Why pump prices are shooting up intensely

The cost of fuelling up at forecourts has shot up exponentially in recent weeks. A slew of factors have combined to leave Ugandans in great distress at the pumps. In this explainer, Robert Madoi and Emmanuel Mutaizibwa peel the layers on the subject matter.

Why are fuel prices high?

The average cost of petrol is now Shs6000 a litre, while diesel also shattered the Shs6,000 mark in the last week of the last quarter of the 2021/2022 financial year.

Forecourts have not charged this much at the pump since the aftermath of Kenya’s 2007 general election and a Covid-19 pandemic-induced supply shock at the start of this year.

The sledgehammer impact of the latter, coupled with soaring crude prices, have contrived to create a perfect storm.

Crude, which is used to produce petrol and diesel, traded at just under $120 (Shs450,000) per barrel on June 8—a jump that rivalled this year’s March peaks when Russia had just invaded Ukraine.

Heading into the new financial year, it is still holding steady at just under $110 (Shs412,000). Brent—the global benchmark—is at slightly over $110 a barrel, having shot past $124 (Shs464,000) at the start of last month.

So why do fuel prices keep rising when oil prices have dipped?

To decisively answer that question, it is instructive to grasp the ‘rocket and feather’ pricing.

It might not be disarmingly simple to placate the debate around pricing at the forecourts, but it does explain the price elasticity.

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At its simplest, it states that prices shoot up as fast as a rocket in case of any shocks (supply of crude oil on the global market in this case) and come down slower than a feather when things normalise (for instance when the price of crude oil dipped during the pandemic when travel restrictions punctured demand).

How has the Ugandan government responded to the soaring pump prices?

The government of Uganda has been fairly consistent in declaring that fuel subsidies—popular with its opposite numbers across the Great Lakes region—might not be an economically rational response.

In the background to the Budget 2022/2023 Fiscal Year document, the Finance ministry held that: “For 37 non-oil-exporting countries in Sub-Saharan Africa, higher oil and gas prices will result in a significant negative terms-of-trade shock, which will worsen trade balances, increase transport and living costs, and deteriorate fiscal balances, particularly for those with fuel subsidies.”

Uganda is among those 37 oil-consuming nations and her Secretary to the Treasury—Mr Ramathan Ggoobi—has made it abundantly clear that not even a consumer backlash about inflation will force them to “interfere with international oil prices.” Instead, Mr Ggoobi says government will “promote a free and competitive environment to ensure continuous supply of fuel and other goods, whose prices have increased.” He adds that “this is to ensure demand does not outstrip supply.”

So which state interventions work and which ones don’t?

According to the Secretary to the Treasury, the laundry list of what doesn’t work includes “subsidies; price control; tax cuts to address exogenous shocks.” Conversely, what works—in Mr Ggoobi’s book—includes “fiscal and monetary policies to arrest inflation; regulation [and not control] of [the] fuel market to guard against [among others] collusion; watching out for price vendors and diffusing them.”

How do pump prices in Uganda compare with others in the Great Lakes region?

In Uganda, if consumers are not accusing fuel retailers of profiteering; they are vocalising a narrative about the government’s inability to assemble a policy mix that acts as a cushion against unpredictable swings in global oil prices.

Needless to say that Uganda had the most expensive pump prices in the region as of June 27, 2022. Petrol pump prices have correspondingly declined with the introduction of subsidies in Kenya (Shs4,857.825 a litre); Tanzania (Shs4,830.085 a litre); and even the landlocked Rwanda (Shs5,372.095). Other countries like the Democratic Republic of Congo (Shs4,412.949 a litre); Burundi (Shs4,990.594 a litre); and South Sudan (Shs4,770.070 a litre) have cheaper fuel prices as per Global Petrol Prices’ index.

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Despite—or in fact because—the idea of fuel subsidies having a simple attraction, the government has been persistent in the urging that they benefit the wrong people.

Close-door neighbour Kenya has been fingered, with its oligopolistic petroleum market structure that fashioned dry pumps for some days in May referenced by many state actors in Uganda.

What about Uganda’s fuel tax regime?

Responding to the Uganda Iron and Steel Manufacturers Association’s counsel in March that excise duty of 30 percent on diesel and 35 percent on petrol be scrapped, Mr Ggoobi says: “Most…suggestions are simply good common sense[,] but very bad economics. Avoid the temptation to think that economics is synonymous with common sense[;] although they share some distant DNA.”

What explains the reluctance of OPEC and OPEC+ to increase oil production?

Oil prices remained volatile before Thursday’s meeting of the Opec cartel of oil-producing nations in which ministers sought to increase output targets for July in their first meeting since the EU imposed sanctions on Russian crude.

Opec will likely come under pressure from some members to exclude Russia, the world’s third largest oil producer, from future quotas, in a move that could pave the way for Saudi Arabia and the United Arab Emirates to pump more oil.

After Russia’s invasion of Ukraine, oil this year rose to a 14-year high. The price of futures for Brent rose by two percent at one point on Wednesday to $117 (Shs438,000) a barrel.

Its North American counterpart, West Texas Intermediate, rose by a similar amount to just shy of $116 (Shs434,000) a barrel. Prices had fallen back from highs of over $125 (Shs468,000) earlier in the week, but bounced again as investors weighed how far production could be increased to counter the effect of sanctions.

Prices have since eased slightly and Brent crude futures stood at around $113 (Shs420,000) a barrel as of Monday, but Western nations have been pressuring oil states to continue adding more oil to the market.

On Monday, French President Emmanuel Macron called on oil producers to ramp up output by “exceptional” volumes, the AFP news agency reported. The spectre of a global recession, however, threatens to slash demand for their crude and diminish their ability to control its price.

As central banks hike interest rates to control inflation, a global economic downturn in the next 18 months has become more likely, economists have warned.

A recession is an “increasingly palpable risk” for the economy, Citigroup analysts wrote in a note on Wednesday in an assessment of the trajectory for global growth over the next 18 months.

Experts say oil producers can’t pre-empt the downturn by pumping more. And if a recession does occur, adding more barrels risks crashing the price of crude and hurting their own economies as per CNN.

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Saudi Arabia and the United Arab Emirates, the only countries that are able to pump more oil, have said the oil market is balanced and that there is no need to produce more. Together, they have the capacity to add 2.5 million barrels per day. So the road ahead looks tough. Fuel prices are destined to keep shooting up.