The never-ending excuses for Uganda’s sticky fuel prices
Posted Tuesday, January 26 2016 at 02:00
Fuel customers are wondering why they are not seeing fuel prices that are reflective of cheaper crude on the international market. Mark Keith Muhumuza sought responses from industry players, who explain why fuel prices cannot fall immediately when the price of raw material – crude oil – drops.
Ugandan fuel consumers are yet to feel significant relief in their pockets as pump prices have been dropping rather sluggishly for the last two years. This is even after the global crude oil prices plunged from $110 (Shs382,000) to below $30 (Shs104,000) a barrel over the same period. That is a decline of about 70 per cent. Crude oil is refined to get products such as petroleum, diesel and kerosene. A lower crude oil price would translate into lower prices for its by-products.
However, that has not been the case. In July 2014, the price for a litre of Diesel and Petrol cost Shs3,250 and Shs3,800, respectively.
At the time, global oil prices were on a downward trajectory but the pump prices were going in the opposite direction, petrol specifically had peaked at Shs3,900. In June 2015, as Matia Kasaija, the Finance Minister read the budget speech, he noted that, “pump prices have fallen to an average of Shs3,400 per litre from about Shs3,850 for petrol, and to an average of Shs2,850 from Shs3,250 for diesel.”
At the time, crude oil prices had halved. The low pump prices were short-lived as prices have since averaged Shs3,650 and Shs2,750 range for petrol and diesel, respectively.
Any hope of lower oil prices?
Fuel customers are wondering why they are not seeing fuel prices that are reflective of cheaper crude on the international market.
Hans Paulsen, CEO Vivo Energy says fuel prices are determined by several factors.
“The cost of the crude contributes about 30 to 35 per cent of the total cost. Other factors include logistical costs, exchange rate impact, tax, other operational costs, inventory levels etc. Therefore, the price of fuel is not a 1:1 correlation with price of crude.”
This is the reasoning of almost all the fuel dealers in the country, who insist that fuel prices cannot fall immediately when the price of raw material – crude oil – plunges.
Notably, according to the petroleum supply department, a small change in crude price without other factors changing cannot cause an observable change in pump prices. Other factors at the moment have been on the upward trend.
On whether there is a plan to reduce the price to accommodate the reality of cheap crude, Paulsen says: “The price of our product has fluctuated over the past few months like the determining factors. The price of our product today has dropped from Shs3,900 to Shs3,600 for petrol and Shs3,100 to Shs2,500 for diesel.”
This is also supported by all industry players in the country, who insist that fuel prices cannot fall immediately when the price of crude oil drops.
An English analogy used to describe pump price movements globally is “The rocket and feather effect.” Pump prices will increase at the pace of the rocket, but when they are meant to fall, they will glide downwards just like a feather.
“While it takes time until the low priced crude products reach the market for pump price to adjust downwards, upward pump price is affected on sight of upward change in crude prices. On getting information on the increase of crude prices, the sellers stop further product price reductions limiting the chance of consumers reaping from previous falling crude prices. It is stiff compensation that is used to hold prices,” Eng. Gershom Rwakasanga, the assistant commissioner Transport and Storage in the Petroleum Supplies Department, in the Ministry of Energy, tells the Daily Monitor.
Is this a case of maximising profit margins?
Fuel customers are also wondering why there is an immediate increase in pump prices whenever there is an upward spiral in global oil prices yet fuel dealers would be having in stock quantities bought cheaply.
“This is not the case and it is only a perception. Our interest is to sell and grow our market share. Therefore, we seek to remain competitively priced. Our price movements are not aligned with crude price movements because of the factors mentioned above,” Paulsen explains.
So, are the fuel companies keeping prices artificially high in order to increase their profit margins? This is an allegation they continue to dispute. Those we talked to off the record insist when the crude oil price falls, the refineries do not necessarily bring down the cost of refining. The refineries convert crude oil into by-products such as petrol and diesel. East African countries are major consumers of refined products from Asia as the only refinery in the region was shut down in 2014.
One former oil company executive tells Daily Monitor that refineries across the world have largely kept costs up despite the fall in crude oil prices. His assertion is affirmed by several articles published by oil-price.net. In one article, oil-price.net indicates that “By far, refiners have been the biggest winners of the crude oil price downturn. This position is reflected in the stock valuations of refining companies.”
In February 2015, McKinsey & Company, an American private management firm released a report titled “Impact of low crude prices on refining.” In its findings, Mckinsey noted that “refiners have generally not been reporting a sharp decrease in earnings and in some regions, margins have clearly improved.” This is specific to refiners in Asia and Europe, according to the report.
However, critics have disputed some of this reasoning, insisting that a fall in crude oil prices should also be matched by falling pump prices. In fact, Uganda is not the only country where consumers are questioning the authorities on why pump prices remain sticky. In an interview with Business Daily – part of the Nation Media Group -, lead economist for the World Bank in Kenya Apurva Sanghi noted that sub-Saharan countries are yet to reap the benefits of low crude oil prices.
“In Kenya, like, in other sub-Saharan African countries, a large part of oil price decline has not been transmitted on to consumers,” Sanghi said.
In Kenya, prices are set by the Energy Regulatory Commission, which caps prices depending on the prevailing market conditions. In Uganda, the forces of demand and supply determine the rates, according to the Uganda Petroleum Supply Act, 2003.
However, even in Kenya where there is a regulator, pump price changes have not been that significant. Kenya’s petrol prices average about Kshs88.64 (Shs3,000) and diesel at Kshs76.70 (Shs2,600) down from Kshs90.64 (Shs3,075) and Kshs78.7 (Shs2,670) in November 2015.
Some economists in Uganda had already dampened any hopes for much lower fuel prices based on the rapid depreciation of the Shilling.
“The potentially positive impact of low oil prices on economic activity has so far been dampened by the rapid depreciation in the value of the shilling,” September 2015, Uganda Economic Update report by the World Bank reads.
Price reflects existing conditions
The Uganda Petroleum Supply Act 2003 led to the establishment of the Petroleum Supply Department meant to encourage and protect fair competition in the petroleum supply market. According to Eng. Rwakasanga, the current prices being seen have been influenced by the depreciation of the Uganda Shilling.
“It is also worth noting that the fall in prices of crude coincided with the increase in foreign exchange rates. While the price of petroleum products went down in dollar currency $0.52 per litre before taxes and margins, this could not be reflected in pump prices as the exchange rate went higher,” he explains.
The Uganda Shilling, according to Bank of Uganda (BOU), depreciated by 17.5 per cent in 2015 alone.
A weak Shilling makes imports more expensive. Rwakasanga further explains that if the US Dollar had been trading at Shs2,500, the price of Diesel would be Shs2,020 and Petroleum Shs2,829. That would be over 25 per cent drop from the current prices.
Additionally, the regulator notes that the current stock of fuel Ugandans are consuming is from October 2015, when the crude oil price was in the $42.5 a barrel range. For the regulator, the current prices are a reflection of the prevailing market conditions.
‘We now are paying for crude priced in October at $42.5 a barrel which is about 10 per cent lower than the price at the beginning of last year. A drop of the price being seen today is a result of that fall in crude price and the anticipation of the future impact of continuous falling crude prices,” he adds.