7 February 2018

Uganda: Fuel Prices Expected to Continue Soaring

In 2008, a litre of petrol used to cost Shs1,950. But 10 years later, this price has increased to Shs4,000, indicating a 51 per cent increase.

To break this further, it means 10 years ago if you had a fuel budget of Shs100, 000, you would get 51 litres of petrol. This would at least take you for a month. Not anymore.

The recent increase in the fuel pump price is not about to stop. Sources well-versed with the oil industry dynamics and industry analysts have warned.

It has also emerged that these are still early days as the pump prices are set to continue rising beyond the Shs4,000 mark.

Over the last three months alone, the pump price of petrol has increased by Shs500 while that of diesel has gone up by about Shs350.

The most affected product- petrol is now trading at nearly Shs4,000 in some parts of Kampala city and its suburbs.

By close of last week, the pump price for petrol was trading beyond the Shs4,000 mark, a price last reached five years ago in 2013.

The cost of living might not get any better if government's proposal to increase Shs100 tax on fuel in the coming financial year 2018/19 materialises.

According to the National Budget Framework paper (NBFP), government intends to focus on road maintenance. The money to do this work will be raised through the Shs100 tax on fuel, amounting to Shs200 billion annually.

Industry player

In an interview with Prosper Magazine last week, Vivo Energy Uganda's managing director Gilbert Assi refuted allegations that there is shortage of fuel. He said the situation is normal, attributing the current price increase to the high Platts price.

Global Platts is a provider of energy and commodities information and a source of benchmark price assessments in the physical energy markets.

"Supplies are not unusual. So it would not be correct to say the fuel price increase is brought about by shortage in supplies," Mr Assi told this newspaper.

Dollar effect

Since October last year to date, the dollar has been on a strengthening spree and this has left the shilling weak.

Currently, the dollar is trading at between Shs3,620 and Shs3,630, meaning more shillings have to be used to buy dollars.

Because the fuel business depends on the exchange rate, its volatility greatly affects the final consumer price.

In November for example, a metric tonne of petrol was imported into the country at $600.386 (Shs2.2 million). The product which was imported into the country for the month of December marginally went down to $599.48 (Shs2.1 million).

"The product which came in December is the one being supplied and shared by the oil companies at the current price," the source shared.

Worse still, the product which was imported into the country for the month of January a metric ton was procured at $639.48 (Shs2.3 million).

It is alleged that motorists will spend more on the imported product for January which fuel importers/companies are preparing to receive.

Shortage issues

Ordinarily, fuel is transported from Mombasa through a pipeline to Eldoret and Kisumu from where it is supplied by road to Nairobi and other East African countries including Uganda.

Any eventuality affecting the more than 2,000 kilometre supply chain will have adverse effects on the local market.

For instance, there have been problems on the Kenyan supply side resulting from the tendering system where a cancelled tender recently forced insufficient supply here in Uganda.

Government's view

Efforts to getting the minister of Energy, Ms Irene Muloni were futile. But the minister is expected in Parliament this week to explain the volatility in fuel prices.

Earlier last week, the Uganda National Oil Company's general manager, Mr John Bosco Habumugisha, told the media in Kampala at his office that there are many factors causing the volatility.

"First, supply delayed in the Kenya Open Tender System (OTS). The OTS has had to deal with one cancelled tender and another one delayed. This has contributed to low supply volumes. Fortunately, this issue has been addressed," Mr Habumugisha said.

The pipeline that is currently under renovation, does move petroleum products to Nairobi from where it is supplied to other parts of the country and the region.

According to oil industry insiders, the shortage is due to delayed decommissioning of tanks at KPC terminal in Mombasa.

"We are experiencing shortage [of fuel most especially petrol] because of ongoing repairs on the Kenya Pipeline Company (KPC) in Mombasa. Because of this there is slow discharge of product," the source said.

KPC, which transports petroleum products from Mombasa to the hinterland, is undergoing refurbishment on some of its storage tanks hence reducing ullage. This has forced the company to store less fuel in the last three months.

Experts say that the infrastructure we have in Kenya has always been unable to meet the demand for product in Kenya and its neighboring countries.

Delayed commissioning of KPC's Mombasa-NBI line 5-a section of the KPC is being developed to address logistics constraints of supplying a market which is growing at a rate of 6 per cent per annum.

Therefore, there is increased demand in volumes which cannot be met with the current supply infrastructure at the port on Mombasa and Pipeline company.

Global effect

Conversely, experts have also identified the impact of the increase in international prices as another possible cause for the current increase in pump prices.

