An Examination of Price Controls in the Downstream Petroleum Sector in Kenya

An Examination of Price Controls in the Downstream Petroleum Sector in Kenya.

Presented by:

Andrew Lisero

MBA/2404/12

A Concept Paper

Submitted in partial fulfilment of the requirements of degree of Master of Business Administration (MBA)

Strathmore Business School

November 2012

CONTENTS

CHAPTER 1:        INTRODUCTION TO THE STUDY        3

1.1        BACKGROUND        3

1.2        PROBLEM DEFINITION        4

1.3        RESEARCH OBJECTIVES        5

1.4        RESEARCH QUESTIONS        5

CHAPTER 2:  LITERATURE REVIEW        6

2.1        INTRODUCTION        6

2.2        PRICE CONTROLS IN KENYA        6

2.3        CONSEQUENCES OF PRICE CONTROLS        7

2.4        ENHANCING EFFECTIVENESS OF PRICE REGULATION        8

2.5        ALTERNATIVES TO PRICE REGULATION        8

2.6        RESEARCH GAP        9

2.7        CONCEPTUAL FRAMEWORK        9

CHAPTER 3: RESEARCH METHODOLOGY        11

3.1        RESEARCH DESIGN        11

3.2        POPULATION        11

3.3        DATA COLLECTION METHODS        11

3.4        DATA ANALYSIS        11

3.5        RESEARCH QUALITY        12

REFERENCES        13

APPENDICES        15

CHAPTER 1:        INTRODUCTION TO THE STUDY

1. BACKGROUND

Kenya’s economy has undergone significant structural reforms since the mid 1980s aimed at improving the overall macro economic performance, attract investments, increase incomes, create employment opportunities and improve the efficiency and productivity of public investments. These reforms included privatization of Government stake in non-strategic public institutions and divesture of Government interests in activities of a commercial nature, liberalization of foreign exchange and interest rate regimes and abolition of price controls.  (Energy Regulatory Commission, 2010)

In line with these public sector reforms, the Government also undertook structural reforms in the energy sector comprising the electricity and petroleum sub sectors, with a view to improving efficiency by eliminating distortions that existed; allow energy prices to move in line with market fundamentals; attract investments into the sector and induce competition. (Kenya Institute for Public Policy Research and Analysis (KIPPRA), 2010)

The commercial energy sector in Kenya is dominated by petroleum and electricity while wood fuel provides energy needs of the traditional sector including rural communities and the urban poor. At the national level, wood fuel and other biomass account for about 68% of the total primary energy consumption, followed by petroleum at 22%, electricity at 9% and others at about less than 1%. (Kenya National Bureau of Statistics (KNBS), 2009)

Petroleum is the most important source of commercial energy in Kenya. Petroleum fuels are imported in form of crude oil for domestic processing and also as refined products, and are mainly used in the transport, commercial and industrial sectors. (Onyango, Njeru, & Omori, 2009). Kenya is a net importer of petroleum products and has a refinery owned and managed by the Kenya Petroleum Refineries Ltd (KPRL), an 800 km cross country oil pipeline from Mombasa to Nairobi and Western Kenya with terminals in Nairobi, Nakuru, Eldoret and Kisumu, run by the Kenya Pipeline Company (KPC). The downstream petroleum sector boasts of over 30 oil importing and marketing companies. (Energy Regulatory Commission, 2009). The local and international companies licensed to undertake the importation, storage, wholesale, export and retail of petroleum products. (Ministry of Energy, 2012)

In 1994, the Government of Kenya deregulated the downstream Petroleum Market operations. These reforms included liberalization of distribution and pricing of petroleum products and partial liberalization of product supply.

Following the deregulation, it was noted that retail prices of petroleum products did not closely follow changes in international oil prices. It was argued that oil marketing companies are quick to adjust retail petroleum prices upwards when international oil prices are rising and slow to lower prices when oil prices are falling. In particular, when the international crude oil prices were rising during 2007 and 2008 Oil Marketing Companies quickly passed on these increased costs to consumers, but took inordinately long to pass on cost reduction benefits to consumers when international oil prices were on a downward spiral in the last quarter of 2008. The price of Murban crude oil dropped from US$ 137.35 per barrel in July 2008 to US$ 42.10 per barrel (69%) in December 2008 while the pump price of super petrol dropped from Ksh.110.00 per litre to Ksh.78.00 per litre (29%) over the same period. This behaviour by the Oil Marketing Companies generated a lot of public concerns on the overall economic efficiency and rationale of unfettered market mechanisms in the retail petroleum market in Kenya and re-kindled debate for re-introduction of price controls. (Energy Regulatory Commission, 2010)

At the same time, prices of many essential items (including food items) had risen sharply due to inflationary pressure attributed to Global and local economic and political factors. As prices were rising from 2007 onwards, per capita income was shrinking, eroding the consumers’ purchasing power and ability to afford essential goods. In an attempt to address the problem, Kenya’s Parliament passed a Bill to control the prices of essential goods, including maize, rice, wheat, cooking oil and petroleum products. (KIPPRA, 2010)

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