What it costs to put fuel on market

Tuesday February 17 2015

Trucks transport fuel from Mombasa to Uganda.

Trucks transport fuel from Mombasa to Uganda. To put fuel on the market, there are a number of costs involved which eventually feed into the final consumer prices. Photo by Stephen Wandera 

By Mark Keith Muhumuza

There is an English adage, “The rocket and feather effect”, which specifically describes the movement of fuel prices in Uganda.
The Macmillan Online dictionary describes this effect as one where prices go up like a rocket and drop like a feather.
Uganda has been experiencing the latter in relation to fuel prices irrespective of dipping international crude oil prices by about 50 per cent since October. Fuel prices have since June shed an average of between 12 per cent and 15 per cent.
For a Ugandan to consume fuel, it goes through several stages, some of which dealers blame for the sluggish fall in prices.
“There are several factors we consider in setting pump prices at Shell Service stations. The world oil prices (Platts) are one key determinant, as well as the cost of bringing the commodity into the country, the strength of the shilling, among others,” says Hans Paulsen the managing director Vivo Energy Uganda, the Shell licensee.
Similarly, a former fuel company executive who spoke on condition of anonymity because he does consultancy for some of fuel companies says Base Price determined by Platts constitutes about 40 per cent of the cost per litre displayed on the market, which as he says depends on various fuel stations.
Platts is an international oil pricing body which determines thousands of price assessments in the energy and metal industries.
In 2010, Uganda adopted an Open Tendering System, meaning fuel dealers had to submit bids to import the commodity.

The responsibility
Once a tender is awarded – to several importers – they are responsible for bringing fuel at good bargains for other retailers, but must pay freight of an average cost of Shs200 per litre once a final price is reached.
“Further to this the capacities of the docks of Mombasa and Dar-es-Salaam are increasingly falling behind regional demand. Resulting in long offloading delays which are accompanied with demurrage charges. Annually, Ugandan oil companies pay combined demurrage charges of more than $10m (Shs28b),” the former executive says.
He adds apart from freight charges, importers have transport costs from Eldoret, Kenya to the final destination in Uganda.
For every litre of fuel, he estimates, transport costs to be at Shs300.
Dealers also have to pay for petroleum duty of Shs950 per litre [petrol] and Shs630 for every litre of diesel.
The duty [excise duty] was in the 2014/15 Budget increased by Shs50.
Government also charges Shs5 per litre for fuel marking. Marking is a form of approval that certifies that the fuel imported is of required standard.
Then there are distribution costs, which are at the discretion of the fuel company.
But then why do prices continue to be high considering that base prices, which constitute the highest cost, have now fallen.
According to estimates, combining all the above factors, it costs about Shs2,855 to bring a litre of petrol to Uganda and to the final consumer compared to the current average of Shs3,500 which a litre is sold.
However, fuel companies reason thus: “First and foremost is that Uganda is a landlocked country and most of the importation is done from the Middle East via Kenya which means that at any specific time, we have two to three months of stock in the logistic chain. As a result, you cannot experience the resultant effect of the drop immediately,” Mr Paulsen says.
This is where the rocket-feather effect comes into play, whereby if there is a shortage in supply, prices will increase at a faster pace but will tend to drag once supply has stabilised. However, dealers also note the depreciation of the shilling as another factor that plays into price determination.
For instance, the unit, which was about Shs2,514 in February 2014 is currently hovering above the Shs2,800 range.
But intriguingly is the failure of government to regulate fuel prices which, accordingly only stops at monitoring supply, licence approvals and enforcing standards among others through the Midstream Petroleum Unit at the Ministry of Energy.
In East Africa Kenya, Tanzania and Rwanda have regulatory authorities that determine the movement of fuel prices.

When government can intervene
According to Uganda’s Petroleum Supply Act 2003: “Except where a petroleum supply emergency has been declared under Section 34, the prices of petroleum products throughout the supply chain shall be governed solely by the rules of demand and supply in a free and competitive market.”
This means the Petroleum Unit applies a light touch approach, which if in contravention of the estimates, the Minister of Energy “may intervene in public interest and take any such action as may be necessary to address the situation”.
However, the ministry insists the current prices being displayed by stations are fair and reflective of the market trend.
However, some argue consumer protection is lacking, which leaves Ugandans at the mercy of dealers. “Consumer protection is lacking in Uganda, which leads to exploitation,” says Mr Paul Bagabo, a consultant with the Natural Resource Governance Institute.
He hints at hidden costs that fuel companies do not make public but are factored on a litre of fuel.

Non-competitive policies
His view is upheld by Dr Ezra Suruma, former Finance minister, who says the current price movements “do not behave competitively”.
“We have ignored competitive policies,” he says. “With the liberalisation of fuel supply, we assumed prices would behave competitively but they haven’t.”
Dr Suruma is a critic of the current liberalisation of the economy across the board and calls for the passing of the Competition Bill, which has been gathering dust in Parliament since 2004.
The Bill proposes the establishment of the Competition Commission, which would enforce penalties on exploitative practices.
In the first half of 2014/15, revenue collections on fuel rose by 18.5 per cent to Shs543.6b according to URA.
URA attributed this to increased volumes of imported fuel, given the fact that retailers did not scale back on imports even with falling fuel prices.
This, according to Mr Joseph Mawejje, a research analyst at the Economic Policy and Research Centre is exploitive since government’s share of revenues is not affected irrespective of the movement in fuel prices.