Explainer: Debunking six myths about petrol prices in Kenya

Fuel taxes amount to about 40 per cent of the cost to consumers of the products you buy. [File, Standard]

Myth 3: The Kenyan Government can work with Saudi Arabia or UAE and buy products cheaper

In theory yes. But why would anyone sell to us for less than the going price? Just to be nice? It might be possible, but how long would it last and how much of a difference would it make? With fuel prices going up another Sh 20, Sh1 or Sh2 would have little impact.

Myth 4: The oil industry likes having prices controlled by the government

I don't think so.

I did a poll a few years ago among the major and independent oil companies; it was unanimous that no one wanted controlled prices. Why? First is that any formula will miss some cost elements. Remember the government determines the cost elements it uses in setting the price. An unintended consequence is that the industry has little incentive to reduce costs as the government will just reduce the prices to compensate.

The industry is already struggling with exchange rates. The government assumes that the US$ is worth 120-121 Kenya Shillings. And they compensate the industry on that basis (remember the millions of US $ they have to pay the supplier for the fuel they purchased). But the reality is that the shilling is really trading at 124-126 to the US $. I know this for a fact since the little company I work for sold US$ last week to a big bank for Sh124. If I sell at Sh124 you can be guaranteed that it would cost Sh125-126 or so to buy a dollar. So can you imagine being confronted with losing some 2.5 per cent in exchange losses? On a cargo worth say Sh15 billion, that amounts to Sh375 million.

Myth 5: A few prominent Kenyans control the industry and are making a huge amount of money

Unlikely.

To begin with, the oil industry doesn't make a lot of money- see Myth 4. Supporting this is that over the past 16 years four of the five major oil companies have left Kenya. Esso, Mobil, Caltex and Shell no longer directly operate in Kenya as the margins were not high enough to justify the risk of operating.

Secondly, almost 60 per cent of the Kenyan market is controlled by five companies, all of them corporations with parent companies outside Kenya, either in Europe or Africa. It is doubtful that any prominent Kenyan holds a controlling share of these international companies.

Myth 6: Kenya should have its own refinery like Uganda is going to have. That would make the price of fuel less expensive

False.

We used to have a refinery. In 2008 I calculated the cost of refining fuel in Kenya versus importing fuel. At that time, Kenya could have saved $25 million by not having the refinery. Refineries are only efficient if they can process a lot of crude. The typical size of an efficient refinery is 300,000 barrels per day. Kenya's former refinery was supposed to process 60,000 barrels per day but actually only averaged about 30,000 barrels per day.

Yes, we could build a 300,000 barrel refinery but the problem is that the entire East African fuel demand is only about 180,000 barrels per day (including Uganda which is planning to build its own). So we would have to find export markets for about 120, 000 barrels per day. That means we would have to compete with all of the Middle East Refineries that are much more efficient (many are 600, 000 barrels per day) and closer to the big demand region of Europe.

There are lots of other myths out there and most of them are looking to find a villain to blame for the fuel prices. But there are no real villains, just a market that works like all other markets based on supply and demand. We don't like it. We don't think it is fair. But life isn't fair, get used to it.

Paterson worked in the global oil industry for over 34 years. His last assignment was as Chairman and Managing Director of Mobil Oil Kenya before the Kenya operation was sold to Oil Libya.