Explainer: Why the cost of fuel is high

It has been a record increase in fuel prices this month with the cost of the three main fuel products crossing the Ksh.200 psychological barrier. There has been much talk in the country about the cost of fuel and the factors that contribute to it. 

Well, there are both external and internal factors that add to the final price at the pump for consumers

First is the International Cost of fuel products, because Kenya does not produce its own oil, nor do we refine it. The other factor affecting the cost is the Exchange Rate between the Kenya shilling and the dollar considering the fuel is purchased in US dollars. 

But how does this work in the region? In Kenya, the prices are regulated by the Energy Petroleum Regulatory Authority (EPRA).

Let’s take a look at Tanzania, where Kenyan motorists are crossing over to buy petrol at a cost of about Ksh.193 per litre. Their fuel prices are regulated too, by a body known as the Energy and Water Utilities Regulatory Authority.

It is an autonomous regulatory authority that sets the cap prices for petroleum prices as mandated by Tanzania’s Petroleum Act of 2015, Section 66. They set a cap, but encourage the oil marketing companies to sell at a price that gives them a competitive advantage as long as they do not exceed the cap, or limit set. 

Uganda is a different story; there are no price regulations for petroleum products in that country. The market forces drive the prices and there has been a push to seek price controls like some of the other countries in the region. 

In Rwanda, price regulation for fuel products is done by the Rwanda Utility Regulatory Authority. 

Back in Kenya, there are a few components to that final pump price. When the product itself arrives in the country, these are the respective costs for petrol, diesel and kerosene; also known as the Landed Cost. Well, it is from here that the costs begin to add up.

The distribution and storage costs include the pipeline cost from Mombasa to Nairobi, other components such as pipeline losses, depot losses ranging in price depending on the different products and then delivery within 40km of Nairobi. 

We then have the suppliers’ margins. The oil marketing companies, the ones we know as the different companies operating filling stations; have their profit margins set at Ksh.12.39 for petrol and Ksh.12.36 for both diesel and kerosene. Incidentally, this margin has remained the same since this time back in 2021, according to data from EPRA.

Now, it is the next component that sends the prices to a whole new level, that is the taxes. There are 9 taxes in total charged on petroleum products.

These are; Excise Duty, Road Maintenance Levy, Petroleum Development Levy, Petroleum Regulatory Levy, Railway Development Levy, Anti-Adulteration Levy, Merchant Shipping Levy, Import Declaration Fee and finally Value Added Tax.

These taxes account for almost 70 per cent of the landed cost, which is the actual cost of the fuel itself.  

Two important changes have been effected on some of the taxes; the reduction of the Import Declaration Levy and the Railway Development Levy both reduced in this year’s Finance Act. Though the reduction accounts for a reduction of no more than Ksh.2, the other change has been to VAT. 

VAT was not initially charged on fuel products, it was re-introduced in September 2018 as the result of an IMF facility that we sought in 2011. It was a Ksh.688 million dollar standby facility. 

One of the conditions of that facility was to amend tax laws and remove some items that were exempt and one of those was petroleum products. That is what the VAT Act 2013 did, proposing to slap VAT on petroleum products. 

But Parliament decided that it would not apply right away, giving it a transition period of three years to be applicable in 2016.

The then CS committed to abolishing the VAT exemption on oil products back in 2016. They however kept kicking the can down the road until 2018 September and even then, to put it VAT at 8%. This year’s budget doubled that to 16%. 

The doubling of VAT alone is a significant addition to the cost of fuel. It means that there has been an addition of Ksh.14.50 for petrol, Ksh.13.86 for diesel, and close to Ksh.14 on kerosene. 

Even though there are some external factors over which we have no control, the taxes, all 9 of them are possibly within Kenya’s sphere of influence. Taxes are introduced and passed by your representatives in parliament meaning that there is influence that can be exerted by both the Executive and Legislature. 

That issue of taxes on fuel products was acknowledged by then-presidential candidate and now President William Ruto during the presidential debate on the 26th of July, 2022.


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