es Salaam, the difference was Sh31.

All contracts across the region are based on PLATs (which refers to S&P Global Commodity Insights, formerly known as Plats, the world's leading independent provider of energy and commodity information and acts as the ultimate benchmark for physical oil and fuel pricing worldwide).

“Most of the supplies of petroleum products to regions like ours are always based on contracts which have pricing based on formulas,” Ochieng said.

“The contracts that we have are based on the international prices, PLATs. PLATs give the prices of finished products in the international market.”

He explained how the system works: “They use monthly average pricing plus a premium. The premium is what you negotiate with your supplier. So, they’ll say, for example, in May, we are going to use PLATs for a particular month plus the premium. Premium will include flight insurance and your margin.”

Kenya operates under a government-to-government arrangement with suppliers in the Middle East, using an M-1 pricing model.

“If you’re doing the pricing for May, you’re going to use the average PLATs for April, one month back,” he said. For the current arrangement, “they have used a product that was supplied between April 10 and May 9.”

Tanzania and Rwanda, by contrast, are on M-2. Tanzania uses a tender system known as BPS, the equivalent of the open tender system that we used to have in Kenya.

"They tender for supplies in Dar es Salaam and whoever wins brings the product for all the companies in Tanzania. In BPS, they use M-2. In other words, in May, they’re going to use the prices for March.”

Because Rwanda procures most of its supplies from Tanzania, its pricing reflects Tanzania a lot. Rwanda is also on M-2.

Uganda’s pricing is based on contracts from around late January to early February — an M-4 or M-5 arrangement. “So, if you see, the Kenyan is current,” Ochieng noted. “That’s why we had a big rally in prices because that’s when the impact of the war between Iran… the biggest impact was actually in April because in February and early March, there were hopes. But if you look at how the prices have risen in the international market, the whole month of April, the prices really shot up.”

He anticipates that going forward, the impact on the pump prices in Uganda, Rwanda, and Tanzania will catch up.

For the first time in Kenya’s history, the price of diesel has overtaken that of petrol by a sharp margin of Sh28.65, with diesel retailing at Sh243, and petrol at Sh214.

Kerosene prices have however maintained a steady margin of Sh152, making it the cheapest petroleum product regulated by the Energy and Petroleum Regulatory Authority (Energy and Petroleum Regulatory Authority).

Matatu operators have expressed suspicion over kerosene being cheaper than diesel, with accusations that it benefits politicians and officials rather than the common mwananchi.

Diesel is a critical commodity that drives Kenya’s economy. The Sh243 price per litre marks an absolute historic record for the highest diesel price in Kenya, making it inaccessible for many Kenyans and drivers of the economy, such as transport.

“I would like to ask the government if they have forgotten that diesel drives this economy. I still want to know if there are boda bodas that run on paraffin,” Cornelius Chepsoi, chairperson of the Drill Owners Association, said.

He has questioned why kerosene has “suddenly” become cheaper than all other fuels.

Chepsoi implored the government to come clean and explain the difference between jet fuel and kerosene. “How is it possible that paraffin has become the cheapest fuel in the country? Who uses paraffin?” he asked.

He claimed it is politicians and government officials who fly around the country, not bodabodas.

“It is obvious why paraffin is cheaper. It has become the habit of government officials and politicians to use business people to cushion themselves,” Chepsoi said.

Jet fuel, such as Jet A and Jet A-1, is a highly refined type of paraffin that includes specialised additives to improve engine efficiency and prevent freezing at extremely high-altitude temperatures.

Domestic paraffin, commonly kerosene, is typically less refined, with potential odour and soot emissions.

The operators say the government-to-government deal has failed to stabilise or lower fuel prices as promised.

“There are many countries that produce oil, don’t force us into a war we did not start. Buy oil from anywhere and everywhere,” Chepsoi said, noting that Epra has become a space for cartels to tax Kenyans to death.

The sharp fuel price increase, according to economists, is a clear indicator that Kenya's government has decided to drop the ball and let the fuel prices and impact of the oil crisis emanating from the Gulf tensions fall on its citizens.

The price increase presents a triple tragedy of high cost of transport, which would consequently be felt in households, further straining disposable incomes.

On mitigation, Ochieng said Kenya is in what we call reactionary mode. “If you look at the way we procure a product, we do not have control over anything. Almost 99 per cent of the components that determine fuel prices are out of Kenya’s control, and out of the oil marketing company’s control.”

“We are not players in determining the international price of crude oil or the price of finished product, because in Kenya or East Africa, we do not produce any of that. So, we are totally dependent on what is happening elsewhere and totally exposed.”

Exchange rates compound the problem. “The products are also quoted and paid for in dollars. Whenever there’s depreciation, we have very little control because the small economies that we have, we have budget deficits and our imports are higher than our exports.”

Short-term measures are limited. “It’s just for us to negotiate and see how to have an impact in terms of better premiums for ourselves.” Taxation, however, remains within local control.

The only long-term solution, he argued, is to follow Nigeria’s example. “Get your own refinery. So, if we can be able to get our own crude, and even if it doesn’t cover fully how much we supply the demand that we have, it will go a long way in reducing our reliance on imports. We’ll also save on freight and insurance.”

Building strategic reserves would also help. “If you read in the whole world, most of these economies have been able to survive or cushion their population by dipping into strategic reserves,” Ochieng said.

In the previous cycle, Kenya's government reduced VAT on fuel to eight per cent and pumped a Sh6 billion subsidy. In the current cycle, the government pumped in a Sh5 billion subsidy.

Development economist Patrick Muinde said the government is faced with a reality of the trade-offs it needs to make between complying with conditions imposed by donors and also trying to manage projects.

“The cash subsidy has been problematic for compensating oil marketers. The process is prone to a lot of malpractice and corruption,” Muinde said.

"The government ends up leaking more compensating oil marketers directly from subsidies."

To address the prices effectively, the economist said the government should offer subsidies at the tax level.

“Remove taxes from the products themselves and let the products sell at less. The government does not have to struggle to collect the taxes and try to figure out how much oil is sold from petrol stations to compensate marketers,” Muinde said.

April inflation in the country hit 5.6 per cent, meaning Kenya’s economy remains very delicate and navigating through recovery, making oil prices disruptive.