Fuel prices may go higher as subsidies fund depleted

The depletion of the Petroleum Development Levy (PDL) Fund that forced the government to withdraw fuel subsidies for the October-November pricing cycle has exposed motorists and businesses to a fresh round of price hikes that are expected to push essentials further out of reach for many Kenyans.

And while the government extended a reduced eight per cent Value Added Tax (VAT) rate on petroleum products for an additional 90 days to January, which was first introduced in April, the tax concession appears to have been inadequate against the surge in pump prices.

Without the stabilisation fund, consumers are now absorbing the full shock of rising landed costs, threatening to trigger broader inflationary pressure across the country’s transport, agriculture and manufacturing sectors.

Public Service Vehicle (PSV) operators yesterday warned that they will increase fares by about 10 per cent, passing on the latest increase to commuters, with other industries also expected to push up the cost of their products.

Over the October-November cycle, Epra did not subsidise any of the products. The regulator explained that the government had heavily tapped into the PDL Fund, spending more than Sh24 billion between April and June this year to cushion the country from high fuel costs. This is nearly the entire amount that the levy collects annually, with the latest annual report showing collections stood at Sh26 billion in the year to June 2025. In past years, the kitty has also been used on other petroleum development activities in addition to subsidising pump prices.

The PDL is a motorist-funded kitty and attracts Sh5.40 per litre of super petrol and diesel at the pump and is later used to cushion them from sharp spikes in retail costs.

“Stabilisation of pump prices remains central to this administration as a primary cushion to the citizens against spikes in the landed cost of petroleum products and through this programme, Sh29.4 billion was utilised in the financial year 2025/26, of which Sh24.3 billion was applied between April and June 2026,” said Epra.

“The government will continue beefing up the PDL Fund, allowing for stabilisation even as prices in the international markets reach unprecedented levels.”

The new prices are expected to push up the cost of living for Kenyans, who are already grappling with high cost of basic items and reduced earnings. Kenya's annual inflation rate has in recent months been inching upwards and rose to 6.8 per cent in September, a 32-month high and climbing closer to the government’s upper limit of 7.5 per cent. Inflation rose on account of the high cost of food and fuel prices and transport.

According to data by the Kenya National Bureau of Statistics, there was a steep increase in the cost of energy and food prices in September 2026, with food inflation surging to 9.5 per cent and transport costs at 15.6 per cent.

The higher fuel costs over the October-November pricing cycle threaten to drive inflation higher.

On Wednesday, Parliament passed the Tax Laws (Amendment) Bill 2026 that extends the eight per cent VAT rate on fuel by another 90 days as among the measures that the government is putting in place to cushion Kenyans from even higher pump prices. Following the extension, the government is projected to forego Sh30 billion in tax revenues over the period that lapses mid-December, but the CS Treasury can extend it for another 90 days.

EPRA on Wednesday explained that the price of petroleum products has this year been under pressure from numerous points, with the most significant being the choking of the Strait of Hormuz. It is, however, not the only geopolitical issue affecting the global supply of fuel, with others being threats to ships plying the Red Sea route, a key alternative for Kenya in sourcing petroleum products.

“Supply of refined petroleum products worldwide has in the recent past been severely affected by the closure of key transit corridors in the Middle East. On July 20, 2026, rebels declared an embargo on Saudi-linked shipping lines,” said Epra.

“The resultant effect is that marine petroleum tanker operators have steered clear of the Bab Al-Mandeb Strait along the Red Sea, a key alternative supply route to Kenya after the closure of the Strait of Hormuz earlier in the year. Our international suppliers have therefore been forced to source cargoes from the Far East (South Korea, Singapore) and Europe to meet the contractual requirements.”

The energy industry regulator added that the situation has further been complicated following fresh attacks and counterattacks in the Middle East that destroyed key oil infrastructure, including for key oil producers such as Saudi Arabia, whose East-West Pipeline suffered a temporary shutdown after missile and drone attacks. The pipeline helps the country bypass the Strait of Hormuz by pushing oil to the Yanbu port on the Red Sea.

The ban on the export of diesel by the US and Russia has also resulted in higher diesel prices.

The hostilities since February this year, Epra said, have resulted in the cost of petroleum products in the global markets nearly doubling, which is now reflecting in pump prices.

Diesel, according to data Epra presented on Wednesday, has increased 90.6 per cent to $1.215.83 per metric tonne in September from $637.76. Super petrol has increased 89.45 per cent to $1,300.65 per metric tonne from $686.53 in February, while kerosene has increased 84 per cent to 1,253.50 from $681.20 in February.

“September 2026 recorded the highest international prices of refined products in more than a decade,” said Epra, noting that over the six months, the impact has been huge on the landed cost of petroleum products, which is the cost of fuel when it gets to Mombasa and before taxes and levies, oil marketers’ margins, transport and storage costs are loaded.

“That translates to an increase in the landed cost by Sh59.36 per litre of super petrol, Sh61.80 per litre of diesel and Sh59.57 per litre of jetA1/kerosene.”

EPRA also explained that the prices would have gone up by a bigger margin were it not for the Government-to-Government deal, which cushioned Kenyans to the tune of Sh17.74 per litre.

“Under the G-to-G framework, the freight and premium is fixed at $84 per metric tonne (Sh8.16 per litre) for super petrol, $78 per metric tonne (Sh8.56 per litre) for diesel and $ 97 per metric tonne (Sh9.97 per litre) for jet A1/kerosene,” said Epra.

“Comparatively, the current freight and premium in the spot market is approximately $250 per metric tonne (Sh26.72 per litre), and this is what the Kenyan consumer could have been exposed to were the G-to-G arrangement not in place.”