Cross-Subsidy on Super Petrol Denies Diesel Users Ksh1.77 Per Litre Drop

Fueling at a petrol station in Kenya.
Fueling at a petrol station in Kenya.

Diesel users experienced a notable yet moderated decrease in fuel prices on Friday, June 15, following the announcement of new pricing regulations by the Energy and Petroleum Regulatory Authority (EPRA).

The price of Diesel was reduced by Ksh6.08 per litre, bringing the new rate to Ksh173.10, down from Ksh180.38 per litre. However, the extent of this reduction was limited due to the regulator's decision to extend the subsidy for super petrol.

Why: EPRA has employed diesel consumers in the latest pricing to subsidise users of super petrol and kerosene.

This cross-subsidy strategy restricts higher price reductions for users of one fuel grade when global prices decrease while providing a buffer for others when their fuel grade prices rise internationally. Additionally, this approach assists the Exchequer in managing expenditures to maintain lower pump prices.

The decision to retain the cross-subsidy on super petrol meant diesel users were denied an additional Ksh1.77 per litre drop. If not for this intervention, diesel prices would have plunged to Ksh171.33 per litre.

A fuel attendant in Kenya.
A fuel attendant in Kenya.

Zero In: EPRA's strategy has been to manage fuel price stability by using cross-subsidies. This involves transferring some of the cost burden across different fuel types, which in this case, resulted in a steeper cut for super petrol prices.

Effective from Friday midnight, super petrol prices fell by Ksh3 per litre to Ksh189.84. This reduction was facilitated by a combination of the Ksh2.99 per litre subsidy and the global decrease in super petrol prices.

Over the past few months, diesel prices have shown a downward trend: a Ksh1 drop in March, a substantial Ksh10 reduction in April, and now a Ksh6.08 decrease in June. Yet, the potential for a further reduction was stymied by the ongoing subsidy policy.

The cross-subsidy approach has not been without controversy. It has been the focal point of legal battles and parliamentary scrutiny, particularly since it is not explicitly mandated by the Energy Act of 2019. Critics argue that this practice unfairly burdens consumers of certain fuel types to benefit others.

Globally, diesel prices fell by 7.7 per cent to $568.20 (about Ksh73,412.69) per barrel, while super petrol prices saw an 8.35 per cent drop to $849.32 (about Ksh109,734) per barrel, according to S&P Global Platts. 

Despite these significant international price reductions, the local impact remains uneven due to EPRA's subsidy policy.

Bigger Picture: Fuel is integral to the cost of living, influencing various sectors such as transportation, power generation, and agriculture. 

Without the cross-subsidy mechanism, super petrol prices would have seen a less pronounced decrease than the Ksh3 per litre adjustment.

This subsidy model was adopted by the government after discontinuing the pump price stabilisation scheme last year. The stabilisation fund had previously been used to manage extreme fluctuations in fuel prices, drawing from the Petroleum Development Fund.

The cross-subsidy concept has historically been applied to mitigate the economic impact of diesel, which is a critical fuel for various sectors. Initially, super petrol was used to subsidise diesel, reflecting its significant role in driving the economy.

A legal challenge to EPRA’s cross-subsidy practice was brought before the High Court in Mombasa last year. The petitioner contended that EPRA’s pricing regulations unfairly overcharged super petrol consumers to subsidise diesel users. 

However, the court dismissed the case, ruling that the cross-subsidy was within legal bounds, given the law's provision for pump price stabilisation.

Last year saw the Kenya Kwanza government scrap the pump price stabilisation scheme amid pressure from the International Monetary Fund (IMF). 

The IMF, a key financier for Kenya, had pushed for the removal of such subsidies. However, surging fuel prices, which at one point exceeded Ksh200 per litre, and widespread public dissatisfaction, compelled the government to reinstate the scheme to alleviate the economic burden on consumers.

Photo collage of President William Ruto and pump station attendant.
Photo collage of President William Ruto and pump station attendant.