Stop Abuse of Power in Kenya’s Oil Market

Columnists

Stop Abuse of Power in Kenya’s Oil Market

Friday 15 April 2022

Evicting Jean-Christian Bergeron, the CEO of international oil marketer Rubis, is the easy part. The most pertinent questions underlying the fuel crisis we are now dealing with are the following.

First, do we have the political backbone to do what Uganda, Rwanda and Ghana have done, which is let the end consumer pass on the full cost of high world prices?

Second, if skyrocketing international prices due to the Ukraine crisis force us to spend more money on grants, will the budget-funded grant be fiscally sustainable?

I read somewhere that since January of this year the petrol price in Ghana has risen by 52 percent. This is what happens when you pass on the full international fuel price increases to the end consumer.

Currently, pump prices in Uganda, Rwanda, Tanzania and the DRC are much higher than in Kenya, as prices are kept artificially low here by the subsidy.

As I see it, one of the main factors fueling the current crisis is the emergence of a vibrant parallel transit oil market, the result of the wide disparity between pump prices in Kenya and in places like Uganda and Rwanda, where there are no subsidies. .

The export has become lucrative because in those countries an oil trader does not have to wait months for the government to release the subsidy. There is another advantage in the parallel transit market: you are paid in cash.

So if the government accuses some oil companies of exporting oil to our neighboring countries, it’s right. The margins on the parallel market for transit oil were enormous. A third factor exacerbated the situation: uncompetitive tactics from some of the major players fueled more turmoil in the market.

It seems to me that one of the triggers of the brisk trade in transit oil started when one of the major players in the market – perhaps to undercut the rest and increase market share – started selling below the government-set price.

Those tactics sent the wrong signals to the market because when you’re a big player, your actions and tactics reverberate on the wider market.

In this case, the so-called independent and unbranded players started buying from this major player and exporting major products to the much more lucrative markets of Uganda, Rwanda and Northern Congo.

The roaring parallel transit oil market was particularly attractive to small players. With the rapid rise in world prices, unlike the big boys, these small players no longer had the cash flows to play in the mainstream and do business. The shortages worsened.

We have to accept that the oil industry’s regulatory regime is not working efficiently. Instead of price controls, ship planning meetings, ullage allocation committees and complex formulas for calculating “price caps”, “floors” and “ceilings”, regulation should place more emphasis on abuse of market power.

When a major player acts as if its intention is to undermine other players, especially at a time when the entire market is engulfed in uncertainty and crippling shortages, it must be stopped immediately. The government should introduce strict sanctions against monopolistic behavior and restrictive practices.

We have to accept that the structure of our oil market encourages cartel-like behaviour. Under the so-called Open Tender System, one oil company is allowed to import all Kenya’s needs on behalf of the rest of the marketers. Because the supply is fixed in the short term, the system more or less guarantees sales to oil marketers at higher prices.

In economics textbooks, we read that collusion occurs under two circumstances: one, when the product is not differentiated and has no close substitutes, and two, where players face a similar cost structure. In a number of cases, oil companies jointly own and share truck loading facilities

We need to review the system for licensing oil companies.

We have recently witnessed an explosion in the number of briefcase traders who are proving to be a barrier to the smooth functioning of the supply chain. Today, you can find a situation where Kenya Pipeline Company’s system contains millions of gallons of gasoline, but the pumps remain dry.

It’s a sign that we have too many stations of fly-by-night merchants with no investment in distribution infrastructure. Let’s introduce a minimum capitalization for licenses and make licensing dependent on proof of ability to invest in gas stations, depots and storage tanks.

Properly implemented, a cleverly crafted regulatory regime for oil companies can have a major impact on this economy.