Fuel prices have a powerful ripple effect on Kenya’s economy, touching the lives of individuals and businesses alike.
Whether you’re a daily commuter, a farmer transporting goods, or a factory owner running machinery, the fuel cost directly affects your bottom line.
It’s like the heartbeat of our economy, pulsating with each price fluctuation.
But have you ever wondered what drives these ever-changing fuel prices?
Well, keep reading to learn more.
We start our analysis here.
|Price per Litre
Kenya vs. Neighboring Countries
Fuel prices in Kenya, when compared to neighboring countries, showcase interesting variations.
Here’s a quick summary of how fuel prices in Kenya compare to neighboring countries.
|Average Fuel Price per Litre in Kenya Shillings
Among these countries, Uganda takes the lead with the highest cost per liter, making it the most expensive fuel.
Kenya follows closely behind, with slightly lower prices but still on the higher end.
On the other hand, Tanzania stands out as the most affordable option, offering cheaper fuel prices compared to Kenya and Uganda.
These differences in fuel prices among the neighboring countries reflect the diverse factors and policies that influence the fuel cost in each respective nation.
There are various reasons why fuel prices continue to rise significantly in Kenya.
Many of these factors are beyond the government’s control, although there are actions it can take to alleviate the burden on its citizens.
Some key factors contributing to the increasing fuel prices include global oil prices, exchange rates due to the weakening of the Kenyan shilling against the dollar, transportation and distribution costs, and taxation.
1. Impact of Global Oil Prices
Fuel prices in Kenya are closely linked to global oil prices, given the country’s reliance on imported petroleum products to meet its fuel demand.
Fluctuations in global oil prices directly impact the cost of importing fuel into Kenya.
When global oil prices rise, it increases import costs and, subsequently, higher fuel prices in the country.
Conversely, when global oil prices decrease, it results in lower import costs and a decrease in fuel prices within Kenya.
Global oil prices are influenced by various factors such as geopolitical events, supply and demand dynamics, and production decisions made by major oil-producing countries.
These factors contribute to the volatility of oil prices, which affects Kenya’s fuel costs.
Since Kenya does not have significant domestic crude oil production, it heavily relies on importing refined petroleum products.
Therefore, the prices of these imported products are directly impacted by global oil prices.
2. Impact of Taxation
Taxation plays a vital role in determining fuel prices in Kenya.
The government imposes several taxes on petroleum products, including excise duty, value-added tax (VAT), and petroleum development levy.
These taxes undergo periodic reviews and adjustments, directly affecting the final cost of fuel.
Excise duty is a tax applied to fuel during production or importation, with rates set by the government.
The higher the excise duty rate, the more it contributes to the overall fuel cost, resulting in higher consumer prices.
Value-added tax (VAT) is a consumption tax added to the price of goods and services, including fuel.
An increase in the VAT rate on fuel directly leads to higher consumer prices.
The petroleum development levy is a specific tax imposed on petroleum products to fund infrastructure and environmental projects.
This levy is included in the final fuel price based on the volume of fuel sold.
Changes in taxation policies can be influenced by government decisions, budgets, or economic factors.
Adjustments in tax rates directly impact fuel costs, with increased taxes leading to higher prices and reduced taxes providing some relief to consumers at the pump.
3. Fluctuations in Exchange Rates (particularly the weakening of the Kenyan shilling against the US dollar)
As the shilling depreciates, the cost of importing petroleum products, which are mostly priced in dollars, increases.
Oil marketing companies in Kenya typically purchase fuel in foreign currency, and any depreciation in the shilling’s value raises their procurement costs.
To maintain their profit margins, these companies pass on the higher costs to consumers, leading to an increase in fuel prices.
Therefore, when the Kenyan shilling weakens against the dollar, it often results in higher fuel prices, affecting transportation costs and overall inflation levels in the country.
4. Transportation and Distribution Costs
The process of getting fuel from refineries or import terminals to retail stations involves various expenses, such as storage, handling, transportation, and logistical operations.
These costs include factors like fuel tanker trucks, pipelines, storage facilities, and personnel. Any fluctuations in these expenses can impact the overall price of fuel.
For instance, if transportation costs rise due to increased fuel prices, road tolls, or labor expenses, it adds to the final cost of fuel.
Consequently, these additional costs are passed on to consumers, leading to higher fuel prices at the pump.
Upon assuming office last year, President Ruto made the bold decision to eliminate fuel subsidies in Kenya.
This significant move directly and significantly impacted fuel prices throughout the country, affecting consumers across various sectors.
The rationale behind this decision was to address the nation’s economic challenges, with President Ruto expressing concerns that the subsidies were primarily benefiting a few cartels while posing a risk to long-term economic growth.
In the past, subsidies were implemented to provide relief to citizens grappling with high fuel prices.
However, the government recognized the need to reassess these measures and make necessary adjustments.
Consequently, fuel subsidies in Kenya have been completely removed.
President Ruto continues to emphasize the potential risks associated with their misuse, highlighting the potential negative consequences for the overall economy.
We may predict future fuel prices, though many factors come into play.
But projections suggest a bumpy ride ahead.
According to Trading Economics, the fuel price in Kenya is expected to reach approximately 1.52 USD per liter by 2024, with a further climb to 1.62 USD in 2025.
However, hold on tight and take these numbers with a grain of salt, for they come from intricate econometric models that attempt to predict the unpredictable.
We all know the future of fuel prices is a complex puzzle, influenced by a variety of factors that can send these projections swirling in unexpected directions.
Fuel prices in Kenya are subject to fluctuations.
Staying informed about these changes is crucial for managing budgets and making informed decisions.
We can navigate these fluctuations by adapting to the evolving fuel landscape and work towards a sustainable future.