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Why fuel prices will not reduce significantly in Uganda

Petrol pump prices in Uganda can only reduce by a maximum of UShs 210, only a 5.6% drop, and the new price would allow retail dealers to earn a margin of UShs 150 – 180 per litre, which is not much.

A Kampala filling station is today selling a litre of petrol at UShs 3550. (Photo: F. Nalubega)

A Kampala filling station is today selling a litre of premium petrol at UShs 3550. (Photo: F. Nalubega)

By Henry Mugisha Bazira

In the last two weeks, international oil prices have fallen from $60 to between $40 and $50 per barrel of crude oil. Several analysts are predicting that this could even drop further.

However, pump prices in Uganda have only reduced by an average of 100 shillings ($0.03) only. This is not in consonance with the international trend.

As a result of the falling international oil prices, foreign currency trading has seen the US dollar appreciate against the British pound and other currencies. Since Ugandans purchase petroleum products in US dollars, the rising value of the dollar did not help the situation.

Although the international price of crude oil was plummeting downwards, the value of the US dollar was appreciating, thus off-setting the magnitude by which pump prices in Uganda would have reduced.

In addition, many of the fuel stations have been selling old stock fuel which was purchased when the international crude prices were still higher. Some fuel dealers in Uganda were hoodwinked by unscrupulous intermediaries that there would soon be scarcity of petroleum internationally and were convinced to hurriedly purchase and stock fuel at the previous higher prices only to be shocked later when supply was not affected in the last half of 2014 and prices drastically fell.

Ugandan-based dealers usually purchase petroleum products from Nakuru, Eldoret or Kisumu in Kenya. The purchase at these points, for example petrol, is $0.77 (UShs.2,195.50) per litre- assuming an exchange rate of UShs2,850 to the dollar. The transport costs per litre range from UShs108-120 Eldoret (Kisumu) to Kampala or UShs140-145 Nakuru to Kampala. This implies that the landed cost per litre in Kampala, before deduction of taxes is in the range of UShs 2,302.50 and 2,339.50. When Excise Duty (UShs1,050) is included, the price of petrol on the Kampala market before adding its distribution costs to other dealers in the country is in the range of UShs 3,352.50 and 3,389.50.

This suggests that petrol pump prices for example can only reduce by a maximum of UShs210, which is not a significant reduction (i.e. only 5.6%) compared to international crude oil prices (above 50% reduction). The new price would allow retail dealers to earn a margin of UShs150 – 180 per litre, which is not much.

This information was obtained through a review of the foreign currency trading and consultations with retail dealers in the industry in Uganda.

International factors also influencing prices

Volatility of oil prices is a common occurrence characterized by a history of booms and busts. Analysts suggest that the industry is currently in early stages of its latest downturn since 2009 when it reached $50 a barrel during that year’s recession (Clifford Kraus, 2015). They further suggest that the price could drop even further to below $40 before beginning to rebound, but failing to attain the $70 a barrel mark. The booms and bursts are traditionally triggered by the simple economic phenomenon of supply and demand.

United States of America – a significant importer and consumer of international oils abandoned its 40 years ban and resumed exporting of oil onto the world market. It has been doing this for 6 years now exporting oils from shale and tar sands and adding up to 4 million barrels of high quality (“sweet”) oil per day on the market.

This has denied traditional producers like Saudi Arabia, Nigeria and Algeria market, forcing them to compete for European and Asian petroleum markets. Consequently, they have been forced to drop prices – rather than production – in a bid to maintain or recapture the European and US markets and force the expensive shale and tar sands oils off the market. One would have expected them to reduce production in order to increase price, but they are doing the reverse i.e. maintaining and sometimes increasing production. For example, Russia’s production is higher than its post Soviet Union era, while Iraq’s production has surpassed its 35 years peaks i.e. it exported 91.1billion barrels of oil in December 2014 (James Stafford).

While OPEC members have agreed not to reduce production in a bid to increase price, the act by Saudi Arabia of reducing price instead of production has not been well received by other struggling OPEC members, particularly Iran, Venezuela, Algeria, Nigeria and other non-OPEC countries such as Russia, US and Canada to the extent that they are accusing the Kingdom of squeezing them out of production and the market and triggering a price war, which could be catastrophic to the industry.

OPEC members have refused to reduce production alone and would prefer a blanket reduction across the world producers, which is logical. However, it is not clear how the internal price war crises will affect this resolve. Last week United Arab Emirates (UAE), Kuwait and Iraq lowered prices in the Asian Market to those offered by Saudi Arabia (Evan Kelly, 2015). This trend and growing dissent among OPEC members could force OPEC producers to renegade on their resolve and could be a catalyst for them to reduce oil production and sales on the world market in order to increase prices. This would be a welcome development by many producers. But it appears none of the producers wants to voluntarily take the first step of reducing production.

The widespread bickering and blame games between leading oil producers; the geopolitical concerns in the Middle East; European and Asian political and economic uncertainties and the hiking dollar are not helping the situation.

In addition, the weakening economies of Europe and the developing countries and the production of more fuel-efficient vehicles is lowering demand for petroleum products to the extent that glut supplies of oil quickly affect prices negatively. A carefully managed production and supply of oil on the international market is needed to prevent escaping prices and the simmering cold oil wars.

The other factor influencing international oil prices, although not accounted for, is the smuggling of oil from politically unstable Middle East countries such as Libya, Egypt, Iraq and Syria. Last week’s bombing by US or “Coalition” Forces of a crude oil pipeline and collection depots controlled by Islamic State Militants in Syria in a bid to disrupt their supplies of oil and destroy makeshift tankers and depots is evidence of the presence of unaccounted for oil supplies on the international market. A similar incident was reported on 4th January 2015 near the Libyan East port when a Greek operated oil tanker was mistakenly bombed by Libya forces during clashes with militants struggling to control Libya’s ports and oil fields to solidify power.

All producers and dealers in the industry wish that the horror of the 2014 oil price plunge does not persist in 2015 and beyond. But currently there are no indications that this is about to happen and no one knows exactly when it will stop.

Henry BaziiraMr. Bazira is the Executive Director, Water Governance Institute (WGI) and founding Chairperson of the Civil Society Coalition on Oil and Gas (CSCO) in Uganda and a member of the Energy and Extractives Working Group (ESWG) of the Uganda Contracts Monitoring Coalition (UCMC).