Tuesday, January 13, 2015

WHY AREN'T PRICES FALLING AT THE PUMP IN UGANDA



Global crude oil prices have been halved since the middle of last year but local pump prices have not seen a corresponding fall in price a situation that is raising suspicion against oil companies.

The oil industry has explained that Uganda does not import crude oil and therefore it is unrealistic to see a direct relation between pump prices and global prices.


"Last year the bench mark West Texas Intermediate (WTI) peaked at $107.73 a barrel in June before plummeting to a five-year low of $46.84 on Wednesday. A barrel of oil contains about 159 litres.
Industry players attributed the stubborn pump price to several factors...


The collapse was attributed to higher supplies on the world market as the US was producing more of its own oil and lower demand due to slowing economies in Europe and  Asia.

Top industry officials say the pump price were not following suit because of the increasingly weakened shilling during last year.

The dollar hit a three high against the dollar at sh2,834 last week from an annual low of sh2,453 in February. This constituted a 15% fall in the value of the shilling during the year.

So one would expect some savings given that crude prices fell by three times the rate at which the shilling depreciated against the dollar.

Other industry officials argue that a change in crude prices do not translate in a one-for-one change in pump prices. That the cost of refining the product is big component of price and may negate a lot of the savings from the falling crude prices.

The components that constitute the pump price in Uganda are the cost of refined oil at Mombasa, distribution or transportation and marketing costs, taxes and the profit margin.

The logic would be that if the cost of crude has fallen so drastically and the taxes remain the same, since they are charged per litre and are not a function of the cost, the distribution costs remain largely same since there has been no disruption in transport from the coast and the size of their networks have not seen any significant growth there are savings being made, which are not being passed to the end consumer.

Industry players choose to hold the pricing formula close to their chest, unwilling to divulge it for competitive issues. And for good reason.

In the US on average the crude component of the pump price account for 66%, refining 11%, distribution and marketting11% and taxes 12%. Across the border in Canada the cost of crude accounts for 54%, refining distribution and marketing 17% and taxes 29%.

In Uganda we know that taxes on a litre of petrol or diesel are sh820 and sh530 respectively, which would account for about 22% and 17% in the case of the respective fuel pump prices.

Whereas our distributors argue they buy refined product using the current price of about $49 a barrel this comes to about sh832 as the component of crude to our pump price or about 22%.


Given the above it means that unlike in the US and Canada where the refining and distribution costs – where the margins are made, constitute 22% of the pump price in Uganda these constitute 56%.

Of course the argument can be made that we are landlocked and the distribution costs are higher than in Kenya and Tanzania, it still does not explain why we are not getting more of the savings from the collapse of world fuel prices.

1 comment:

  1. eToro is the ultimate forex broker for newbie and professional traders.

    ReplyDelete