Assessing the efficacy of price regulation on fuel pump prices in Kenya
Miswa, Beryl Anyango
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The government through the Energy Regulatory Commission (ERC) sets the fuel price using a formula that takes into consideration the importation cost of crude or refined product, freight, local transportation costs, insurance, refinery processing fees (for crude oil), taxes and a profit margin. Oil Marketing Companies (OMCs) have been critical of the ERC’s pricing formula since it does not cover financing costs and the rising cost of doing business due to inflationary pressures. Margins in the sector are also negatively impacted by low margins and high finance costs due to the capital- intensive nature of the business. This study aimed to examine the efficacy of price regulation on the pricing of fuel in Kenya. It sought to assess the appropriateness of components of the pricing formulae, determine the various perspectives of the oil marketers in relation to the pricing of fuel, and examine the success and challenges of the pricing formulae/regulation. The study used descriptive research design, secondary data from the websites of ERC and the oil marketers and conducted in depth interview with top 7 OMC managers. The scope of the study was the ERC and the top seven OMCs based on their market share in Kenya. The findings of the study showed that; the introduction of oil price controls in Kenya had greatly affected the pump prices; the pricing regulation was not beneficial to OMC’s and the changes in oil prices due to the pricing formulae had led to increased and uncontrolled economic fluctuations. The study recommended that since the demurrage costs tend to be significant due to clearance delays experienced and the operations should be closely monitored to avoid such unnecessary delays and increased costs. The ERC should still consider changes in international crude oil prices and the changes in the US dollar Kenya shilling exchange rate in setting maximum oil retail prices for the four products. The study recommends a structure that establishes a clear link between retail prices and import prices based on import costs, distribution margins, demurrage costs, landed costs and tax levels.