Stop abuse of power in Kenya’s oil market
- I read somewhere that since January of this year the price of petrol in Ghana has gone up by 52%.
- This is what happens when you pass on all international fuel price increases to the end consumer.
- Currently, pump prices in Uganda, Rwanda, Tanzania and DRC are much higher than they are in Kenya because prices here are artificially kept low by the subsidy.
Expelling Jean-Christian Bergeron, the CEO of international oil distributor Rubis, is the easy part. The most pertinent questions at the heart of the fuel crisis we are currently experiencing are the following.
First, do we have the political backbone to do what Uganda, Rwanda and Ghana have done, which is to allow the full cost of high world prices to be passed on to the end consumer?
Second, if exorbitant international prices resulting from the Ukraine crisis force us to pour more money into grants, will the budget-funded grant be financially viable?
I read somewhere that since January of this year the price of petrol in Ghana has gone up by 52%. This is what happens when you pass on all international fuel price increases to the end consumer.
Currently, pump prices in Uganda, Rwanda, Tanzania and DRC are much higher than they are in Kenya because prices here are artificially kept low by the subsidy.
In my opinion, one of the main factors that has inflamed the current crisis is the emergence of a dynamic parallel market in transit oil, a consequence of the wide discrepancies between prices at the pump in Kenya and in places like Uganda. and Rwanda where there are no subsidies.
The export business has become lucrative because in these countries an oil trader does not have to wait months for the government to release the subsidy. There is another advantage in the parallel transit market: you are paid in cash.
So when the government accuses certain oil companies of exporting oil to our neighboring countries, it is right. Margins in the parallel transit oil market have been huge. A third factor made the situation worse: the uncompetitive tactics of some of the big players added to more anxiety in the market.
It seems to me that one of the triggers for the booming transit oil business started when one of the big players in the market – perhaps to undermine the rest and increase their market share – started selling below the price decreed by the government.
These tactics sent the wrong signals to the market because when you are a big player, your actions and tactics have repercussions in the wider market.
In this case, the so-called independent and unbranded players started buying from this big player and exporting big products to the much more lucrative markets of Uganda, Rwanda and northern Congo.
The effervescence of the parallel transit oil market was particularly attractive to smaller players. With world prices rising rapidly, these smaller players, unlike the big boys, found themselves without the cash flow to play and do business in the mainstream. Shortages have worsened.
We have to accept that the oil industry regulatory regime is not working effectively. Instead of price controls, vessel scheduling meetings, dead volume allocation committees and complex formulas for calculating “price caps”, “floors” and “caps”, regulations should put more emphasis on focus on the abuse of market power.
When a big player acts as if it is intent on undermining other players, especially at a time when the entire market is engulfed in crippling uncertainty and shortages, it must be stopped quickly. The government should introduce severe sanctions against monopolistic behavior and restrictive practices.
We should accept that the structure of our oil market encourages cartel-like behavior. Under the so-called open bidding system, one oil company is allowed to import all requirements from Kenya on behalf of the rest of the traders. Since supply is fixed in the short term, the system more or less guarantees oil traders sales at higher prices.
In economics textbooks, we read that collusive behavior occurs in two circumstances: first, when the product is undifferentiated and has no close substitutes, and second, when the actors face a cost structure similar. In a number of cases, oil companies jointly own and share truck loading facilities
We should review the licensing system for oil companies.
We have recently witnessed an explosion in the number of briefcase merchants who are proving to be an impediment to the smooth functioning of the supply chain. Today, you may find a situation where the Kenya Pipeline Company system holds millions of liters of gasoline while the pumps remain dry.
This is a sign that we have too many underground-owned stations without investment in distribution infrastructure. Let us introduce minimum capitalization for licenses and make licenses subject to proof of ability to invest in service stations, depots and storage tanks.
Well implemented, a smartly designed regulatory regime for oil companies can have a major impact on this economy.