U-turn from the government as fuel subsidies are reinstated

In a dramatic U-turn, the government restored fuel subsidies on Monday in an effort to protect customers from increasing pump prices in response to the arrival of a cheaper shipment last week that alarmed oil marketers.
After reinstating the subsidies that would have caused pump prices to surpass KSh200, the Energy regulator decided to maintain the fuel prices at their current levels.
“In order to cushion consumers from the spike in pump prices as a consequence of the increased landed costs, the government has opted to stabilise pump prices for the August-September pricing cycle,” the Energy and Petroleum Regulatory Authority said in a statement.
Epra stated that the Petroleum Development Fund will be used to pay the oil marketing businesses. Without it’s action, Epra claims that the cost of gasoline in Nairobi would have grown to KSh202.01 per litre, the cost of diesel to KSh183.26 per litre, and the cost of kerosene to KSh175.22 per litre.
Instead, they will stay at KSh194.68 for gasoline, KSh179.67 for diesel, and KSh169.48 for kerosene.
As a result, starting on Tuesday, the government will subsidize gasoline for KSh7.33, diesel for KSh3.59, and kerosene for KSh5.74.
This follows correspondence obtained, which reveals that Epra Director-General Daniel Kiptoo wrote to the chief executive officers of oil marketing companies on 9 August in response to worries that dealers would incur cost “differences without clear mechanics of recovery” should the State proceed with it’s plan to intervene to lower fuel prices.
Mr. Kiptoo sought to calm concerns that the comparatively low-priced merchandise would cause a price distortion and disadvantage them since they will be selling stock with a higher price after revealing the intention to interfere in an effort to reduce the burden of fuel expense on Kenyans.
“The authority notes that volumes in excess of the quantities factored for the July to August pricing cycle may be introduced in the market prior to the next pricing cycle,” stated Epra director-general’s letter to the CEOs.
“Oil industry players are concerned that should the State intervene to cushion consumers from the high prices being experienced in the international markets in the coming pricing cycle, the cargo introduced prior will suffer cost differences without a clear mechanism of recovery.” Kiptoo continued.
As part of the intervention to protect consumers, Mr. Kiptoo indicated that the government would release a fresh supply of fuel onto the market. However, he gave the marketing firms the assurance that Epra would verify and collect the amounts.
What quantities, how they are sourced, and when they are anticipated to be available on the market are all unclear. When Mr. Kiptoo was contacted about the situation, he declined to respond.
However, the CEO of a big oil marketer said that the government had already put less expensive cargo on the market in the week of 12 August and that this had upset participants in the sector.
“There’s been an extremely high cargo introduced in the market this week and most OMCs (oil marketing companies) had stopped selling to the resellers citing the huge price difference. This was very likely to cause a major disruption in the distribution and supply network,” the CEO told in confidence.
“The cost of the current cargoes goes beyond what Epra provided as the wholesale caps last month and I can only think that this letter seeks to allay these fears may be among other things,” the CEO says.
Just 3 months prior, Kenya discontinued it’s subsidy program in accordance with the terms of it’s ongoing funding agreement with the International Monetary Fund.
The price of a litre of super gasoline jumped by KSh3.40 on 14 May when the Kenya Kwanza administration ended the fuel subsidy scheme, while the prices of diesel and kerosene increased by KSh6.40 and KSh15.19, respectively.
After the State doubled the value-added tax  to 16.0% from 8.0%, the cost of fuel soared much more.
According to Epra’s commitment to oil marketing companies, the government will be prepared to compensate market participants for the price differential between the stock that was introduced at a lower price and the stock that they will be selling.
The government’s action comes after the Treasury issued a 3 year bond in the fixed-income market to securitize subsidy arrears owing to oil marketing companies.