LESSONS FROM THE KENYA FUEL CRISIS

Kenya has been suffering a fuel crisis in recent days and Ugandan night dancers have been rubbing their palms in anticipation for when it will hit our shores.

They have been sorely disappointed.

The Kenyan fuel crisis is not one of low supplies but one created by a delay or refusal of Nairobi to pay an agreed upon subsidy to the fuel companies for supplies provided in the past.

The way it worked is that government in an attempt to cushion its citizens from fuel price increases, that have arisen from increased demand in recent months following the lifting of Covid-19 restrictions around the world and the Russia-Ukraine war, agreed with the fuel companies to cap pump prices at a certain level and pay the companies any extra costs they incur.

Last month global fuel prices hit a 14 year high at $139 a barrel.

Government fell back on payments to the fuel companies and they turned off the taps. Fuel prices had jumped to about sh6000 a liter of petrol from the capped value of sh3,500 a liter. The fuel companies claim government owes them about sh600b but the Kenya government says its about sh400b.

There were reports that the fuel companies were sending some of the excess fuel on to Uganda, where they get paid in full at the pump, hence no supply shortages on our side of the border.

Kenyans may get some relief soon as President Uhuru Kenyatta signed off a Kshs35b supplementary budget to continue the subsidy on fuel.

The problem with subsidies of this kind they are often driven by bad politics rather than good economics.

Kenya is in election season, with the elections coming up in August, the ruling party cannot afford to have people grumbling ahead of what is expected to be a tightly contested poll. So they bow to populism and ignore the economics.

There is an old saying that the market can remain irrational longer than you can remain liquid. So the Kenya government is hoping the price increases on the global market are not rational and will revert to previous levels. They think they have enough money to subsidise the pump price until this happens. I think they do not have the money and will be forced to remove the subsidy, after a few more fuel crisis in coming months.

The more cynical take is they will hang on to the subsidy at the cost of providing public goods and services and remove it once the election is done and dusted in August. If they are still in government they will grit their teeth and weather the protests but if they are out the new government can sweat with the mess they have created.

Subsidies, especially of consumption are never a good idea.

They keep the people happy for a while but the market will not be fooled for long.

As is already happening a parallel – black market, in fuel has emerged in Kenya and prices are almost double the targeted pump price. That’s an indicator of what will happen when the government gives up on the subsidy.

Across the border in Uganda where there is no subsidy the fuel prices have increased steadily allowing us to adjust our behavior, without suffering unnecessary shock. We have huffed and puffed about government’s insensitivity to our lives, that they should do something like the Kenyans are doing for their people, that was a few weeks ago.

Suddenly we are quiet as the Kenyans are lining up for hours to get fuel at their stations.

There was a funny story about boda bodas escorting a fuel truck. They thought the fuel tank was going to deliver fuel to a station, so they would be first in line.  To their shock even the fuel tank was looking for fuel.

What is popular is not always right and what is right is not always popular.

That being said the warranted subsidy government should be paying in Uganda is the cost of ensuring our fuel reserves are maintained and managed well in the event of fuel shortages -- hopefully not cause by bad economics, sometime in the future.

A few days ago US President Joe Biden announced the release of a million barrels a day for the next six months form the country’s strategic reserves to ease the pain of high prices there. It is expected the release will slow the rise in fuel prices – US daily demand stands at up to 20 million barrels.

The US oil reserves stand at just over 700 million barrels, which have been accumulated since the 1970s oil crisis.

I couldn’t determine the cost of storing them but assuming it was even $0.1 a barrel per day that would still come to about $25 billion a year that the tax payer has to foot, money that may be “better” spent on improving their health and education services.

Our consumption of about 20,000 barrels daily means our reserves would be much less, but we should have them. Like an insurance policy, they will be frowned upon in good times but will come in handy in tricky situations.