An examination of the effect of energy price regulations (2010) on the alignment of retail petroleum prices in Kenya to international prices

Abstract

In response to increasing inflation in the mid-2000s, the Government of Kenya proposed and in some cases re-introduced price controls in various sectors including energy sector. In the petroleum sub-sector the reintroduction of the price controls was widely expected to reduce the tendency of oil marketing companies to quickly adjust petroleum prices upwards when international oil prices are rising and to lower prices slowly when international prices are falling. However since the introduction of the energy price regulations in 2010, the expected outcome has not been tangible. This study investigated the long term relationship between retail petroleum prices in Kenya and the international crude oil prices in an attempt to assess the effectiveness of price controls in aligning local petroleum prices to international prices. The study used multivariate time series analysis of monthly retail prices of the three main petroleum products used in Kenya and international crude oil prices for the period July 2006 and June 2015 to model the long term relationship between the variables. The study confirmed that a long term relationship exists between international crude oil prices and the retail petroleum prices for the products under review (premium motor spirit, automotive gas oil and illuminating kerosene) both before and after introduction of price controls. The study found only a slight increase in responsiveness of the retail prices of illuminating kerosene and premium motor spirit to changes in international prices after the introduction of price controls and a slight decrease in the response rate in the case of automotive gas oil. Given these findings, the study recommends alternatives to price controls including boosting competitiveness in the retail petroleum sub sector and using the current retail petroleum price formula published by the Energy Regulatory Commission (ERC) as an indicative guide to consumers on optimal prices. Additionally, the study recommends further investment in the underlying infrastructure supporting the energy sector including refining, storage and distribution to achieve efficiency and cut prices.