Let’s leave it to the market to stabilize uncontrolled fuel prices


Rubis’ companion, Kennedy Mutua, refueled a car along Koinange Street in Nairobi. [Boniface Okendo, Standard]

The rise in fuel prices when we travel less other than at funerals in the middle of a pandemic is not a paradox.

Why am i saying this? On the one hand, the situation can be attributed to increased vaccination of the masses against Covid-19. As vaccinations become more widespread, the chances of a return to normal increase.

This means an increased demand for goods and services. Fuel is an input in the provision of goods and services; Think of transportation or raw materials in the chemical industry. But take heart. The rise in fuel prices is a global phenomenon. The UK and USA are also reporting rising fuel prices.

China released part of its strategic oil reserves earlier this month to stabilize rising prices, CNN reported.

China is the world’s largest oil importer. The fact that the effects of the delta coronavirus variant were not devastating as expected opens up further prospects for a return to normality.

Second, with the fall in prices during the Covid-19 pandemic, inventories were reduced while investments in exploration and oil production were reduced. This has continued to depress prices.

Third, the Organization of Petroleum Exporting Countries (OPEC) has cut production and pushed prices up.

Oil producers came together after oil prices plummeted in the wake of the Covid-19 pandemic. Once upon a time, oil prices were negative due to low demand and lack of storage space.

Third, fuel prices in Kenya have a large tax component at around 50 percent. The higher the prices, the higher the tax revenue.

One wonders whether fuel demand will not fall as prices rise. In economic jargon, fuel has a low price elasticity of demand, so that a price increase does not necessarily lead to a decrease in demand, because fuel is a necessity.

Fourth, it has been suggested that taxes are a better alternative to debt. Didn’t we complain about debt? Maybe we should celebrate our ability to finance the state with more taxes!

Sixth, price controls incentivize the controller to get the most out of consumers. It was assumed that price controls would stabilize prices and protect consumers. They have not.

Which price controls have worked without unintended consequences? Many Kenyans today did not experience price controls prior to economic and political liberalization in the early 1990s.

The rise in fuel prices in the middle of a pandemic is not a paradox. [File, Standard]

Seventh, oil doesn’t have enough competition yet. We still have too few electric cars, while gasohol – a fuel made from a mixture of ethanol and unleaded gasoline – has never gained popularity in Kenya.

Liquefied petroleum gas is also not yet a popular car fuel in the country. Our lives are made even more complicated by the lack of a good public transport network, which makes private cars popular and increases fuel consumption. Eighth, and worse, the rise in fuel prices came shortly after the government declared the current drought in the country a national disaster.

An increase in food and fuel prices would affect the economy and lead to a sharp increase in the cost of living.

Add in unemployment and economic stagnation due to the Covid-19 pandemic. In these circumstances, the preparations for the parliamentary elections in 2022 do not bode well for our economy.

What is the solution to the rise in fuel prices? Politicians make hay quickly while the sun is shining.

They are calling for a reduction in fuel prices. They do not propose an alternative source of fuel tax revenue. Interestingly, they are behind the fuel price controls that don’t seem to be working. The Energy and Petroleum Regulatory Authority (EPRA) sets fuel prices each month as set out in the Energy (Petroleum Pricing) Regulations, 2010.

Did I hear that we cannot benefit from the fuel subsidy because there are no rules to implement it?

Politicians know that next year’s elections are not far away. An angry electorate is the last thing politicians want to see.

Perhaps a better question is why the fuel price was controlled in the first place. Why wasn’t the market allowed to do its job?

My guess is that if the controls were removed, the fuel price would be lower.

Allow anyone who can import fuel to do so. Competition would lead to lower prices. If we don’t control the cost of intensive care unit (ICU) services, a matter of life and death, why are we controlling the price of fuel? By controlling fuel prices, we seem to have given a political solution to an economic problem. This doesn’t just apply to fuel prices. Do you remember the limit on school fees?

Since the price controls didn’t work, let’s try the market. With the pandemic still ongoing and economic activity subdued, the price of fuel should be lower than it is. Refute me!

About Sonia Martinez

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