Lies that set up Kenyans for record prices at the pump

It has been a well scripted web of deceit fuelled with lies and blatant disruption, oiled by high profile greed that is now threatening to grind the economy to its knees.

It started as a solution-based intervention clothed as Government-to-Government (G-to-G) deal but it has now spiralled into a full-blown scandal, benefitting a cabal of cartel as Kenyans are pushed to the edge by high cost of living.

Even after an injection of Sh5 billion subsidy and blatant risk of Kenyans' lives by allowing into the country substandard fuel to stabilise supply, prices still went up significantly.

Meanwhile, Energy Cabinet Secretary Opiyo Wandayi continued his public relations exercises, telling Kenyans lies and insisting on Friday that there are “adequate petroleum stocks" in the country.

And the ripple effect has been fast and immediate - fares will go up up by 50 per cent from Monday. The transport sector could be paralysed as operators threaten mass protests which could potentially cripple the economy.

The truth, however, is that months of seemingly calculated deception by the State and its agencies,  the G-to-G deal that has failed to deliver on its promise of security of petroleum supply and the oil industry that appears to be profiteering at the expense of the public.

While global crude prices have been volatile, a series of policy decisions by the government are being cited as major contributors to the record-breaking pump prices.

The Sh46 hike in the cost of diesel to retail at Sh243, industry players and analysts said yesterday, would be damaging to the economy, with the fuel being a primary driver for transport, agriculture and manufacturing.

Despite repeated assurances from the government that the fuel pricing and supply chain were under control, the recent crisis has exposed significant cracks in the G-to-G deal. 

The breakdown began when Gulf Energy and other key players in the G-to-G deal failed to deliver fuel cargoes on time, triggering widespread shortages that paralysed transport across the country. 

The faltering of the G-to-G deal, which was meant to ensure supply security, led to the importation of sub-standard fuel.

While the government dismissed several senior officials over high-sulphur fuel imports, it shortly afterwards, relaxed the national standards to allow for even lower-quality fuel, which has not resulted in lower pump prices

The initial high sulphur cargoes, which were brought through an emergency importation, were by One Petroleum and Oryx Energy.

One Petroleum had discharged a portion of the fuel before it was directed to stop the discharge process while Oryx Energy’s cargo was turned away.

Oryx Energy, sources told The Saturday Standard, has threatened to sue Kenya at an international court for reneging on its obligations.

This is expected to cost the tax payer in litigation costs and the amount could be higher should the court give a verdict against Kenya.

“The delays by Gulf Energy to acquire a shipment at the time necessitated the emergency shipment. These delays have also led to subsequent supply hiccups that we have been experiencing, which could mean that Gulf Energy, the main firm in the G-to-G deal handling 80 per cent, may not be in good relationship with the firms and hence its orders are not prioritised,” said an industry source.

The consensus within the local industry is that despite its shortcomings, the G-to-G deal should ensure predictability in availability of products and that Kenya should be prioritised in terms of accessing fuel.

The government’s intervention measures, which critics described as half-hearted, have also fallen short of arresting the surge in the cost of petroleum products.

This is such that despite pumping Sh5 billion into subsidies over the May-June pricing cycle and halving of the Value Added Tax (VAT) to eight per cent, prices surged to record highs.

Different stakeholders on Friday said the government should spend more money from the motorists funded fuel subsidy kitty. 

Kiharu MP Ndindi Nyoro accused the government of a nonchalant approach in dealing with fuel crisis. 

“This is not an emergency. We have always known from February 28 that we needed to think and do something about the fuel crisis. The fact that we have had to postpone offering solutions shows how the government has been taking the matter seriously,” he said.

“This morning we have seen the transport industry passing that burden to the consumers. That is also likely to happen in manufacturing and every other sector in our economy,” Nyoro said.

Nyoro, who spoke yesterday at a press briefing in Nairobi noted that reinstating the Road Maintenance Levy to 2024 levels of Sh18 per litre of diesel and petrol, a further reduction of VAT by five per cent and pumping more money from the fuel subsidy kitty could cut fuel prices by Sh27, offering immediate relief. 

The fuel stabilisation, he said, has Sh20 billion, which could be tapped into and provide an additional Sh5 billion to subsidise fuel.

Taking out money from the fund, he noted, is not charity but a kitty funded by motorists and meant to cushion them from shock fuel price increases. Motorists pay Sh5.40 per litre of fuel as Petroleum Development Levy at the pump, which has a fuel stabilisation mandate.

