Fuel Prices Have Shot up But Will Come Down [opinion]

Tag : Freight Insurance
Fuel Prices Have Shot up But Will Come Down [opinion]

Daudi Migereko
Released : Monday, November 03, 2008 10:27 AM
Nov 03, 2008 (The Monitor/All Africa Global Media via COMTEX NewsNetwork) -- In the last two weeks the pump prices of petroleumproducts have been increasing to the concern of all of us.
This is the result of market forces playing in a liberalisedeconomy. Government policy is to allow prices be fixed by themarket but without creating cartels or price collusion. Theprincipal factors responsible for the current price levels are; theexchange rate, transport issues and insurance premium.
The Uganda shilling has depreciated over the past three to fourmonths and more so since the beginning of October. The monthlyaverage exchange rate for the dollar has gone up from Sh1,607 inJune to Shs1,793 in October. More pronounced is the depreciationduring October where the rate increased from Shs1,675 at thebeginning of the month to Shs2,118 as of October 27. This is adepreciation of 21 per cent.
The pump prices of petrol, diesel and kerosene at the beginning ofthe month were Shs2,550, Shs2,450 and Shs2,250 per litre,respectively. If international prices of the products had notreduced, the depreciation of the shilling would have meant that thepump prices should be adjusted to Shs3,100 per litre for petrol,Shs2,930 for diesel and Shs2,720 for kerosene, respectively.
Fortunately, this has been cushioned by the fall in internationalprices. The international prices of crude oils have fortunatelyfallen since their record highs in June/July. The price of lightsweet crude on the New York Mercantile Exchange dropped from amonthly average of $127 per barrel in July (the maximum was $147per barrel) to $78 this month. The price of OPEC basket of crudesdropped from $128 a barrel to $57 during the same period.
In the price build-up, the Cost Insurance Freight price of theproduct constitutes about 53 per cent of the pump price. Otherfactors such as exchange rate, distribution costs and profitaccount for the balance. This means that pump prices will not dropby the same ratio as that for international price of crude orimported products. While this should result in lower pump prices,some oil companies report that they are still holding stocksprocured at the high international prices of July 2008 mentionedabove.
Petroleum products for Uganda are imported mainly from the MiddleEast / Arab Gulf, transported by sea to Mombasa and transitedthrough Kenya to Uganda by a combination of pipeline, railway androad trucks. There have been recent negative developments on thisroute which have had the effect of pushing up costs of deliveringthe petroleum products.
The increased piracy around the coast of Somalia has resulted inhigher insurance premium being levied. Besides, some ships alsohire security escorts. The capacity constraint on the Kenyapipeline has persisted, much as the pipeline authorities arecarrying out repairs and capacity enhancement. The work is not yetcompleted. The pipeline cannot deliver sufficient volumes of fueland therefore oil companies are forced to lift some of the fuelmainly by road and to a limited extent by rail, which are moreexpensive modes of transportation.
Implementation of regulation limiting trucks to maximum of threeaxles by Kenya with effect from October 2008 has meant the trucksmust carry less volumes/weight of fuel, thus pushing up the unitcost per litre delivered. Besides many transporters are stillmodifying their fleets to meet this requirement. Once this is donemore trucks will be available to ferry products.
About two weeks ago, long-haul truck drivers went on strikeprotesting poor customs yard at Malaba and Busia border points.This caused oil companies to run down their fuel stocks in thecountry without adequate replenishment. The problem of the customs'yard has been attended to at the highest level. The strike is nowover and oil companies are starting to build up stocks.
The build-up of stocks will help bring down prices The abovedevelopments have contributed to an over all increase of price offuel. During this period, the impact of decrease in the world pricewas more than offset by the depreciation of the local currencyagainst the dollar and the increase in cost of freight, insuranceand transit costs through Kenya. The ministry will continue tomonitor these developments to ensure the oil companies do notexploit the consumers.
Mr Migereko is minister of energy and mineral development
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Keywords:
African Downstream Oil , African Oil , Business News , Economic Policy & Policymakers , African Oil & Gas , Commodity Pricing Of Natural Gas , Downstream Oil , Oil & Gas Market , Oil , Non-U.S. Natural Gas Industry , Oil & Gas Pipeline