Fuel prices: Focus on regulation, actors

Fuel prices in Uganda rose by more than Shs1,000 in the last five months, from an average of  Shs4,450 in January.

The trend can be explained by many factors ranging from; residual effects of the Covid-19 restrictions that had created supply shortages, to global opening up of economies, which led to increased demand and most recently, the Russia-Ukraine conflict.

To investigate the trends, it is paramount to appreciate what constitutes the price per litre of fuel. The price per litre of fuel is influenced by the price per barrel of brent crude oil, transportation costs from the nearest port to any country’s distribution terminals, the tax per litre and the behaviour of actors in the fuel supply chain.

 A change in either one or a combination of the mentioned parameters will lead to a change in the price. For Uganda’s case, the transportation cost has remained relatively stable over the period at an average of $75 (about Shs282,919) per cubic metre from Mombasa to Kampala. 

The tax component equally remained stable at Shs1,450 per litre of petrol, and Shs1,130 per litre of diesel . Whereas these components remained stable, the crude oil prices rose by more than 30 percent from $86.51 (Shs 326,359) in January to $115.6  (Shs436,211) by May 31. Empirical estimates of impact of the behaviour of the actors remains an intense academic exercise.

It is therefore critical to appreciate that for some of the components of fuel price drivers, the government has direct control while for others it does not. For instance, government cannot ably influence the international price of brent crude oil.

 Secondly, in the absence of a refinery; it is equally cumbersome to influence the cost of transport of fuel. This leaves Uganda with two components, which lie in the ambit of direct control of government. The first one is tax and the other is regulation of the behaviour of actors in the fuel supply chain.

Government has treaded cautiously against the controlling fuel prices through tax cuts of the dealers through the budget mechanism. Some authorities argue that such actions are not only unsustainable but also have dire consequences on the resource envelope.

Estimates by government show that a Shs200 reduction on the price per litre translates into an annual revenue loss of Shs200b yet the consumers will not register a significant relief.  It is appealing to agree with government on this position.

Consequently, the last component to consider is the behaviour of actors. Globally, the fuel supply market is dominated by cartels such as Oil Producing and Exporting Countries. This makes the market oligopolistic in nature, wherein the actions of the market leaders has direct bearing on the prices. The situation is not any different in Uganda, where the leading suppliers are Vivo Energy and Total Energies.  It is therefore risky to say that we should leave the prices to be determined by the forces of demand and supply in the absence of a perfectly competitive market.

It is important to note that among all the East African Community (EAC) member states, only Uganda does not have a regulatory body for fuel.  Uganda is a member of the EAC and the Common Market for Eastern and Southern Africa.  Both bodies have competition law regimes to which Uganda is subject. However, Uganda is yet to enact its own domestic competition law to cushion nationals against deceitful and unfair trade practices.

The closest Uganda has gone in this direction, is mooting a consumer protection and completion bills which are yet to be debated and passed by Parliament. Amidst such domestic circumstances, accentuated by global shocks, pessimism surrounding a likely downward trend in fuel prices is inevitable. 

It is therefore imperative for the government to expedite the enactment of the consumer protection and competition laws, and institute a formal mechanism of regulating business actors.

The writer is a research fellow at ACODE