The Kenya National Chamber of Commerce and industry (KNCCI) also noted the impact that a sharp spike in the cost of diesel would have on the economy. 

“The sharp rise in diesel is particularly concerning because diesel is the backbone of transport, agriculture, manufacturing, logistics, construction and general trade,” said Erick Rutto, KNCCI president, adding that this would result in an increase in the cost of all goods and services.

The lobby also queried the sharp spike, which it said did not tally with global surge, with local prices increasing at a faster rate compared to international prices.

This points to the Kenyan consumer shouldering a bigger burden seen in higher taxes as well as margins to oil marketing companies and other industry players.

“The April–May comparison shows that while global crude oil prices increased by about 10.7 per cent, Kenya’s diesel price rose by 23.5 per cent over the same period. This points to the continued role of domestic cost build-up, including taxes, levies, exchange-rate effects, margins and landed product costs,” said Rutto.

Kenyans are also paying significantly more for fuel than their counterparts in neighbouring countries.

As Kenyans pay Sh243 per litre of diesel, the cost in Uganda is 28 per cent lower at Sh174 per litre.

It is also in comparison to Sh175 in Burundi, Sh176 in Ethiopia and Sh190 in Rwanda. A litre of diesel in Tanzania is currently at Sh211. 

“Kenya remains a relatively high-cost fuel market compared to regional peers such as Uganda and Tanzania. This weakens Kenya’s competitiveness in logistics, manufacturing, cross-border trade, and investment attraction,” said Rutto. 

The lobby further called on the government to “review and rationalise fuel taxes and levies, especially on diesel”. 

In Kenya, the major contributors to the Gross Domestic Product (GDP) that will bear the brunt of high fuel costs are agriculture (23.2 per cent), transport (11.8 per cent) and manufacturing (7.8 per cent). 

 In agriculture, the hike will inflate the cost of mechanised farming, irrigation and the distribution of produce from farm to market.

Among manufacturers, who are already grappling with high production costs, expensive diesel threatens to increase the cost of all finished goods, further eroding the purchasing power of the Kenyan household.

Kenyans have been grappling with high costs for essentials, which have been inching upwards since the April pump price review.

The cost of essentials, many of them manufactured, is set to further go up as industries grapple with both high transportation but also production costs.

Inflation - which is the speed at which prices of commodities increase – increased to 5.6 per cent in April up from 4.4 per cent in March, pushed up by transport and food prices. 

Other than the likely impact of crippling the economy, Kenyans are also staring at a resurgence in fuel adulteration.

Martin Chomba, chairman Petroleum Outlets Association of Kenya (Poak) said the Sh90 difference between the retail prices of diesel and kerosene could incentivise unscrupulous dealers to shore up diesel volumes using kerosene.

Kenya has reduced instances of adulteration to negligible levels following imposing of taxes on kerosene – including the anti-adulteration levy in 2018 - and brought it to be at par with diesel. 

Over the last two pricing cycles, kerosene has been heavily subsidised with the gap between its price and that of diesel and petrol growing significantly.

Over the current cycle, the fuel is subsidised by Sh91 per litre while the subsidy over the April-May cycle stood at Sh89.

“The danger that is looming in the petroleum trade is in the disparity between the price of petrol and diesel in comparison to that of kerosene. Kerosene has in the past been used for adulteration. And when you give a price of Sh152 per litre against a price of a diesel Sh243 per litre, what we are likely to start seeing now is the return of adulteration," he said.

“If not checked we could see a resurgence now that there is a serious incentive because of the price disparity, which would take us back from where we have come from as a country.”

Chomba said the government should have shared the subsidy given to kerosene across all the fuels. 

Despite the crisis that is now unfolding in the country and calls by Kenyans for the government to do more,  Wandayi said things could have been worse were it not for the Sh5 billion, the cut in VAT and G2G system, things would have been worse.

“Currently, global spot freight and premium rates for petroleum cargoes have more than doubled, exposing countries reliant on spot purchases to very high escalations in the landed costs. Insurance premiums have also escalated greatly considering the impasse at the Strait of Hormuz further, compounding petroleum import costs,” said Wandayi. 

“Kenya continues to benefit from the fixed freight and premium costs for refined petroleum imports secured under the G-to-G arrangement.”