Non-tariff measures to cut and stabilize cost of fuel in Kenya – Cofek proposals

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Everyone has been talking of reviewing tax measures in order to claw back the current surge in fuel prices. Granted that is key area for review.

But it may lead to a huge budget deficit if a supplementary one is not put in place. It is for this reason that Cofek proposes non-tariff measures that would make fuel not only affordable but support the huge national budget demands.

Given that Kenya is walking a fiscal tightrope with 58 percent of the total tax revenue collected going to service public debt, it is no doubt that the country should be thinking of non-tariff measures to lower and stabilize the cost of petroleum products in Kenya.

First, authorities need to boost Kenya’s capacity to store strategic reserves of fuel products for up to 90 days, which is in line with global best practices.

Kenya’s current storage capacity is only able to last a maximum of 10 days, or 7 days average.

On a monthly basis, Kenya consumes an average 160 million litres of super petrol; 220 million litres of diesel; 75 million litres of jet fuel and 13 million liters of kerosene.

This means we need a strategic reserve capacity of about 1.4 billion litres to meet this threshold. This can be done in 3 to 5 phases.

Kenya Pipeline Company (KPC) in 2018 built four new fuel storage tanks with a total capacity of 133 million litres at a cost of Sh5.3 bn, about US$48 mn at current rates.

Petroleum strategic stocks are a critical tool in cushioning the economy from the shocks of erratic prices in the global oil markets, which will come as a great relief to consumers.

It would allow the economy to stock up when global fuel prices dip, and release these stocks when there are market disruptions and high prices.

The U.S. keeps 714 mn barrels in its strategic petroleum reserve, the world’s largest supply of emergency crude oil. Kenya can afford at least 5 p.c of such a reserve. Once attained, it will go a long way.

Secondly, Kenya needs to address the challenge of demurrage costs, which fuel vessels incur as they queue at the Mombasa port to discharge fuel. Limitations on the pipeline diameter and ship docking space means the ship has to wait for room to be made for it to begin offloading fuel.

Accordingly, Kenya Ports Authority (KPA) needs to fast-track relocation and expansion of Kipevu Oil Terminal. This Sh20 bn project was meant to be completed by December 2020, but has faced unforeseen delays.

The move was necessitated by the need to move to a safer location and gain the capacity to handle the large post-panamax vessels.

The average amount Kenya pays to shipping tankers is about US$12 mn every year, an amount that is passed onto consumers. The ongoing upgrade works at the port of Mombasa should be expedited to cure this malady and provide a relief to fuel consumers.

Third, Kenya can pursue hedging options in an effort to stabilize fuel prices. National Treasury and Energy ministries may explore put options to lock in fuel supplies at a certain price.

It is import that these contracts are done as transparently as possible and with the requisite expertise. Otherwise, it may end up more as a scandal akin to Kenya Airways fuel fatal hedging initiatives, in the past.

Kenya can take advantage of low prices in the market to initiate negotiations on put options on oil imports – with flexibility to either make actual purchases or sell these rights for a profit.

Another strategy to help lower the cost of fuel is to work on the demand side. Strategies such as higher adoption of LPG for cooking and motoring, electric vehicles, and renewable energy sources such as geothermal, wind and solar will lower the demand for gasoline and fuel oils.

Kenya would easily lower our fuel prices if our MPs to consider these policy measures as long-term feasible measures to lower and stabilize the cost of fuels, while protecting revenue sources.

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