Let the market take care of stabilizing the fuel price boom

Rubis’ attendant Kennedy Mutua fuels a car along Koinange Street in Nairobi. [Boniface Okendo, Standard]

The rise in fuel prices when you travel less except for funerals in the midst of a pandemic is not a paradox.

Why am I saying that ? First, the situation can be blamed on increased vaccination of the masses against Covid-19. As vaccination becomes more widespread, the prospects for a return to normal increase.

This means increased demand for goods and services. Fuel is an input in the provision of goods and services; think about transportation or raw materials in the chemical industry. Take heart, however. Rising fuel prices are a global phenomenon. The UK and US are also reporting an increase in fuel prices.

Earlier this month, China released some of its strategic oil reserves to stabilize rising prices, as reported by CNN.

China is the world’s largest importer of oil. The fact that the effect of the delta variant of the coronavirus was not devastating as expected, opens up new prospects for a return to normal.

Second, with the collapse in prices during the Covid-19 pandemic, inventories have been reduced, while investments in oil exploration and extraction have been reduced. This has lowered the prices even further.

Third, the Organization of the Petroleum Exporting Countries (OPEC) has cut production, pushing up prices.

Oil producers came together after oil prices collapsed in the wake of the Covid-19 pandemic. At one point, oil prices were negative due to low demand and lack of storage space.

Third, in Kenya fuel prices have a strong tax component at around 50 percent. The higher the prices, the greater the tax revenues.

It is questionable whether the demand for fuel will not decrease with the rise in prices. In economic jargon, fuel has low price elasticity of demand, which means that higher prices do not necessarily lead to lower demand, because fuel is a necessity.

Fourth, it has been suggested that taxes are a better alternative to debt. Have we not complained about the debt? Maybe we should celebrate our ability to fund government with more taxes!

Sixth, price controls provide an incentive for the controller to get the most out of consumers. It was assumed that price controls would stabilize prices and protect consumers. They do not have.

What price controls worked without unintended consequences? Many Kenyans today did not live in price controls until the economic and political liberalization of the early 1990s.

The rise in fuel prices in the midst of the pandemic is not a paradox. [File, Standard]

Seven, oil does not yet have enough competition. We still have too few electric cars, yet gasohol – a fuel made from a mixture of ethanol and unleaded gasoline – has never gained popularity in Kenya.

Liquefied petroleum gas is not yet a popular automotive fuel in the country. Our life is further complicated by the lack of a good public transport network, which makes passenger cars popular and increases the demand for fuel. Eighth, and more worryingly, the rise in fuel prices came just after the government declared the country’s drought a national disaster.

An increase in the price of food and fuel would affect the economy, causing the cost of living to rise sharply.

Add unemployment and economic stagnation due to the Covid-19 pandemic. Preparing for the 2022 general election does not bode well for our economy under these circumstances.

What is the solution to rising fuel prices? Politicians rush to make hay while the sun is shining.

They are calling for lower fuel prices. They do not suggest an alternative source of tax revenue from fuel. Interestingly, they are behind the fuel price controls that don’t seem to be working. The Energy and Petroleum Regulatory Authority (EPRA) sets fuel prices on a monthly basis, as stipulated in the Energy (Petroleum Pricing) Regulation, 2010.

Have I heard that we cannot benefit from the fuel subsidy because there are no regulations to implement it?

Politicians know next year’s polls are not far off. An angry electorate is the last thing politicians want to see.

Perhaps a better question is why the price of fuel was controlled in the first place. Why was the market not allowed to do its job?

My hunch is that the price of fuel would be lower if the controls were removed.

Just allow anyone who can import fuel to do so. Competition would lead to lower prices. If we don’t control the cost of intensive care unit (ICU) services, a matter of life and death, why do we control the price of fuel? By controlling fuel prices, we seem to have provided a political solution to an economic problem. This is not unique to fuel prices. Remember the cap on tuition fees?

Since the price control didn’t work, let’s try the market. With the pandemic still ongoing and economic activity declining, the price of fuel is expected to be lower than it is. Prove me the contrary!

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About Aldrich Stanley

Aldrich Stanley

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