At the start of this month oil prices hit the $70 per barrel mark (Shs255, 500) down from December's $64 (Shs233, 000).

Mr Peter Ochieng, the managing director Hashi Energy operating in Kenya, Uganda and Rwanda in an interview with Prosper Magazine said that the increase might have been influenced by the volatility in the dollar market.

"All oil transactions are paid in dollars. The stronger the dollar the higher the pump prices will be for the final consumer."

At the start of this year, the Shilling weakened against the dollar depreciating to sell between Shs3,650 and Shs3,660. This was weaker than the Shs3,540 at the start of January.

KPC side of the story

However, in an earlier phone interview with this newspaper Mr Jason Nyantino, communications manager with KPC in Kenya, denied these allegations saying they have enough stock.

"KPC has enough stock to sustain the region for the next 12 days and we are replenishing it regularly," Mr Nyantino said.

He said the company has depots in Eldoret (45 million capacities) and Kisumu (40 million capacities) and these all have the product to supply Uganda and the rest of Western Kenya.

However, Nyantino blamed the shortage challenge on the truck drivers and border clearing delays.

The low supply has created anxiety as suppliers try to buy among themselves to starve off the looming crisis.

Impact on economy

Dr Fred Muhumuza, an Economist and Makerere University Lecturer, says the increase in oil prices will lower the demand further and this will affect the profits and business taxes.

"Oil is a major component of imports and this is likely to affect the exchange rate as well as transport costs," Dr Muhumuza shared.

According to records at the Ministry of Energy, Ugandans consume about 5.4 million litres of petroleum products per day.

This means any shortages or supply hiccups have an adverse impact on the economy.

When contacted, Mr Gideon Badagawa, the Private Sector Foundation Uganda executive director, said the immediate effect will feed into commodity prices which are likely to drive inflation high.

"High fuel costs will result into a high cost of doing business. A farmer spends about 22 per cent on transporting the produce from the farm to the market. If fuel prices go up, this will automatically impact the final price of the commodity and increase inflation," Mr Badagawa shared.

Secondly, those exporting and importing products will not be spared as they will find doing business more costly.

He adds: "Ideally, it costs $2,800 (Shs10.2 million) to transport a container from Mombasa to Kampala and vice versa. If the fuel prices are high, we are going to see reduced exports and imports."

Alternative route

Experts say this problem will always surface if Ugandan companies and government do not increase the capacity of alternative supply routes. They say supply through Tanzania's-Dar-es-Salaam has higher efficiency in terms of bringing in enough products on the market.

"The advantage with the Tanzanian route is premised on the multiple fuel storage depots which are privately owned. This means they operate 24 hours a day and can be accessed even on weekends," a source who requested anonymity to speak freely source says.

When using the Tanzania-Dar-es-Salaam route, players have the advantage of loading more trucks at ago, making the turn-around faster. But it is harder to load 10 trucks at a go in Kisumu.

However, some industry players say the Dar-es -Salaam-Kampala route is longer and expensive with a landed cost of about Shs400 per litre more than the Kenyan route.

Transporting products from Kisumu costs $50 (Shs181,000) per cubic metre while the Dar-es-Salaam route costs about $100 (Shs362,000) per cubic metre. The beauty about the Dar-es-Salaam route is one carries more products and the turn-around is higher.

In order to mitigate this problem, the source proposed that Government gives oil companies incentives to use the Dar-es-Salaam route.

"Let government lower the excise duty to encourage the oil companies use this route to bring enough products on the market. This will somewhat stabilise the pump price and inflation will go down," said the source.

OPEC cuts production

The Organisation of Petroleum Exporting Countries (OPEC) and Russia have agreed to maintain production cuts until the end of the year to reduce over-supply, which is already propping prices to a near high of $70 (about Shs255, 500) per barrel of crude.

Motorists hit hardest

Just three months ago, Mr Abel Muhereza would spend about Shs210,000 to Shs220,000 to fill his vehicle's tank which he would then cruise around for a week before refilling.

"But now, I use more money for fuel (about Shs250,000) and my tank runs dry within the same time--a week," Mr Muhereza narrated in an interview last week.

He continued: "In just three-months, my fuel budget has increased by Shs30,000. That is not something to be happy about!"

Regional status

Two weeks ago, Kenya; the region's leading economy, increased its retail pump prices for diesel, super petrol and kerosene.

The Energy Regulatory Commission reportedly said the prices of super petrol per litre will rise to $1.06 (Shs3,869), diesel to $0.95 (Shs3,476) and to $0.75 (Shs2,737) for litre of kerosene, mainly used bay poor homes for lighting and cooking.

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