Fuel shortage: Dealers don’t supply you with a commodity because they love you

The problem with price controls is that we often fail to take advantage of windfalls. [Christopher Kipsang, Standard]

Last Friday evening, I drove into a petrol station on Limuru Road ready to fill up my car’s tank.

I was told I could only be allowed Sh1,000 worth of fuel. But why was petrol being rationed? The answer lies in simple economics; it’s a consequence of price controls. 

If the price goes up because of shortage or higher demand, the price does the rationing.

Those who can afford will go ahead and buy it instead of sitting out the shortage. If the price is controlled by the government, suppliers keep their products off the market. They want to make a profit; they don’t supply you with something because they love you.

How do we enforce this rationing? Motorists in need of more petrol could bribe the fuel pump attendant. They could even agree “on the side” to pay a bit more per litre to get more petrol. 

Entrepreneurs could also buy petrol at a low price and sell it at a higher price. Many Kenyans queuing for petrol could be doing that.

It seems you can’t cheat the market, though. Control the price and an underground market will thrive. What would stop Kenyans from getting petrol from neighbouring countries and selling it locally?

Why not just free the market and let petrol or other products get their equilibrium price that matches supply and demand?

What if the prices were freed? Petrol prices would go up. [File, Standard]

The government will not allow that. The argument is that too many citizens (read voters) will be affected by oil prices. If the price of petrol hits about Sh160, the price of transport and many many products and services will, in turn, go up. 

The solution is to give subsidies. Simply put, the government pays the suppliers the difference between the controlled price and the market price.  If the market price per litre is say Sh160 but the controlled price is Sh130, the suppliers or marketers are paid Sh30 per litre. How is the market price determined without letting the market work? My head is left spinning. 

The same happens to fertiliser. If the market price is Sh7,000, the control price is set at Sh3,000. This leads to shortage and rationing. Have you noted that you can only buy a  maximum of 10 bags? Clearly, subsidies distort the market. The “low” price of petrol is borne by taxpayers who pay for the subsidies. Could that money be put to better use?  

What if the prices were freed? Petrol prices would go up. But more Kenyans would bring in petrol from neighbouring countries to rake in profits. The resulting competition would reduce the price.

The problem with price controls is that we often fail to take advantage of windfalls. Recall when oil prices fell to almost negative during the initial days of Covid-19? Did we benefit?

I may sound like a hard-nosed or heartless economist, but if anyone who can import fertiliser or oil is given a permit, why will the price not come down? Remember the price of eggs going down because of importation?  

And why do we think that petrol is the only cause of inflation? What of monopolies? Why do we think fertiliser is the major determinant of crop yield? What of land fragmentation?  

A bigger question is how sustainable subsidies are. Will other sectors also demand subsidies? What of unga (maize flour)? What of rent or even dowry?

The problem with price controls is that we often fail to take advantage of windfalls. [File, Standard]

We abandoned price controls in the 1990s. Why did we return to that?

Clearly, price controls do not make economic sense. This year’s Budget speech was longer at 106 pages without appendices. Two things caught my attention. One is depositing 50 per cent of disputed tax into an account in the Central Bank.

It sounds like a great idea, but why does the government feel it needs the money more than the affected citizens or firms?  Courts are there to determine such disputes; punishing Kenyans or firms for raising a dispute is not fair. 

Two is that the government plans to retire the debt ceiling. I am for that and indeed suggested it a long time ago. The debt to Gross Domestic Product (GDP) ratio is a better measure of our indebtedness instead of an absolute figure like Sh12 trillion. Why?

If we fix a debt ratio of say 50 per cent, we only need to increase the GDP to raise more debt. Remember your fractions? That is the beauty of this approach! 

Grow the economy, and phew! You can take up more debt. We should now spend more time figuring out how to grow the economy instead of when we shall hit the debt ceiling.  Three simple ways to grow the economy - more trade, more tourism and focusing on sectors that matter, like agriculture. Also, reward those who do the real work, not brokers and speculators. 

Finally, we have a unique Budget. It will cut across two regimes and two crises - Covid-19 and the Ukrainian war. Let’s hear from the front-runners in the August General Election, Azimio and UDA, on how they plan on implementing it should they win.