Business Daily (Nairobi)
Zeddy Sambu
9 July 2009
The huge time lapse it takes Kenyan importers to get petroleum products from the global market to pump stations is denying consumers a chance to benefit from the frequent swings in crude prices leaving domestic prices on a near permanent climb.
The real impact of this inefficiency has been felt in the Kenyan petroleum in the past two weeks that have seen crude prices rise to a peak of $75 per barrel before dropping to yesterday's average of $63.
During the same period however, prices have climbed by up to Sh8 per litre of petrol at the pump stations with the dealers pointing at the build-up in the price of crude in recent months.
Analysts said this rapid rise in the price of petroleum is increasingly eroding one of the key pillars that have kept the Kenyan economy on track in recent months - cheap fuel - against the backdrop of high inflation, rising cost of food and exchange rate swings.
Energy experts at the industry regulator, ERC said oil companies are known to reap from major swings in crude prices as is currently the case.
"In the last six months, crude prices have climbed by $30 per barrel (or Sh15 per litre) leaving marketers room to pass on higher costs to the consumer while keeping the benefits that come with a drop in prices," said an ERC official.
Highly priced petroleum is expected to push up the cost of doing business in the economy at a time when scarcity of rains is posing new threats to electricity generation from cheap hydro sources.
Industry players said were the supply chain more efficient, pump prices would be expected to drop with the arrival of the next petroleum consignments at the end of the month.
That possibility however depends on whether the current downward pressure on the crude price will persist and on the willingness of local oil marketers to pass over the benefits to consumers.
"If the current trend continues then there should be a price reduction early next month," said an industry chief executive. Crude prices have dropped by an average $10 to settle at $62 per barrel (or 159 litres) during Wednesday's trading.
"The crude price trend means July Average will be lower than June's and if marketers are fair it should culminate into a drop in pump prices," said Mr George Wachira, an analyst with Petroleum Focus, an energy consultancy firm.
On Wednesday, the price of super petrol hit the Sh84 per litre mark, an Sh8 gain over prices last Friday while diesel retailed at Sh76, a Sh6 rise in the past one week.
Another Sh1-2 gain is expected by the end of the week. Marketers say current sales were bought at $72 per barrel-- the highest price recorded in the past six months.
"Pump prices are going up because industry tender material started arriving on June 22. This consignment was bought when international crude prices peaked at $72 per barrel," said the executive. There however remains a wide variation of pump prices in Nairobi and across the country - pointing to the stiff competition in the marketplace.
"The market is very competitive. Margins are most of the times under threat and only the most efficient operators are able to deliver good results," said Mr Wachira.
Murban crude oil-that comes from the Abu Dhabi National Oil Company (Adnoc) and determines Kenyan prices is related to Brent crude oil -- an international marker crude oil.
Kenya's fuel requirements are met through a 50/50 supply of the Murban type of crude and the other half through direct imports of refined fuel products from across the international markets.
Apart from the Freight-On-Board (FOB) prices, premium plus freight costs to Mombasa, port handling charges, refinery costs, pipeline storage and local distribution charges, financing cost, plus profit/ dealer margin as well as government taxes including licences determine the pump prices for the estimated 3.2 million tonnes annual national consumption which is growing at around 10 per cent year-on-year.
While price premium freight financing cost form a big share of the FOB price that is being blamed for the current prices, experts say the swings are more speculative than fundamental due to weak global demand for commodities including oil.
The role of the oil producing giant cartel- the Organization for Petroleum Exporting Countries (OPEC ) that supplies 40 per cent (one third of world supplies) has also come under scrutiny for recent price surges.
"Today the fundamentals of supply and demand no longer hold, and market speculation has entrenched itself. The speculators move oil prices just like any other commodity based on the global economic 'feeling," said Mr Wachira.
Industry analysts say the higher costs for fuel will dampen hopes for economic recovery and further exert pressure on inflation that had significantly dropped in the month of June, helped by the oil price tumble-from a record high of $147 on July 11 last year to a low of $30s a barrel in December, before the recent rally, prompting local oil marketers to increase pump prices.
Now the era of high inflation that has stalked consumers since last year beckons in the coming months fuelled by increases in the prices of food, energy and other industrial inputs and highly priced electricity due to thermal -powered generation.
The Kenya National Bureau of Statistics said inflation dropped to 17.8 per cent in June from 19.5 per cent in May in tandem with the decline in the food segment of the Consumer Price Index (CPI).
But financial analysts said the lull was only temporary, arguing that the economy was braced for an upward jerk in inflation from the last quarter of the year.
Should it come to pass, it will delay the recovery of the country's under-performing economy with key sectors like power generation and transport sector , the first culprits.
The Business Daily has learnt that consumption of ordinary diesel by the emergency generators has gone up in the last one week, sparking fears of another round of oil generated inflation occasioned by highly priced electricity.
A worsening of the hydrology conditions in the coming months means that KPLC will continue to transmit more thermal power on the national grid to bridge the expected deficit.
This will see power consumers pay higher electricity bills, driven by rising fuel costs charges -- a varying item on the power bills that is linked to the amount of power on the national grid that is generated from thermal sources.
"We will be using more of thermal due to the lower hydro capacity, but consumers will have to pay more," said Mr Joseph Njoroge, the KPLC managing director.
In the past one month, consumption by Agrekko emergency generators went up by four million litres to 24 million litres, up from 20 million in May.
He said Aggreko's consumption is likely to hit 25 million litres at the end of July with more emergency generators are expected to be licensed too.
With the country's available thermal power thinning out, the search for emergency power producer to add 80 megawatts of power to the national grid from mid this month is underway.
"Between July1-5, there has been a significant increase in the consumption by the Kengen's emergency generators. We expect consumption to remain high," said Mr Mwendia Nyaga, the managing director of National Oil Corporation (Nock), whose company won a contract to supply the emergency generators until December.
Commercial transporters too have warned that they would adjust their rates upwards should the current trend in pump prices for diesel.
Sam Machio--the national secretary for the Kenya Transporters Association (Kta)-- the umbrella body for large fleet owners said members are free to adjust their rates to meet operational costs.
A survey by the Business Daily shows that transport costs have climbed by up to 30 per cent. Transporting 25 tonnes between Nairobi and Mombasa used to cost Sh90,000 but now is Sh120,000. To move a 20-foot container onwards to Malaba costs Sh210 000.
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