A Quantitative assessment of the influence of taxes, levies, landed costs, storage and distribution expenses on pump prices in Kenya

Abstract

This study provides a quantitative assessment of how taxes and levies, landed costs, and storage and distribution expenses influence petroleum pump prices in Kenya. It aims to inform policy decisions on fuel pricing by offering empirical evidence on the drivers of domestic petroleum prices. Between January 2018 and May 2024, prices for Super Petrol, Diesel, and Kerosene rose by 81%, 86%, and 121%, respectively. These increases have contributed to reduced fuel consumption especially for Kerosene and rising inflation. The study had three objectives to assess the extent to which: i Taxes and levies influence the price of petroleum products. ii Landed costs for refined petroleum products influence their prices. iii Storage and distribution costs influence the price of petroleum products. The research was guided by several economic theories: the economic theory of price control, Pigouvian taxation theory, price theory, the informal approach, and exchange rate theory. A quantitative longitudinal research design, utilizing a time series approach was employed, using secondary data from the Energy and Petroleum Regulatory Authority (EPRA). The analysis involved Pearson correlation, unit root tests using the Augmented Dickey-Fuller (ADF) method, co-integration testing, and the Auto-Regressive Distributed Lag (ARDL) model. Data analysis was performed in R-Studio and Microsoft Excel. The results showed that the model explained 58.63% of the variability in kerosene prices, 49.82% in diesel prices, and 31.03% in super petrol prices. Taxes and levies had the greatest impact on Super Petrol prices, while landed costs had a stronger influence on kerosene. Storage and distribution costs did not significantly affect diesel prices. The findings revealed that these factors have significant short-term effects, often influencing prices immediately or within one to two periods. However, the absence of long-term co-integration suggests they do not determine long-term trends in petroleum pricing. The study concludes that although taxes, levies, and logistical costs drive short-term price fluctuations, they lack a stable, long-term predictive relationship with fuel prices. These insights are essential for developing targeted, evidence-based fuel pricing policies in Kenya.

Keywords: Kenya’s Petroleum Prices, Petroleum Taxes and Levies, International Platts prices, Petroleum Regulation Kenya, EPRA