There's more to fuel prices than meets the eye

We have heard of the oil shocks of 1973 and other years. But ours was “live” and on our shores at Sh40 per litre before it came down, half the price of bread.

The shock was amplified by the sudden rise in the prices of other goods and services when fuel prices went up. As usual, price adjustment is immediate, starting with bus fare.  The shock is made worse by businesspersons, who never waste a good crisis. They increase their margins more than the fuel margin.

If the petrol price goes up by 25 per cent, you can increase your prices by 30 per cent. It’s a free market.  

Why the oil shock? What are the consequences, and what is the remedy? The 

The Iran war is partly to blame. It’s simple economics. The supply of oil was reduced, and prices responded by going up. Some countries mitigated this by releasing strategic reserves, increasing the supply to reduce price – Economics 101. Does Kenya have strategic oil reserves? Why were we taken by surprise, yet we knew the prices would rise because of this war?  

The other force behind higher oil prices is taxes and levies. The government knows we are addicted to oil in our homes and workplaces.

It’s an easy but must-add lazy source of revenue. The retail price is loaded with levies and taxes. Beyond Value Added Tax (VAT), we have excise duty, the road maintenance levy, the petroleum development levy (used for price stabilisation and infrastructure), the petroleum regulatory levy for funding the Energy and Petroleum Regulatory Authority (Epra) operations, the railway development levy, and the import declaration fee.

Which other commodity or service has such taxes and levies? Add the profit margin for players in the oil supply chain. 

The reduction in VAT and subsequent reduction in fuel price demonstrated the role taxes play in raising the price of fuel.

Some could add the politics of the oil sector. We should be bold and remove some of the taxes and levies loaded on oil.

We could collect more taxes from other sectors as profits soar. The Kenya Revenue Authority’s (KRA) collections did not reduce significantly when taxes were lowered during the Covid-19 pandemic. The International Monetary Fund’s (IMF) prescription will make fuel pricing murky. Remember the VAT on fuel? Could levies and taxes explain why the debate on electric cars is so muted? What will be taxed if we shift to electric cars? We should celebrate innovations as alternative sources of government revenues. Think of Safaricom, Google, M-Pesa or Meta. How much tax revenue shall we raise from Artificial Intelligence (AI)? An easy option for taxes is to reduce the government’s appetite for money and expenditure. Reduce waste and tame corruption.

The Auditor General gives a litany of waste and misuse of government money every year. One silent waste is overemployment at all levels of government.

But try reducing the number of government workers and see the political repercussions. Sadly, we are reluctant to reduce the number of job seekers. Do I need to explain how? Which government can be bold enough to convince Kenyans that we need to lose jobs to create more jobs by shifting money to development, not salaries and wages? 

Beyond raising inflation, higher oil prices affect the poor more than the rest. The poor have no savings to fall on. The poor include the salaried who lose purchasing power as prices rise. 

Who got an instant salary raise after fuel prices went up? When shall we index our salaries and wages to inflation? The stagnant wages explain why everyone in Kenya has a side hustle. It supplements the salary. And when salaries are raised, it’s often too late to cover the erosion by inflation. 

Let’s be blunt, the inflation from such an oil shock drives corruption. Squeezed by economic reality, anyone with a chance to make money illegally will exploit the opportunity and justify it! The shock makes citizens feel economically insecure; they rush to be secure by amassing wealth and cash. Add the fact that most Kenyans have no pension; they create their own. 

The high cost of living has consequences for social harmony. We are likely to see crime go up and families broken by economic pressures. 

Even mental cases could rise. We have copied the constitutions of developed countries but not their welfare system for the unemployed and the disadvantaged. The stipend for the elderly was a step in the right direction.

Let us leave the profit for the oil marketers and return to government revenue from oil levies and taxes. The most likely alternative source of revenue is borrowing, locally and offshore.

It’s tough being the government. That will be costly to us; interest must be paid, while the private sector will be starved of credit – a crowding effect. We don’t want more taxes and more borrowing. That is why reducing our expenditure, corruption and waste remains the best option on the growth path. But 2027 is beckoning, and expenditure is likely to go up. 

You have heard the promises to every region. Scrutinise the Finance Bill, 2026 and the sources of revenue. 

The oil shock, while unwelcome, exposed our economic and political soft underbelly. We should see it positively; it’s a stress test for our economy. We are lucky it’s raining, and the food supply is not another shock.

We can’t forget that the oil shock came when the echoes of the 2024 Gen Z protests over the high cost of living can still be heard. What have we done to make our economy grow faster? After all, we can beat the cost of living by making more money. The average Kenyan does all they can to make money.

What of the business environment? Since the 2024 protests, fear and caution have characterised our economy.

It is little surprise that banks have excessive liquidity. Surprised by the popularity of bonds and stocks, even among Gen Z? No one wants to take the risk. Who will grow the economy if no one wants to take the risk? 

The government, through good policies and their follow-through, makes it easier for us to take risks, start and expand enterprises and grow the economy.  It’s also time we set the oil market free. Why is the price of oil controlled? Why can’t we test if the market can get us a better price?

ICU charges are not controlled! A free oil market could chase cartels out of the town. And who are these cartels stronger than the government? 

Does the government-to-government oil importation programme block alternative sourcing and better prices? How about smaller cars and working from home to reduce fuel demand?

The Iran war and many other wars will come and go, as will 2027, but our economy will remain. How to grow it should matter more than anything else. 

Let’s be blunt too: a country in shock is “good for governance”; citizens will prioritise survival over democracy and freedom.

The leaders are also tempted to use force to keep rising anger under control. That mutes long-term economic growth and could raise the level of anger further. Someone must bell the economic cat, more so as 2027 beckons.